History of Cryptocurrencies
Cryptocurrencies epitomize innovation. Virtual currencies are by far the most quickly-growing asset class globally. Blockchain, as the underlying technology, is now disrupting various industries – from finance and real estate to health care, supply chains and corporate management.
But have you ever wondered how did we get to this point? When was the first cryptocurrency created? Why do cryptocurrencies exist? Which were the defining moments for the cryptocurrency market?
For many, the virtual currency world might seem chaotic and contradictious. However, when you look closely and examine the journey it had gone through to get where it is today, it becomes evident this isn’t necessarily the case.
Instead, the crypto assets’ development has followed a methodical and logical path where every event has contributed to what they are today.
The Pre-Bitcoin Era
Many think that the concept of crypto assets has originated from Bitcoin. But for online currencies to get where they are today, we should thank Whitfield Diffie and Martin Hellman, two Stanford scientists who explored the idea of “public key cryptography” in a paper dating back to 1976.
But cryptography alone wasn’t sufficient to empower the birth of Bitcoin. The other fundamental ingredient is the concept of “digital money.” Combine those two, and we have cryptocurrencies. Here is how it panned out over the years:
The 1980s: The Search for Alternatives to Paper Money
Around the 1980s, petrol stations across the Netherlands were looking for a way to overcome the problem of the growing number of nighttime thefts. To avoid having their cash stolen, they started thinking of introducing an electronic currency system to allow for cashless transactions. As a result, they introduced smartcards. While this was an essential step for the world of digital currencies, I consider this event more relevant to the introduction of Point-of-Sale systems.
Around the same time, David Chaum, an American cryptographer, published his dissertation where he explored the idea of a token currency. The concept of “blinded cash” allowed individuals to safely and privately transfer electronic cash between each other.
The main similarity with the cryptocurrency units we use today is that the “blinded cash” method required a signature of authenticity and granted the ability to be modified without traceability. Chaum’s idea materialized in DigiCash – a project that went bankrupt in 1998. Yet, DigiCash popularized the idea of relying on encryption tools to make electronic cash safer and helped shape the image of cryptocurrency as we know it today.
The 1990s: Crystalizing the Idea for the First Cryptocurrency
The 1990s saw the rise (and ultimately, the fall) of several projects that continued to explore many of the fundamentals that define the cryptocurrency asset class today. Bright minds like Wei Dai and Nick Szabo and projects like B-Money, Bit Gold, Hashcash explored ideas like designing a real-life anonymous and distributed electronic cash system, the proof-of-work concept, decentralization, DDoS attack prevention and more.
While on an individual level, the majority of these projects might not have lived up to their potential, their contribution to the current state of the cryptocurrency space is undeniable. In addition, many of the elements and technology advancements introduced in the 1990s proved critical to Bitcoin’s development as well.
The 2000s: the Decade of Bitcoin
The decade is so fundamental since it highlighted the instabilities of the global financial system on several occasions. First, it was the dot com bubble. Then there were local instabilities across many countries around the world. It all led to the Global Financial Crisis of 2008. And it was in the midst of it when Satoshi Nakamoto came up with the idea of Bitcoin.
2008: The Birth of the Bitcoin Network
We can say that the brief history of cryptocurrency as we know it today started in August 2008 with the purchase of the domain Bitcoin.org. A few months later, in October, the individual or the group behind the pseudonym Satoshi Nakamoto published a paper titled “Bitcoin – A Peer to Peer Electronic Cash System.” The paper outlined how existing concepts and years-old ideas could be applied in practice with great success. The paper introduced a peer-to-peer digital cash system based on the proof-of-work algorithm and a new form of distributed public ledger technology called “blockchain.”
At the time, it became the first-of-its-kind cryptocurrency with a finite supply of 21 million – the reason why some started referring to it as “digital gold.”
2009 – 2010: Bitcoin’s First Steps and the Rise of Bitcoin Mining
Similar to gold and other precious metals, Bitcoin also needed to be “mined.” The first Bitcoin block was mined at the start of 2009. It consisted of 50 Bitcoins and has remained known in the history lessons as “The Genesis Block.” It contained a note referring to the financial crisis and the fact that central banks and governments bailed out commercial banks. The first Bitcoin transaction took place between Nakamoto and Hal Finney on 12th January 2009.
