Bitcoin history

Bitcoin has fulfilled the dreams of many, and was the dream of many before its inception. One such prophet was Timothy May (former Intel scientist and founder of the cyberpunk movement). In 1992, he presented "The Crypto Anarchist Manifesto," in which he advocated the need for a digital, government-independent, online money that exchanged value pseudo-anonymously (not anonymously, but under a pseudonym).

Bitcoin was proposed at the height of the financial crisis: October 31, 2008. At a time when governments (with money taken from citizens' savings without their consent and public knowledge) were bailing out failing financial institutions (too big to fail - as explained at the time). Bitcoin was the answer, so that the theft of citizens' wealth would never happen again. So that the next time there was a crash, we wouldn't have to grit our teeth and pay up or take to the streets in a revolutionary mood. So that the biggest crash of all time, which is still ahead of us, can be relatively peaceful. Dividing the people into the wise and the foolish, instead of the thieves and the cheated.

On January 3, 2009, Satoshi Nakamoto unearthed the first block of Bitcoin. Bitcoin was built. From the blocks that were the codes of several programmers. However, its properties exceeded expectations and it became a remarkable multi-level discovery.

Bitcoin was a discovery because it was not simply an invention of electronic money. This invention was known for a long time - but it had old problems. Such a system was built in 1983 (eCash), commercialized in 1989, and declared bankrupt in 1998 (DigiCash). When currency issuance is handled by a corporation, sooner or later the same thing happens to it that happens to paper currency issued by governments - hyperinflation occurs. This is an inevitable process given central control and human nature.

Decentralization required another technology called "proof of work". It was developed by Adam Back and served him as a system to reduce spam emails (imposing a minimum cost for sending an email). This ensured that keeping track of transactions by random people did not lead to the possibility of spending the same money more than once (the double spending problem).

But even this was not enough to create a better money than gold. In many ways it was better than gold in its early days, but it will formally become better than gold in mid-2024, because then it will achieve less inflation than gold (recent decades have not been kind to gold in its role as a store of value; for example, more than 3,100 tons of new gold was mined in 2022, showing the scale and efficiency of modern mining operations).

The electronic money of the future will have to be properly distributed so that its first owners do not become monopolists (premine). Such a practice is the affliction of many mediocre cryptocurrencies. Its quantity had to be permanently limited, despite continuous distribution. This was extremely difficult, since growing popularity usually meant more money being generated. Another invention was needed, which was a dynamic mining difficulty change (difficulty adjustment). Nick Szabo - the inventor of this idea called it unforgeable costliness.

At the beginning of this century, many tried to give the Internet its global currency, but each scheme had a drawback. Crypto groups have already begun to accept their fate, that it is impossible to become independent of government money issuance. That modern technologies do not yet allow it, because there is always something missing. And then there was a new person who, in the first post on the discussion group, offered a binding and complete solution to the problem in one fell swoop, and in only 9 pages. The author of the post was Satoshi Nakamoto.

This is how Bitcoin was created, by combining many inventions into a coherent and harmonious system.

Bitcoin solved the problem of the Byzantine generals for the first time in history. It made it possible to create a mechanism that allows entities that do not trust each other or are even hostile to each other (without an intermediary that is trusted by both parties) to cooperate in the name of a common goal.

This allowed the creation of the first absolute scarcity in history, i.e. the total elimination of the problem of inflation. Every commodity that had previously served as a store of value slowly lost its value over time. Gold retained the most value over time, and only in ancient times when industrial mining methods were unknown. Today, gold inflation (in terms of new gold added to the pot, not the price) is at a record 2%, due to improvements in mining technology over the last century.

Bitcoin makes it possible to completely freeze inflation by top-down determining the total pool of Bitcoins that will ever be created in history (at just under 21 million units). Bitcoin is the first entity in the history of the world that is both truly fungible and limited. Bitcoin is the first asset in history that is truly rare (i.e. it will be in 2140). When the supply of a digital good is infinitesimally small, it becomes qualitatively new: digital scarcity.

Bitcoin is the first completely new type of commodity that is not valued on the basis of its suitability for the production of other goods or for future supply. Its weightlessness, or immateriality, gives it a unique feature - the ease of transfer is virtually independent of the amount. A transfer of hundreds of billions of dollars is practically as easy as a transfer of ten dollars.

The future supply of newly created Bitcoin is predetermined, so each market participant has an information equilibrium. Inequality of access to knowledge is no longer a factor in pricing, making Bitcoin the purest realization of game theory (the so-called Nash equilibrium). The price of Bitcoin is a reciprocal game of supply and demand between network participants.

Bitcoin is not simply an invention of the blockchain. It is not electronic money. Each of these things existed long before Bitcoin, and each of them individually was of no use to society because it did not spread (it was hardly used at all).

This is why the creation of cryptocurrencies based on blockchain technology leads to bankruptcies and fraud, rather than offering competitive forms of electronic money. Only decentralized projects have a value proposition, and even these will either find their niche or become worthless due to the zero-sum competition with Bitcoin.

Because of its convenience, money tends to monopolize its market. There is a feedback loop between what is popularized and the existing users. As with any technology that people actually need, the barrier is lack of education. When the information barrier is removed, the increase in adoption is exponential, right after a certain threshold. Ultimately, people want to use what everyone else is using because it makes it easier to accumulate that good as money.

Zbigniew Galar, PhD

Post Scriptum

This is not investment advice. The author does not encourage the purchase of Bitcoin, nor does he discourage the purchase of Bitcoin; instead, he encourages education about Bitcoin and strongly discourages the purchase of any other non-decentralized cryptocurrency.