Chapter 1
Bitcoin in a Nutshell
IN THIS CHAPTER
Discovering the history of digital currency Finding out about early Bitcoin and its creator Understanding what money (and Bitcoin) is and is not Exploring the benefits of Bitcoin For a mere teenager, the Bitcoin network has certainly had a big impact on the world, transacting more than US$12.4T in 2021 alone. As we write these words, Bitcoin has a market capitalization (total value) of $918,705,395,133, which is almost a trillion dollars. (The market cap is the total number of Bitcoins in âcirculationâ multiplied by the current market price of a single Bitcoin.)
But thatâs a current low price; just a few weeks prior, it had a combined value of almost 1.3 trillion dollars. By the time you read this, the value may be higher, lower, or the same. Thatâs one of the things about Bitcoin: Its market price can be very volatile, as youâll soon learn if you spend a little time watching the markets.
But the impact weâre talking about is not just referring to Bitcoinâs current market value. In fact, the market cap of Apple, Inc. is more than three times that of the Bitcoin network. However, a comparison with Apple might be apropos right now. Figure 1-1 shows how much Bitcoin would be needed to buy a single share of Apple stock, from 2010 through 2021. The value of a single Bitcoin has been increasing against the Apple stock (just as it has, of course, against the U.S. dollar and other governmental currencies).
The launch of Bitcoin set off a revolution in blockchain and cryptocurrency. There are now more than 13,000 different cryptocurrencies. (Most, be warned, are essentially valueless and will remain that way.) At the time of writing, the top five cryptocurrencies have a combined market cap of almost 1.7 trillion dollars, and a number of cryptocurrencies have genuinely useful functions beyond merely being used as money or a store of value. Itâs likely that some of these cryptocurrencies will endure, even if most wonât.
But weâre here to talk about Bitcoin, so letâs begin with a little history. Where did Bitcoin come from, and how did it develop?
In the Beginning, There Were ⌠Digital Currencies?
Blockchain-based cryptocurrencies are pretty new, but digital currencies designed for use online have been around for quite a while. (Donât worry about this blockchain thing for the moment; we explain that in not-too-mind-numbing detail in Chapter 2. Just understand for now that a blockchain is a special kind of database, a store of digital data.)
As people started flooding online â the process began in the early 1980s, but really took off in 1994 with the advent of the commercial Internet â it became clear that they were going to need some way to spend money in cyberspace (the first Internet stores opened in that year). Of course, most online transactions today use credit and debit cards â even PayPal and Venmo are essentially enabling such transactions, along with bank transfers â but that wasnât the case in the early days. Many people were concerned about credit-card theft and thus wary of using their numbers online, for instance. (When co-author Peter opened an online store in 1997, he did have a functioning credit-card gateway, but many customers would print out a paper order form and mail a check!)
There was also the issue of microtransactions. Surely, in the digital world, it should be possible to pay someone, say, five or ten cents for something, such as access to a video or article. The microtransaction problem has still not been solved (though one might argue that the Bitcoin Lightning network, which we discuss in Chapter 4, almost gets us there), but nonetheless, thatâs one of the ideas that drove the development of digital currencies.
And develop they did. In 1983 David Chaum wrote a research paper on the concept of digital currency (Blind Signatures for Untraceable Payments), suggesting the use of cryptography to create and manage a digital currency. So even back then, cryptography had a role in digital currencies, although they werenât known as cryptocurrencies back then. When you hear people talk about cryptocurrencies, they are generally talking about this new generation of blockchain-based cryptocurrencies that started with Bitcoin. (We explain more about cryptography and how it relates to cryptocurrencies in Chapter 2.)
Chaum actually launched a cryptography-based digital currency, known as DigiCash, in 1990, but these were still very early days. Very few people were online in 1990, and the currency died out by around 1998. What likely hurt digital currencies by the end of the â90s was that the credit-card companies wanted a piece of the online action, and thus went out of their way to assuage consumersâ fears of using credit cards online.
Still other digital currencies came along. There was e-gold, a currency backed by real gold, and Millicent, a currency created by a major computing company, Digital Equipment Corporation (DEC). (If youâre younger than, say, mid-thirties, you probably wonât remember DEC, but it was a big deal. In fact, even IBM had a micropayments division working on digital currencies at the time.)
Then there was NetBill, a project of Carnegie Mellon University, which was later merged into another system, CyberCash, which eventually ended up in the clutches of PayPal. There was Beenz, which had a partnership with MasterCard at one point, First Virtual, CyberCoin, Flooz (promoted by Whoopi Goldberg, no less!), and various others.
But nothing much stuck. Lots of great ideas, but nobody could quite make it all work. By the early 2000s, most of these endeavors were moribund (probably ushered along by the dotcom crash of late 2000). There were exceptions. Liberty Reserve, based in Costa Rica, ran from 2006 until 2013, but was shut down after accusations that it was being used to launder billions of dollars of criminal proceeds. And closed systems that work on particular networks, such as Chinaâs QQ Coins, are mostly used on the Tencent QQ Messaging service.
But then, there was Satoshi Nakamoto and his magical blockchain.
The Birth of Bitcoin
On November 1, 2008, someone named Satoshi Nakamoto posted a message to a cryptography forum, titled
Bitcoin P2P e-cash paper (archived at
https://www.mail-archive.com/[email protected]/msg09959.html). In his message, Nakamoto announced that he had âbeen working on a new electronic cash system that's fully peer-to-peer, with no trusted third party.â
In other words, heâd created a currency system that worked on a network of peers â computers working together with each equal to the other. With no central power required, no bank or government to act as a âtrusted third partyâ was required.
A comment he made in the post explained his view of the problem with the earlier cryptocurrencies. âA lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s,â he said. He believed that these other digital-money systems had a critical weakness, an Achilles heel. âI hope itâs obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time weâre trying a decentralized, non-trust-based system.â
Nakamoto had previously set up a domain name and a simple website, bitcoin.org, and there he posted a document explaining how all this would work:
https://bitcoin.org/bitcoin.pdf. You might want to take a quick look, though itâs not essential for your understanding of Bitcoin (itâs pretty geeky stuff).
The whitepaper he posted describes how a blockchain (a special form of database) could be used to manage the currency. Essentially, the blockchain records a ledger, a record of currency transactions, and because the blockchain is duplicated over numerous computers (the peers) and because these peers are all equal, no trust in a central party is required. You may hear Bitcoin described as a âtrustlessâ system. That doesnât mean it canât be trusted; it means that a trusted third party is not required. The trust, in effect, is baked into the system. The mathematics â or mathemagics, as Peter likes to call it â which powers the system means that Bitcoin transactions can be trusted, even without a central âpowerâ overseeing the system. (See Chapter 2 for an explanation of why.)
Satoshi Nakamoto (whoever he, she, or it is) didnât use the words
cryptocurrency, blockchain, or
trustless anywhere in the whitepaper. Those are terms that others applied to the system later.
The idea of blockchain had actually been around for a while â at least since 1991 â in fact, remember David Chaum of DigiCash fame? He had been working with the idea of a blockchain since the early 1990s.
Anyway, Nakamoto didnât stop there. In January of 2009, he/she/it launched the Bitcoin network. Nakamoto released some thirty-thousand lines of code that defined the network protocols and processes necessary to operate this peer-to-peer, decentralized money system. And Bitcoin was born.
Of course, in January of 2009, Bitcoin had essentially no value. Still, the genesis block created by Nakamoto (the very first block of data in the blockchain creating the first 50 Bitcoins), along with subsequent blocks of data âminedâ by Nakamoto (see Chapter 7), comprise perhaps a milli...