In its first year, Bitcoin was only mined by a small number of enthusiasts and had virtually no transactional value. At first, Bitcoin mining was an easy process that could be handled through a traditional desktop computer. Nakamoto is estimated to have mined about 1 million Bitcoin during 2009, none of which have ever been used since. Over time, the increasing difficulty made the process more energy-intensive and demanding in terms of computing power. To mine the cryptocurrency, enthusiasts needed a new generation of computers with powerful graphic processing units (GPUs).
However, as the mining difficulty continued to increase, they soon became inefficient. This led to the birth of mining rigs or ASICs – specially designed hardware machines with more computational power and better graphic processing units. Today, cryptocurrency is generated only through large mining pools, consuming massive amounts of electricity. The process also became subject to societal pressure since it is associated with extreme carbon dioxide emissions.
In history, 2010 will remain the year of the first real-life physical Bitcoin transaction – an event known as the “Bitcoin pizza day.” And what a story it was! Laszlo Hanyecz, a Florida programmer, paid 10,000 BTC for two Papa John’s pizzas. At the time, the value of the Bitcoins for the pizza was $40. Today it is over 400 million. Ouch!
In July, the same year, a user on the Bitcointalk forum announced the launch of the Mt. Gox exchange – the first crypto exchange in history. In hindsight, although this event was fundamental for the industry, it also left a huge stain on its reputation.
2010 – 2013: the Rise of the Term “Digital Currency”
The next decade was the most influential for the growth of the cryptocurrency niche, with several notable events taking place. Its start proved detrimental and gave us everything – from Bitcoin’s bull run to the birth of alternative cryptocurrencies (known as “altcoins”) and the rise of one of the most emblematic cryptocurrency exchanges.
2011: The Most Dynamic Year in the History of Bitcoin
The year marked the start of Bitcoin’s price surge. Before 2011 it was barely above the zero level. However, when the Electronic Frontier Foundation (EFF) announced its intention to start accepting BTC for donations (although it backtracked later), the price started rising. The cryptocurrency hit the first important milestone of $1.00 price in February 2011. By June, it traded at over $30 but then closed the year at $5.
The period offered a lot of developments in the crypto currency exchange niche as well, with the launch of Coinbase and other venues.
In April 2011, Time Magazine featured Bitcoin in an article entitled “Online Cash Bitcoin Could Challenge Governments, Banks.” This was the first and the most important appearance of the digital currency in mainstream media. Moreover, it proved that if there was ever the one cryptocurrency to rule them all, it would be Bitcoin.
Furthermore, 2011 saw the birth of Electrum, the first Bitcoin software wallet for the masses. To date, it remains a popular and trusted solution.
The most essential thing that happened during that year, however, was the birth of altcoins. The most notable example is Litecoin – a fork of Bitcoin based on the same open-source code. Its idea was to improve some of the characteristics and specifics of the Bitcoin network, including speed of transactions, anonymity and more.
But the year also saw instances where Bitcoin’s dark side was exploited. For example, in 2011, online black markets started to accept the cryptocurrency in exchange for contraband items and illegal stuff, taking advantage of its anonymity.
2012 – 2013: Cryptocurrency Transactions Going Mainstream
In terms of market developments, 2012 was very calm or even “boring,” if you will (which isn’t always bad considering its history) with one major exception – several legitimate online merchants, including WordPress, began accepting Bitcoin as a form of payment. Others followed, including online electronics retailer Newegg.com, Expedia, Microsoft, and Tesla.
Aside from this, 2012 saw the launch of the Bitcoin Foundation in a bid to promote the mainstream adoption of the cryptocurrency. Over the year, BTC’s price rose steadily. In addition, Ripple, another altcoin, burst onto the scene.
2012 also saw the French-based crypto exchange Bitcoin Central gain clearance to operate as a real bank in France, marking the first case of an exchange licensed under European regulation.
