One of the biggest financial stories of the past year has been the incredible rise of bitcoin. The virtual currency was designed to revolutionize peer-to-peer transactions; it doesn't require a go-between like a bank or credit card network , the exchange of personal information, or transaction fees.
Yet while many are still confused about what exactly a "bitcoin" is and how the nascent cryptocurrency works, just as much confusion exists about where bitcoin came from and how it got to where it is today -- a technological innovation that has shaken the financial world to its core.
While no one knows what the future has in store for bitcoin, the cryptocurrency's past is just as mysterious for many investors. Image source: Getty Images. The backbone of bitcoin is the blockchain technology it uses to record the transactions on its network. A blockchain is essentially a publicly distributed ledger; it records each and every bitcoin transaction ever made on a block. When that block's memory is full, it is added in sequential order to the chain of blocks.
This ledger -- freely available on any computer in the bitcoin network -- validates bitcoin transactions, stores the blockchain, and relays transactions to other network computers. These computers are called nodes. Blockchain technology is a publicly distributed ledger that records every single bitcoin transaction. Because the database is stored on a network of computers, rather than on a single server, hacking or stealing bitcoin data is virtually impossible for would-be cybercriminals.
A hacker would have to break into the majority of nodes simultaneously, a virtually impossible task. There is also only a predetermined number of bitcoins that can ever be created, meaning that the currency cannot be devalued in the future by a central bank issuing more.
Thanks to the claimed advantages of the cryptocurrency, the only thing that has risen faster than the number of bitcoin enthusiasts is the price of a bitcoin token. In late , the financial crisis was in full swing. In September of that year, Lehman Brothers Holdings, then the fourth-largest investment bank in the world, filed for Chapter 11 bankruptcy protection. As the world's financial infrastructure was crumbling, the domain bitcoin.
Later in , a person or group using the pseudonym Satoshi Nakamoto published a white paper on bitcoin to a cryptography mailing list, explaining how the cryptocurrency would work. In early , Nakamoto mined the first-ever bitcoin, known as the "genesis block. Others also believe it pointed to the crumbling financial infrastructure of the modern world, and the need for a new way forward. The first bitcoin transaction soon followed, when a bitcoin was sent from Nakamoto to Hal Finney, a cryptography expert and enthusiast.
To this day, Satoshi Nakamoto's identity remains a mystery. Several people have claimed to be the mysterious programmer or, as often suspected, a group of programmers; numerous attempts have been made to identify the person or group, but none have been satisfactory enough to be viewed as conclusive.
The only personal details that Nakamoto gave to others were claims to be living in Japan and to have been born April 5, Nakamoto encouraged other cryptographers to assist with the coding, but the creator stepped away from bitcoin in and has not been publicly seen or heard from since.
As we will soon see, Satoshi Nakamoto is not the only infamous alias in the annals of bitcoin. The first ever bitcoin transaction involved the purchase of two pizzas for a Florida programmer.
In May , a Florida programmer named Laszlo Hanyecz offered 10, bitcoins in exchange for pizza. A British enthusiast took Hanyecz up on the offer and ordered two pizzas to be delivered from a pizza place near Hanyecz's residence; the Briton paid for the pizza using a credit card, and Hanyecz reimbursed the purchase with 10, bitcoins.
This is believed to be the first time bitcoin was ever used to make a purchase, and May 22 is celebrated in the bitcoin community as Bitcoin Pizza Day. What makes the transaction even more memorable, however, is the incredible value the bitcoins used to purchase two pizzas have accrued.
That's a lot of dough. While the pizza purchase is celebrated, in bitcoin's early days very few places of business accepted bitcoin as payment. One area where bitcoin's anonymous nature and digital movement were prized, however, was the black market. It quickly became apparent that bitcoin filled a huge need in the criminal underworld. In , an online dark-web marketplace dubbed Silk Road was founded by Ross Ulbricht, who ran the site using the pseudonym Dread Pirate Roberts.
The use of Tor routers so users could browse in anonymity and untraceable bitcoin payments proved to be a potent combination to avoid detection and arrests by law enforcement. In founding the site, Dread Pirate Roberts claimed libertarian ideals, saying customers would be free to purchase anything without fear of violence or arrest.
Later, he wrote that he wanted Silk Road "to grow into a force to be reckoned with that can challenge the powers that be and at last give people the option to choose freedom over tyranny. While his intentions might have been noble, the site freely allowed all sorts of illegal drugs to be bought and sold with impunity. Other illegal items like fake driver's licenses could also be purchased, though categories like child pornography and weapons were banned from the site. Bitcoin fills a need in the criminal underworld because it allows criminals to move money both digitally and anonymously.
