From barter to bitcoin |03 July 2017
Imagine going back to the stone ages; back to a basic unit which helps attribute value and facilitates transactions.
Money in itself is nothing. It can be a shell, a metal coin, or a piece of paper with a historic image on it. It derives its value by being a medium of exchange, a unit of measurement and a storehouse for wealth.
Money started with the barter way back in 3,000 BC. However, such arrangements take time. This resulted in the emergence of prehistoric currencies like animal skins, salts, weapon and even shells!
Early money was decentralised, directly peer to peer. Fiat or Government backed money came in much later in 600 B.C.
With the emergence of the internet, intermediaries, online payments demanded a single currency which could facilitate global internet transactions. With this we see the emergence of the bitcoin, ethereum -direct peer to peer; no interference of Governments, central authorities and banks.
Welcome to the wonderful world of bit coin, ethereum and crypto currencies; a whole parallel world of virtual currencies, coins, listing.
Fascinating but how did all of this start?
In the late 1990s, hackers started working on a project to decentralise money and facilitate internet transactions.
Internet transactions required a merchant, an intermediary for example PayPal, a bank, and your credit card details.
All this also had a security risk, your card could be hacked.
There were numerous attempts at digital cash and there were many failures - reliance on a merchant / bank for acceptance. Also there was the issue of creating money out of thin air?
To create a free floating digital currency that is likely to attain a real value, one had to do something that was scarce by design. Scarcity is the reason that gold and diamonds have been used as a backing for money.
To achieve this in the digital realm, minting money required solving a "puzzle" which takes a while to crack. This is called "Mining".
Another key feature of bitcoin and crypto currencies is the block chain. Block chain is a ledger in which all transactions are securely recorded.
This literally has blocks of information stacked up like blocks and linked together with a chain. Events are kept by a series of nodes and stored by miners. Anyone can become a miner by solving computational problems to create blocks. There is no one trusted server. Every minor keeps track of blocks.
This technology cannot be hacked and it has immense uses in all fields’ education, land registries, etc. It may well be the technology to revolutionise the world.
In essence, bitcoin combines the idea of using computational puzzles to regulate the creation of new currency units with the idea of secure time stamping to record a ledger of transactions to prevent double spending.
Who invented bitcoins?
Bitcoins were invented by a person or group of persons under the pseudonym Satoshi Nakamoto in 2008. There were many attempts at e-currency and many failures. Satoshi combined many technologies of that time to create bitcoin.
He stuck around for 2 years, was on numerous blogs, created patches and then disappeared.
The success of bitcoin is remarkable. Its notable innovations - block chain and decentralised model supports user to user transactions.
To understand bitcoins better let us look at its history.
October 2008 – White paper
Satoshi Nakamoto releases his white paper on the P2P Version of electronic cash. He manages to solve the problem of money being copied providing a vital foundation for bitcoins.
January 2009 - First mining
The first block called "genesis" is mined and the first transaction.
October 2009 – First value
Bitcoin receives its value in traditional currency. The initial equation was USD 1 = 1,309 BTC. The equation was derived as to the cost of electricity to run the first computer who created bitcoin.
February 2010 – World’s first bitcoin market is launched
May 2010 – First and most expensive pizza bought in bitcoins
A programmer Laslo paid a volunteer 10,000 BTC. The volunteer paid USD 25 to order a pizza for him.
Today that pizza is valued at GBP 1.9 m!!
August 2010 – Bitcoin hacked and value crashes
November 2010 - bitcoin reaches USD 1 m.
Based on demand and supply, the valuation leads to a surge in bitcoin value to 0.5/BTC.
January 2011 - the Silk Road
An illicit drug market is set up using bitcoin as an untraceable way to buy and sell drugs online
February 2011 - BTC reaches parity with the USD.
By June each BTC is worth USD 31 giving it a market cap of USD 206 million.
June 2013 - security breach and the value plummets to 0.01 BTC
March 2013 – First guidance note
The US FINCEN releases a guidance report for persons exchanging, administering or using virtual currency. This sparked the debate on regulation.
March 2013 - BTC achieves a market cap of USD 1 billion
August 2013 - US Judge declares that
“Bitcoin can be used as money. It can be used to buy goods and services."
Bloomberg begins bitcoin data on its terminal
November 2013 – US senate first hearing on e-currency
BTC climbs to USD 700 as the US senate holds its first hearing on the e-currency. The Fed Reserves chairman Bernanke states that "bitcoin may hold long term promise, particularly if the innovations promote a faster, more secure and more efficient system of payment."
December 2013 - China Central Bank bans financial institutions from handling bitcoins.
They stated that it was not a currency with real meaning and does not have the same status as fiat money.
The ban reflects the risk that bitcoin poses to China capital controls and financial stability.
That being said, China is the world’s largest bitcoin trader with 80 per cent of the world’s bitcoin transactions being processed there.
January 2014 - First insured bitcoin vault for institutional investors
February 2014 - The taxing event! Bitcoin taxation.
The HMRC classifies bitcoins as assets or private money. No VAT charged on mining or trading.
June 2014 - Silk route closed and their bitcoins auctioned by the US Government
This enhances the legitimacy of bitcoin. From this point onwards bitcoin can no longer be used as a currency for criminals. The use of block chain means that the identity of users can be established.
July 2014 – First fund and regulations
- First regulated bitcoin fund GABI launched
- "Bit license" rules proposed for regulating bitcoin launched in the US
- European banking authority launches its opinion on virtual currencies. European regulators consider declaring virtual exchanges as obliged entities to comply with AML regulations. This report acts as a catalyst to launch bitcoins into the mainstream by highlighting the fact that virtual currencies need a regulatory approach to strive for international coordination to achieve a successful regulatory regime.
August 2014 - Chancellor of the Exchequer buys bitcoin
George Osbourne, Chancellor of the Exchequer buys GBP 20 worth of digital currency,
showing his support. He announces HMs call for digital currencies. The report was later published on March 2015.
October 2014 - the first bitcoin derivative transaction on a regulated exchange
December 2014 - Microsoft starts accepting payments in bitcoins
Looking at the history, what lies ahead for bitcoins, crypto currencies and block chain?
With the acceptance by international regulators it is likely to enter the financial main stream. It solves many payment problems making transacting more efficient and more secure.
With the emergence of AEOI, loss of confidence in Governments crypto currencies have seen a surge, despite glitches.
A currency which transcends borders, languages, ethnicity, unifies the online world, decentralised, secure and more efficient - peer to peer!
Malika Jivan