In 2013, the altcoin universe continued to develop. However, the market was shaken by several federal, criminal and regulatory-related issues. As a result, Bitcoin’s price experienced extreme volatility. It made the leap from $13 to surpassing the $1,000 price level for the first time in history. The academic research at the time suggested that the rapid growth in Bitcoin’s value had much to do with artificial trading between trading bots on the Mt. Gox exchange.
The key event in 2013 was the birth of Initial Coin Offerings (ICOs). The Mastercoin project was the pioneer in the cryptocurrency crowdfunding niche, marking another key milestone.
In 2013, Vancouver installed the world’s first Bitcoin ATM, allowing people to convert cash into crypto.
2014 – 2018: Hacks, Scams and on the Rise Again
The people who started losing faith in Bitcoin and the other cryptocurrencies due to the volatility were in for a rude awakening. The years 2014 – 2017 saw a boom in crypto scams, hacks, and thefts, leaving many scratching their heads in disbelief for their lost funds. Fortunately, this didn’t change Bitcoin’s trajectory, and by 2017, the digital asset industry had been back on track with its growth projections.
2014: The Mt. Gox Hack and the Birth of Hardware Wallets
At the time, Mt. Gox was the most popular crypto exchange globally. Despite suffering a hack in 2011 and a loss of 2,000 BTC, it still had the trust of the major part of the market. At its peak, it was responsible for over 70% of the Bitcoin transactions globally.
However, the fairytale came to an in 2014 when Mt. Gox suffered the first and the biggest exchange hack in history. Hackers stole 850,000 BTC, or 6% of the Bitcoin in circulation, valued at over $460 million at the time. Adjusted to the current value of Bitcoin, the theft amounts to $36.55 billion.
As a result, Mt. Gox closed, while Bitcoin’s price plummeted 50% and didn’t recover for the next 2 years. The silver lining of the incident was that it showed that no matter how secure blockchain is, having humans and central authority structures involved in the process called for additional focus on security.
The year also saw one of the most incredible breakthroughs and innovations in the history of cryptocurrency security – the birth of hardware wallets and the introduction of the “private key” concept. Although the prototypes date back to 2012, it was in August 2014 when Trezor shipped its first hardware wallets. Its main competitor, Ledger, also emerged around that time. Ever since, both companies have been setting the standards in the digital asset security niche, giving investors peace of mind when storing their Bitcoin and new coins.
2015: Blockchain Technology Going Mainstream and the Rise of Ethereum and Coinbase
In 2015, Vitalik Buterin and his team launched the Ethereum protocol. This is one of the most decisive moments, not only in the particular year but in the whole history of the niche. The move brought to light smart contracts – the foundation of structured with decentralized control, including DeFI, DAOs, and more. Today, the Ethereum blockchain is home to some of the most progressive decentralized network projects in the field, designed as ERC-20 tokens. It is the go-to environment for crypto entrepreneurs, with the first ERC-20 token being Augur – a project that is successful to date.
Over the years, Ethereum’s currency, Ether (ETH), has become the second most popular and biggest in terms of market cap after Bitcoin.
Another market leader that we still enjoy today also made the headlines in the same year. Although Coinbase was launched way back in 2011, in 2015, it became the first regulated crypto exchange in the U.S. The event was a breath of fresh air for an industry struggling to shake off the scare of Mt. Gox’ hack. To date, Coinbase remains the most popular place for retail and institutional investors to trade cryptocurrencies with reasonable transaction fees.
The year also saw blockchain technology earn recognition from major financial institutions. First, NASDAQ adopted it to handle transactions. Later that year, nine of the world’s leading banks, including JP Morgan, Goldman Sachs and Bank of America, joined a pact to create a framework for using blockchain in the markets and across the banking industry.
2017 – 2018: The Breakout
In 2017, the Swiss private bank Falcon became the first to sell Bitcoin directly to its customers.
The year for the digital currency continued on a positive note. Bitcoin went through a software upgrade intended to solve its blockchain latency issues and improve its scalability. Once the Lightning Network was activated, the price of Bitcoin embraced on a bullish run reaching $2,700. But Bitcoin investors didn’t have a clue what was going to happen. By the end of the year, Bitcoin was trading at an all-time-high of almost $20,000 (although it plummeted 50% in the next month).
