January 3, 2009: What is Bitcoin?

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A Brief History

On January 3, 2009, the Genesis block, the first of the blockchains, of the crypto-currency known as Bitcoin was first established online by creator, Satoshi Nakamoto, an alias for an unknown person or persons.  The form of “currency” invented by Nakamoto (or whatever) does not entail any tangible coins or paper money and is purely theoretical online tradable currency.  A decentralized payment system, Bitcoin allows financial transactions of many types to be conducted without the oversight or vagaries of governments or a central bank.

Digging Deeper

A crypto-currency is a system that uses digital data as a medium of exchange, data that is highly encrypted to prevent hacking and theft.  Bitcoin is the premier crypto-currency in use today, with somewhere between 2.5 and 5.5 million users worldwide, although the exact number is unknown.  There are other crypto-currencies (often called “altcoins”) in use, but Bitcoin is by far the most widely used.  With the shady origin of Bitcoin, the crypto-currency giant has drawn the attention of government agencies around the world, as these government agencies do not really know who is behind the Bitcoin phenomenon or what his/her agenda is.  Plus, the fact that Bitcoin is believed to have been used as a method of hiding transactions from governments to avoid taxes, regulations, and scrutiny, governments are understandably concerned.  Additionally, it is possible criminal elements such as arms dealers and drug dealers are using Bitcoin or other crypto-currencies to conduct their businesses.

Simplified chain of ownership as illustrated in the Bitcoin whitepaper. In practice, a transaction can have more than one input and more than one output.  Chart by Graingert.

Another concern about Bitcoin (and other crypto-currencies) comes from economic analysts and advisors that worry about the stability of the system.  The ever-present fear of the system being hacked could ruin people to the tune of billions of dollars.  Another problem may lay in whether or not the Bitcoin craze is merely a fad that will burst like other economic bubbles have burst in the past.  With some investors using Bitcoin as an actual investment strategy, the stability of the system can make or break those investing in Bitcoin.

Bitcoin came to be in 2008 when it was registered as “bitcoin.org” and described via a paper by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System.  As stated earlier, the name Satoshi Nakamoto is an alias for an unknown person or persons.  Bitcoin was released as an “open source code,” with a start date for use of January 3, 2009, the kickoff triggered by release of the Genesis block, the first blockchain of code, with the following note indicating the opening of the system: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”  This so called “note” is interpreted as a slam on the international banking scene of regular national currencies as well as a timestamp for Bitcoin enterprise.  Bitcoin found its initial customers mostly among the ranks of the underworld, the “Silk Road,” the “Dark Web” and others of a questionable nature, though it has now become largely mainstream.

Screenshot of an item description page on the Silk Road Marketplace.

(Note: Forgive the liberal use of links to replace technical explanations that the author probably does not understand well enough to describe in laymen’s terms.  Thanks.)

The unit of currency, a “bitcoin,” is a floating number with a US dollar equivalent that can be used to pay for debts or be exchanged.  As the value of the bitcoin changes much like stock and currency speculation, the bitcoins can also be speculated upon and thus bought and sold strictly for the investment value.  The Bitcoin franchise started with an initial 1 million bitcoins before “Nakamoto” sold his interest in the system and related software to American software developer  Gavin Andresen, who in turn created the Bitcoin Foundation.  The price of a bitcoin has risen from about $5 to a current (January 2, 2018) price of $3883.67 per “coin,” a heady return on investment indeed!  To illustrate the volatility in price, we need only to look back to December 2, 2018 when a bitcoin was worth $4104.20 or to December 15, 2018 when a bitcoin was worth $3183.51.  Fortunes can be made and lost in short order, and no government is controlling this seesaw trading.  (December 17, 2017 was the high-water mark so far for bitcoins, with a shocking price of $19,666 each.)

Total bitcoins in circulation.  Chart by Ladislav Mecir at English Wikipedia.

Users of Bitcoin are called miners, at least those that “create” bitcoins by investing money in exchange for bitcoins.  Transactions are kept track of on “blockchains” on the internet, a form of public ledger.  Transaction fees are kind of confusing and supposedly optional, payable in “satoshis per byte (sat/b).”  A “satoshi” is defined as 0.00000001 bitcoin.  (Please click the link for an explanation.)  Suffice to say that using Bitcoin can be intimidating at first, but once a person learns all the terminology (wallets, mining, pooled mining, forks, implementation, ownership, supply, etc., etc.) presumably the use of the crypto-currency becomes commonplace, run of the mill familiar activity.