Before Ulbricht was found and arrested, Silk Road had over a million active user accounts and had accounted for 1. Marshals; they finally found Ulbricht to be the man behind the site, and arrested him at a San Francisco public library in October While Silk Road was shut down, cryptocurrencies remain popular in black markets, as they offer buyers and sellers a cloak of anonymity without the limitations of using large amounts of cash. While this was an arbitrary milestone, it was probably not a coincidence that the cryptocurrency soon started attracting the attention of Silicon Valley and venture capitalists.
The best-known of these early investors may be the Winklevoss twins. Tech-savvy businesspeople soon moved in and invested in bitcoin and other cryptocurrencies. The twins insisted on collecting the lawsuit's settlement in shares of Facebook, not cash. The Winklevosses are also majority owners in Gemini, a virtual currency exchange they founded after realizing how difficult it was to buy and sell bitcoin. In , the website Mt. Almost from the moment Karpeles took over the site's operations, to its inglorious end a few years later, the exchange was plagued with operating deficiencies, security breaches, and negligence.
These incidents included:. Despite all these troubles, and an early association with illegal activities, bitcoin's rise as a currency is unparalleled in human history. It is not issued as a monetary unit by any country in the world, nor does it contain any tangible or intrinsic value. Yet not only has its price skyrocketed, it is increasingly used as a medium of exchange by individuals and merchants all over the world.
Today bitcoin can be used to buy a surprising number of goods and services: gold, real estate, guns legally , and goods from some of the world's largest companies. Bitcoin's current price may ultimately prove to be in bubble territory. But few of the world's cryptography experts, libertarian dreamers, and successful venture capitalists ever dreamed the cryptocurrency would become what it is today. Apr 2, at PM. Author Bio As an economic crimes detective, Matthew focuses on helping others avoid becoming victims of fraud and scams.
He is most familiar with the fintech and payments industry and devotes much of his writing to covering these two sectors. Follow FoolMCochrane. Stock Advisor launched in February of Join Stock Advisor. Related Articles. The History of Bitcoin themotleyfool stocks Next Article.
It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented in by an unknown person or group of people using the name Satoshi Nakamoto  and started in  when its source code was released as open-source software. They can be exchanged for other currencies, products, and services. Bitcoin has been criticized for its use in illegal transactions, its high electricity consumption, price volatility, and thefts from exchanges. Some economists, including several Nobel laureates , have characterized it as a speculative bubble.
A bitcoin primer
It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented in by an unknown person or group of people using the name Satoshi Nakamoto  and started in  when its source code was released as open-source software.
They can be exchanged for other currencies, products, and services. Bitcoin has been criticized for its use in illegal transactions, its high electricity consumption, price volatility, and thefts from exchanges.
Some economists, including several Nobel laureateshave characterized it as a speculative bubble. Bitcoin has also been used as an investment, although several regulatory agencies have issued investor alerts about bitcoin. The domain name "bitcoin. On 3 Januarythe bitcoin network was created what year first bitcoin Nakamoto mined the first block of the chain, known as the genesis block. The receiver of the first bitcoin transaction was cypherpunk Hal Finneywho had created the first reusable proof-of-work system RPoW in Blockchain analysts estimate that Nakamoto had mined about one million bitcoins  before disappearing inwhen he handed the network alert key and control of the code repository over to Gavin Andresen.
Andresen later became lead developer at the Bitcoin Foundation. This left opportunity for controversy to develop over the future development path of bitcoin, in contrast to the perceived authority of Nakamoto's contributions. After early " proof-of-concept " transactions, the first major users of bitcoin were black marketssuch as Silk Road. During its 30 months of existence, beginning in FebruarySilk Road exclusively accepted bitcoins as payment, transacting 9. Litecoinan early bitcoin spin-off or altcoinappeared in October The Bitcoin Foundation was founded in September to promote bitcoin's development and uptake.
In March the blockchain temporarily split into two independent chains with different rules due to a bug in version 0.
The two blockchains operated simultaneously for six hours, each with its own version of the transaction history from the moment of the split.
Normal what year first bitcoin was restored when the majority of the network downgraded to version 0. As a result, this blockchain became the longest chain and could be accepted by all participants, regardless of their bitcoin software version. The US Financial Crimes Enforcement Network FinCEN established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American link miners who sell their generated bitcoins as Money Service Businesses MSBsthat are subject to registration or other legal obligations.
In April, exchanges BitInstant and Mt. On 15 MayUS authorities seized accounts associated with Mt. On 5 Decemberthe People's Bank of China prohibited Chinese financial institutions from using bitcoins. China banned trading in bitcoin, with first steps what year first bitcoin in Septemberand a complete ban that started on 1 February Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges, including thefts from Coincheck in JanuaryCoinrail and Bithumb in June, and Bancor in July.
The unit of account of the bitcoin system is a bitcoin. Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 0. The bitcoin blockchain is a public ledger that records bitcoin transactions. A network of communicating nodes running bitcoin software maintains the blockchain.
Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. To achieve independent verification of the chain of ownership each network node stores its own copy of the blockchain. This allows bitcoin software to determine when a particular bitcoin what year first bitcoin spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but the blockchain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.
Transactions are defined using a Forth -like scripting language. When a user sends bitcoins, the user designates each address and the amount of bitcoin being sent to that address in an output. To prevent double spending, each input must refer to a previous unspent output in the blockchain. Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction.
As in a cash transaction, the sum of inputs coins used to pay can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer. Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees. The size of transactions is dependent on the number of inputs used to create the transaction, and the number of outputs.
In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires nothing more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second.
But the reverse, computing the private key of a given bitcoin address, is mathematically unfeasible. Users can tell others or make public a bitcoin address without compromising its corresponding private key. Moreover, the number of valid private keys is so vast that it is extremely unlikely someone will compute a key-pair that is already in use and has funds.
The vast number of valid private keys makes it unfeasible that brute force could be used to compromise a private key. To be able to spend their bitcoins, the owner must know the corresponding private key and digitally sign the transaction.
The network verifies the signature using the public key ; the private key is never revealed. If the private key is lost, the bitcoin network will not recognize any other evidence of ownership;  the coins are then unusable, and effectively lost. To ensure the security of bitcoins, the private key must be kept secret.
Regarding ownership distribution, as of 16 March0. Mining is a record-keeping service done through the use of computer processing power. To be accepted by the rest of the network, a new block must contain a proof-of-work PoW.
Every 2, blocks approximately 14 days at roughly 10 min per blockthe difficulty target is adjusted based on the network's recent performance, with the aim of keeping the average time between new blocks at ten minutes.
In this way the system automatically adapts to the total amount of mining power on the network. The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted. The successful miner finding the new block what year first bitcoin allowed by the rest of the network to reward themselves with newly created bitcoins and transaction fees.
To claim the reward, a special transaction called a coinbase is included with the processed payments. The bitcoin protocol specifies that the reward for adding a block will be halved everyblocks approximately every four years. Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins [g] will be reached c.
New bitcoins are created roughly every ten minutes and the rate at which they are generated drops by half about every four years until all will be in circulation. Computing power is often bundled together or "pooled" to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block.
This payment depends on the amount of work an individual miner contributed to help find that block. A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold  or store bitcoins, due to the what year first bitcoin of the system, bitcoins are inseparable from the blockchain transaction ledger. A what year first bitcoin is more correctly defined as something that "stores the digital credentials for your bitcoin holdings" and allows one to access and spend.
There are several modes which wallets can operate in. They have an inverse relationship with regards to trustlessness and computational requirements. Third-party internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware.
A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen. An example of such a security breach occurred with Mt. Gox in Physical wallets store the credentials necessary to spend bitcoins offline and can be as simple as a paper printout of the private key:  : ch. A paper wallet is created with a keypair generated on a computer with no internet connection ; the private key is written or printed onto the paper [h] and then erased from the computer.
The paper wallet can then be stored in a safe physical location for later retrieval. Bitcoins stored using a paper wallet are said to be in cold storage. We just send money from our Bitcoin app directly to those paper wallets, and keep it safe that way. Physical wallets can also take the form of metal token coins  with a private key accessible under a security hologram in a recess struck on the reverse.
Another type of physical wallet called a hardware wallet keeps credentials offline while facilitating transactions. Hardware wallets never expose their private keys, keeping bitcoins in cold storage even when used with computers that may be compromised by malware. The first wallet program, simply named Bitcoinand sometimes referred to as the Satoshi clientwas released in by Satoshi Nakamoto as open-source software. Bitcoin Core is, perhaps, the best known implementation or client. On 1 Augusta hard fork of bitcoin was created, known as Bitcoin Cash.
On 24 October another hard fork, Bitcoin Goldwas created. Bitcoin Gold changes the proof-of-work algorithm used in mining, as the developers felt that mining had become too specialized. Bitcoin is decentralized: . Researchers have pointed out at a "trend towards centralization". Although bitcoin can be sent directly from user to user, in practice intermediaries are widely used. The pool has voluntarily capped their what year first bitcoin power at According to researchers, other parts of the ecosystem are also "controlled by a small set of entities", notably the maintenance of the client software, online wallets and simplified payment verification SPV clients.
Bitcoin is pseudonymousmeaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public.
How Much was 1 Bitcoin Worth in 2009?
Archived from the original on 19 October SFOX Follow. InAdam Back invented hashcash, a proof-of-work system that would prove very similar to what Bitcoin uses. Gox's bitcoin customers could lose again". The transaction was soon erased yaer the vulnerability fixed. Retrieved 9 October Preferred Stocks. Debt Management. Further information: Bitcoin Core. Bifcoin World. Archived PDF from the original on 16 June CNN Money. Archived from the original on 15 June