The rest of the industry thrived in the same way with record transactions and price booms. In addition, the number of projects built on the Ethereum network was booming. Over the course of 2017, Ethereum rose over 9,000%, while Ripple rose a staggering 36,000%.
By January 2018, the market capitalization of the whole market hit $820 billion.
Unfortunately, the exponential growth in the digital currencies market caught the eye of hackers. From scams and fake IPOs to phishing attacks and security breaches, cybercriminals stole millions from crypto investors.
Despite this, the year saw a surge in the interest in blockchain technology. Many industries outside the financial one started theoretical and practical testing of the distributed ledgers as a way to solve business challenges or streamline operational processes.
2019 – Present: Cryptocurrencies as a Critical Extension of the Global Financial System
The last few years have been packed with events that have helped the crypto industry evolve. While hacks, scams and thefts continued to grow, so did security and technological development. And more importantly – digital assets are now a step closer to mainstream adoption.
2019 – 2020: Institutional Investors Getting on Board with the World’s Best Performing Asset
Bitcoin’s volatility extended into 2019, starting the years at prices of around $3,700. Its returns outperformed even U.S. tech stocks, booming at the time. The asset closed the year at a price of around $7,900. While still far from its all-time-high, Bitcoin and digital assets gained another win.
Businesses from all industries have started accepting cryptocurrency payments. Starbucks, Whole Foods, Home Depot – those and many others joined the company of over 15,000 global businesses to allow for a cash alternative in their stores.
The need for cryptocurrency regulations also gained traction throughout 2019. For example, the Chinese government banned cryptocurrency mining and activities, while India started working in that direction. However, in many regions, digital assets received a more favorable approach from regulators.
In 2019, JP Morgan Chase launched “JPM Coin” – the first-ever major U.S. bank approved cryptocurrency, while the European Central Bank started exploring the idea of developing a digital currency.
While institutions had long been investing in cryptocurrencies by that time, 2020 saw the biggest growth of the non-retail part of the market. As a result, Bitcoin surpassed its all-time-high, closing the year at over $28,000.
Another essential highlight of that year was the launch of Ethereum 2.0. The hard fork release introduced major changes in the employed transaction validation model. As a result, the network became more efficient and agile.
2021: NFTs, Regulations and Bitcoin Reaching for the Stars
While NFTs had been a topic for years, with the first one created back in 2014, the past year cemented their place in the crypto ecosystem. Celebrities from the sports and music industry started launching their own non-fungible tokens. Luxury brands like Dolce & Gabbana and Luis Vuitton and sportswear leaders like Nike already enjoy a surging interest in their NFT-backed lines.
One of the key events that triggered the growth in these new cryptocurrency units was the sale of Christie’s first-ever digital-only work of art at an auction in March 2021. Beeple’s work was sold for $69.3 million paid in Ethereum. After that, NFTs became a mainstay in the headlines. Retail investors started buying all types of non-fungible tokens. NFTs are now making their way within real estate, gaming, ticketing, logistics, supply chain management, and other high-value industries.
In April 2021, Coinbase went public and sealed its rank as the 7th biggest new U.S. listing of all time.
October 2021 saw the debut of the world’s first Bitcoin ETF when the Securities and Exchange Commission approved the ProShares Bitcoin Strategy ETF (BITO). The day after the launch, Bitcoin hit a record high of $67,016, reflecting the booming investor interest in the asset class. At that point, Bitcoin surpassed $1 trillion in market value for the first time in its history.
Throughout 2021, regulators started warming to the idea of easing the crypto industry in its quest to attract more institutional interest. Governments and oversight authorities became more comfortable with crypto-backed products.
For example, chief officials in the U.S. opted not to ban cryptocurrencies. Bitcoin and other digital currencies started building deeper roots in markets with a history of financial instabilities or existing barriers to traditional financial products. For example, El Salvador adopted the currency as legal tender.
The institutional investors’ involvement in the industry also continued to grow steadily.
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