If you’ve been swept up in the recent popularity of cryptocurrencies or are just curious about how they work, it’s important to understand the history of cryptocurrency and how digital currencies like Bitcoin and the underlying blockchain technology came into being.
While the creator of cryptocurrency flagship Bitcoin is somewhat mysterious, there’s plenty we know about the history of cryptocurrency that could influence your decisions around investing and trading in this relatively new asset class.
The Challenge of Digital Currency
Digital currencies offer a unique challenge compared to traditional currencies like dollars and euros, called “fiat” currencies in the cryptocurrency community. That’s because, unlike dollars and cents that can be physically exchanged and tracked, cryptocurrencies exist only in the digital domain.
Digital assets are inherently difficult to secure. Just as you can copy a picture of your dog or your kids into an email to your parents or friends, most digital files are easy to replicate and send worldwide.
Creating a digital currency means creating a digital asset that can’t be duplicated and traced to a single, verified owner.
While your bank may hold dollars on your behalf, you can’t copy those dollars to double your holdings. They are secure at the bank. You, the bank, and the U.S. government agree what’s in a bank account is your money. With digital currencies, many of those systems would need to be recreated from scratch. That led to several attempts at cryptocurrencies before the current versions, built on a technology called blockchain, took off and went mainstream.
Early Concepts of Cryptocurrency
Before the current iterations of cryptocurrencies, several attempts didn’t gain widespread traction. Those include ideas in the early 1980s in the Netherlands and United States. The earliest noteworthy digital currency may be Digicash, which failed in the 1990s.
PayPal and competitors later emerged and took a hybrid approach where they handled digital transactions in existing currencies. These businesses still play a major role in online and international commerce.
Other attempts at cryptocurrencies or their underlying technology include B-Money, Hashcash, Flooz, and Bit Gold. One of the biggest names in early cryptocurrency is David Chaum, a computer scientist and mathematician who created DigiCash and may have had a role in later crypto development. But the true origin of Bitcoin remains somewhat mysterious.
Blockchain and Bitcoin
Modern cryptocurrencies were first described in 1998 by author Wei Dai. The concept fully emerged in 2009 with the release of a white paper that explains the foundations of blockchain and bitcoin. The author of the white paper is “Satoshi Nakamoto,” which is presumably a pseudonym for either a person or group of people.
Bitcoin runs on a technology called blockchain, which the Bitcoin Foundation calls a “triple entry” bookkeeping system. Every time there’s a new transaction, the sender, receiver, and a third-party must confirm and agree on the transaction. Every Bitcoin transaction is recorded in a triple-entry digital record called a “blockchain”—any Bitcoin transaction can be located on that digital record.
This allows for a combination of trust and a certain level of anonymity, as you can trace every transaction to a specific Bitcoin wallet but don’t necessarily know who owns that wallet. That’s great for privacy advocates but can be a challenge for anti-terrorism and anti-money-laundering officials who would like better ways to trace digital currency transactions around the world.
The total value of all bitcoin, known as the “market cap,” surpassed $1 trillion in March 2021. The currency is highly volatile, often experiencing significant swings in short periods of time.
In the past four Januaries, Bitcoin hit highs of around $900; $15,000; $4,000; $9,500; and $37,000. In March 2021, Bitcoin’s price hit $61,000.
An Explosion of Cryptocurrencies
Bitcoin isn’t the only player in the cryptocurrency game. As its popularity began to rise, other currencies were released using the same blockchain technology. The most noteworthy Bitcoin alternative is Ethereum, which has the second-largest market cap in the crypto market. There are plenty of others to choose from, though. The following list shows currencies with the largest market capitalizations available for trade on popular exchange Coinbase, as of March 30, 2021:
- Ethereum/Ethereum 2
- Binance Coin
This list contains currencies that change in value with market demand, like Bitcoin, and currencies pegged to the U.S. dollar. Tether and USD Coin are two major “stablecoins” that track major fiat currencies.
The Future of Cryptocurrency
It appears that cryptocurrency is on track for more widespread adoption. While there may be some changes and bumps in the road along the way, cryptocurrencies and blockchain technology are likely to continue to grow in popularity.
It has the attention and support of major investment banks like Goldman Sachs and JP Morgan. It isn’t just some crazy meme for nerds on the internet. It’s a risky investment opportunity that’s gathering interest and recognition across the world.
Mathew McDermott, the London-based Goldman Sachs managing director of its digital asset team, told Financial News that “we’ve crossed a line” into an era of adoption in which cryptocurrencies are a widely accepted store of value and hedge.
There’s no saying if cryptocurrencies will outperform or underperform traditional assets. But there’s little doubt that Bitcoin and other cryptocurrencies are here to stay.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.