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CryptoHistory: The birth of Bitcoin (2007-2010)

CryptoHistory: The birth of Bitcoin (2007-2010)

This will be the first in a multi part series exploring the history of cryptoassets, focusing on some of the most important projects and moments of the past decade. 

On the cusp of the Global Financial Crisis, Satoshi Nakamoto began work on a project that would attract the ire of lawmakers, be used by people in unstable nations and black market users alike and would lead to its creator emerging as technically one of the richest individuals alive. But how did Bitcoin come to be? And what were the early years like?

The first concrete mention of Bitcoin comes with the registration of bitcoin.org on the 18th August 2008. 2 months later, on the 1st of November, came the now famous email from Satoshi to a cryptography mailing list which stated:

I’ve been working on a new electronic cash system that’s fully
peer-to-peer, with no trusted third party.

The paper is available at:
The main properties:

Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the network to prevent double-spending.

With the benefit of hindsight, it is tempting to over exaggerate the significance of this moment, that all of a sudden tens of thousands of people rushed to their PC’s and began downloading Bitcoin mining software. This is not the case. For one, the network wouldn’t be operational for another two months, but also the impact was limited to those on the mailing list. Adoption was very slow in the initial days and Satoshi would eventually mine his own creation to the tune of some c. 1m BTC.

A subsequent post on the p2pfoundation forum laid out Satoshi's rationale and thesis for Bitcoin. Satoshi explored:

  • His issues with central banks, and their history of debasing currency
  • The issue with trusting a central party to protect your privacy and keep your accounts safe
  • The need for a currency that did not require a third party for trusted transactions
  • How they would solve the double spend problem through a decentralised distributed system with no single point of failure

Given the unfurling global financial disaster, Satoshi’s inclusion with the genesis block of the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” was likely intended as both proof of block creation but also to highlight the issues Satoshi saw with central banks. This philosophy was in accordance with the ‘Cypherpunk’ manifesto that directly inspired the cryptography mailing list Satoshi was active on. This manifesto, by Eric Hughes, laid out in 1993 the aim that "Privacy is necessary for an open society in the electronic age...We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy...We must defend our own privacy if we expect to have any.”

The Cypherpunk beliefs in privacy of communications, anonymity and censorship resistance are clearly reflected in the Bitcoin network. It also foreshadows and tackles issues that have become defining issues of the last decade, with data leaks of large volumes of personal information by corporations commonplace and technology companies employed by governments to listen in to citizen’s private communications. 

9 days after launch, the first transaction on the blockchain took place between Satoshi and the now deceased Hal Finney for 10BTC. Hal discusses the initial lack of excitement to Bitcoin, explaining that “When Satoshi announced Bitcoin on the cryptography mailing list, he got a skeptical reception at best. Cryptographers have seen too many grand schemes by clueless noobs. They tend to have a knee jerk reaction.”

2009 would see little real adoption. However, it did gain an exchange rate for the first time as New Liberty Standard published a buy/sell price. This was worked out, as the site archive explains, by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days. At the time this valued Bitcoin at $1 to 1,309 BTC, a rate that would see that $1 now be worth over $11m.

By 2010 there was the beginnings of forums that were discussing Bitcoin but still very limited publicity or usage. An offer to sell 10,000 BTC for $50 failed to find any takers. It remained very much a niche interest for a very small community. This is underscored by the nature of the first ever transaction of Bitcoin for a product. This took place on the 22nd of May with the now infamous purchase of two pizzas for 10,000 Bitcoins, following a post on Bitcointalk by a Bitcoin contributor called ‘Laszlo’:

Papa John's write their way into crypto history

Papa John's write their way into crypto history

A user named jercos fulfilled the request and acquired the 10,000 Bitcoins that would as of today be equivalent to just under $100m.

The first exchanges began to launch in 2010, which helped grow the Bitcoin community. Bitcoin Market was one such site that launched in March 2010. This was a far cry to the exchanges we have today, but it allowed people easier access to purchasing Bitcoin for the first time. Bitcoin v0.3 was then released in July and saw Bitcoin begin the first of what would become many meteoric rises, with the value increasing by 10x in a 5 day period. July would also see the creation of Mt. Gox, an exchange which will be forever intertwined with cryptoassets and Bitcoin in particular (a topic we will return to in future posts).

As 2010 came to a close, Bitcoin remained very much the preserve of a special interest group. Users had to be technically capable, given the lack of any graphical interfaces (with the software limited to command prompts and code). Actual usage was low but despite this Bitcoin’s market capitalisation crossed $1m for the first time, an important milestone.

This period also saw the end of Satoshi’s involvement with Bitcoin, as they wrote to another contributor that they had “moved on to other things”, leaving Gavin Andreson to continue the project. Satoshi’s identity, be it an individual or a collective, will likely never be uncovered but their contribution can hardly be overstated. It is impossible to know Satoshi’s original thoughts as to the eventual success of Bitcoin, but that the blockchain is still standing nearly a decade later after the litany of crises to befall it is testament to both the solidity and ambition of the project.

Satoshi’s anonymity and departure only adds to the intrigue and aura that surrounds Bitcoin. Following their departure, Bitcoin would begin a new chapter and would usher in a new wave of users and attention. From 2011 onwards, Bitcoin would begin a relentless march into the mainstream, most noticeably through the introduction of online black markets and in particular the infamous enterprise known as The Silk Road it would forever be associated with.

Note: The image at the top is in too low a resolution to read it properly - given it is quite superbly illustrated, here is the full resolution version. 

Bitcoin history.jpg
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