Although so far Bitcoin remains a decentralized trading system of peer to peer transactions, there is a trend toward centralizing through mining pools and intermediaries.  While no single user or mining pool is permitted to have 51% of the Bitcoin value, a mining pool called Ghash.io exceeded the 51% “hashing power” of Bitcoin in 2014, though the cooperative has promised since to refrain from monopolizing more than 39,99% of the hashing power since.   Apparently there is a nefarious technique called “a 51% attack” by which a mining pool can attempt to double spend bitcoins in order to quickly increase their digital wealth.  This technique, like most get rich quick schemes, is not as easy as it seems.

Today, bitcoin mining companies dedicate facilities to housing and operating high performance mining hardware.  Photograph by Marco Krohn.

Since Bitcoin transactions are conducted through Bitcoin addresses instead of real life company or person names, the transactions are anonymous.  This level of privacy lures numerous investors and traders into the world of crypto-currency to avoid government and competitor scrutiny and enforcement.  The transactions are public information, but the addressees are pseudonymous.  Libertarians and anarchists seem to love the privacy of crypto-currency transactions and the fact that governments cannot manipulate the currency as they can with “real” currency (as can large banks).  Opponents of the US Federal Reserve System are enthusiastic about Bitcoin and other crypto-currencies possibly undermining the hated Federal Reserve System.  Just how much the commercial merchant world will accept crypto-currency such as Bitcoin with its inherent problem in collecting various charges remains to be seen.

Along with a myriad of criticisms from various sources, Bitcoin has been criticized by environmentalist due to the immense amount of electricity used in all the various transactions and mining involved with using bitcoins.  As of 2015 (and presumably much more now) the amount of electricity used in a year by Bitcoin use would total about 166.7 megawatts per year!  (And that is assuming the use of modern, energy efficient devices.)  The defenders of Bitcoin point out that even if Bitcoin increased by 100-fold, its energy demands would be less than 2% of the electricity used in the world.  Additionally, traditional banking and finance uses considerably more electricity than crypto-currency at current rates.  Fears of hacking (including phishing and scams) are well founded, as by December of 2017 almost a million bitcoins had been stolen electronically.  Many search engines and social media ban Bitcoin from advertising on their platforms, both in the United States and in foreign countries such as Japan, Russia and China.

Bitcoin price bubbles in 2011, 2013 and 2017.  Graph by Kurzycz (http://www.kurzy.cz/).

If you want to know more about Bitcoin you can access their website or other crypto-currency websites, or to perhaps get a simple “how to” lecture talk to your financial consultant.  Unfortunately, we do not know enough about crypto-currency to provide meaningful advice to potential users.  Sorry!

Questions for Students (and others):  Were you aware of crypto-currency?  Do you know anyone that has used Bitcoin or an altcoin?  (Do not mention their name in the interest of privacy!)  Do you believe crypto-currency is a good thing or a bad thing?  Would you trust crypt0-currency with your money to invest in it?

Various cryptocurrency logos. The bitcoin logo in the middle displays two hands, one hand is giving and one hand is receiving, as a metaphor for the exchanging of bitcoin.  Image by voytek pavlik (https://www.goodfreephotos.com/other-photos/bitcoin-and-other-cryptocurrency-exchanges.jpg.php).

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Historical Evidence

For more information, please see…

Ammous, Saifedean.  The Bitcoin Standard: The Decentralized Alternative to Central Banking. Wiley, 2018.

[AMAZONPRODUCTS asin=”1119473861″]

Antonopoulos, Andreas. Mastering Bitcoin: Programming the Open Blockchain.  O’Reilly Media, 2017.

[AMAZONPRODUCTS asin=”1491954388″]

Patel, Nik. An Altcoin Trader’s Handbook. Amazon Digital Services, 2018.

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The featured image on this article, a paper wallet with the credentials required to send and receive bitcoin payments printed to the page as 2D barcodes by Casascius from http://bitaddress.org, is licensed under the Expat License, sometimes known as the MIT License:

Copyright © The author(s)

Permission is hereby granted, free of charge, to any person obtaining a copy of this software and associated documentation files (the “Software”), to deal in the Software without restriction, including without limitation the rights to use, copy, modify, merge, publish, distribute, sublicense, and/or sell copies of the Software, and to permit persons to whom the Software is furnished to do so, subject to the following conditions:

The above copyright notice and this permission notice shall be included in all copies or substantial portions of the Software.

The Software is provided “as is”, without warranty of any kind, express or implied, including but not limited to the warranties of merchantability, fitness for a particular purpose and noninfringement. In no event shall the authors or copyright holders be liable for any claim, damages or other liability, whether in an action of contract, tort or otherwise, arising from, out of or in connection with the Software or the use or other dealings in the Software.


About Author

Major Dan

Major Dan is a retired veteran of the United States Marine Corps. He served during the Cold War and has traveled to many countries around the world. Prior to his military service, he graduated from Cleveland State University, having majored in sociology. Following his military service, he worked as a police officer eventually earning the rank of captain prior to his retirement.