A Short History of ‘Bitcoin and Crypto Currency’

Bitcoin hit the news headlines on an almost daily basis in Autumn and Winter 2017 as the price of one unit of the crypto currency passed $18,000 (£13,000) for the first time.

Although it’s often referred to as new, Bitcoin has existed since 2009 and the technology it is built on has roots going back even further. In fact if you had invested just $1,000 in Bitcoin the year it was first publicly available, you would now be richer to the tune of £36.7 million.

Even as a financial professional I have to admit my knowledge of its history was sketchy at best, I had always thought of it as a mysterious cyber currency only to be found on the so called ‘dark web’ and often used for nefarious means.

However, in recent years it has gained a fair amount of credibility, to the extent whereby on Radio 4’s money programme in December 2017, 2 out of the panel of 4 ‘experts’ suggested that it really is here to stay!   

Whilst I watch in silent horror as groups of acquaintances with no financial experience set themselves up on social media as ‘cryptocurrency traders’ with self-styled names such as ‘The Wolf of Crypto’ in honour of Leonardo Di Caprio’s financial scam artist in ‘The Wolf of Wall Street’. This alone seems to suggest to me that the current bitcoin bubble and price rise is entirely built on greed with no real thought of the moral considerations as to how a credible cyber currency really could be a great benefit to a world which will spend more and more time and money online in years to come.

Some people liken the current bitcoin price surges to Dutch tulip bulbs, others to the beanie baby craze of the late 90’s - one thing for sure is that those who don’t learn from history are doomed to repeat its mistakes – so here is a brief history of Bitcoin and cryptocurrency.

1998 – 2009 The pre-Bitcoin years. Although Bitcoin was the first established cryptocurrency, there had been previous attempts at creating online currencies with ledgers secured by encryption. Two examples of these were B-Money and Bit Gold, which were formulated but never fully developed.

2008 – The Mysterious Mr Nakamoto. A paper called Bitcoin – A Peer to Peer Electronic Cash System was posted to a mailing list discussion on cryptography. It was posted by someone calling themselves Satoshi Nakamoto, whose real identity remains a mystery to this day.

2009 – Bitcoin begins. The Bitcoin software is made available to the public for the first time and mining – the process through which new Bitcoins are created and transactions are recorded and verified on the blockchain – begins.

2010 – Bitcoin is valued for the first time. As it had never been traded, only mined, it was impossible to assign a monetary value to the units of the emerging cryptocurrency. In 2010, someone decided to sell theirs for the first time – swapping 10,000 of them for two pizzas. If the buyer had hung onto those Bitcoins, at today’s prices they would be worth more than $100 million.

2011 – Rival cryptocurrencies emerge. As Bitcoin increases in popularity and the idea of decentralized and encrypted currencies catch on, the first alternative cryptocurrencies appear. These are sometimes known as altcoin and generally try to improve on the original Bitcoin design by offering greater speed, anonymity or some other advantage. Among the first to emerge were Namecoin and Litecoin. Currently there are over 1,000 cryptocurrencies in circulation with new ones frequently appearing.

2013 – Bitcoin price crashes. Shortly after the price of one Bitcoin reaches $1,000 for the first time, the price quickly begins to decline. Many who invested money at this point will have suffered losses as the price plummeted to around $300 – it would be more than two years before it reached $1,000 again.

2014 – Scams and theft. Perhaps unsurprisingly for a currency designed with anonymity and lack of control in mind, Bitcoin has proven to be an attractive and lucrative target for criminals. In January 2014, the world’s largest Bitcoin exchange Mt.Gox went offline, and the owners of 850,000Bitcoins never saw them again. Investigations are still trying to get to the bottom of exactly what happened but whatever the story, someone dishonestly got their hands on a haul which at the time was valued at $450 million dollars. At today’s prices, those missing coins would be worth $4.4 billion.

2016 – Ethereum and ICOs. One cryptocurrency came close to stealing Bitcoin’s thunder this year, as enthusiasm grew around the Ethereum platform. This platform uses cryptocurrency known as Ether to facilitate blockchain-based smart contracts and apps. Ethereum’s arrival was marked by the emergence of Initial Coin Offerings (ICOs). These are fundraising platforms which offer investors the chance to trade what are often essentially stocks or shares in startup ventures, in the same manner that they can invest and trade cryptocurrencies. In the US the SEC warned investors that due to the lack of oversight ICOs could easily be scams or ponzi schemes disguised as legitimate investments. The Chinese government went one further, by banning them outright.

2017 – Bitcoin reaches $17,000 and continues to grow. A gradual increase in the places where Bitcoin could be spent contributed to its continued growth in popularity, during a period where its value remained below previous peaks. Gradually as more and more uses emerged, it became clear that more money was flowing into the Bitcoin and cryptocoin ecosystem. During this period the market cap of all cryptocoins rose from $11bn to its current height of over $300bn. Banks including Barclays, Citi Bank, Deutsche Bankand BNP Paribas have said they are investigating ways they might be able to work with Bitcoin. Meanwhile the technology behind Bitcoin – blockchain – has sparked a revolution in the fintech industry (and beyond) which is only just getting started.

Whatever your opinion on Bitcoin and cryptocurrency – and educated commenters have described them as everything from the future of money to an outright scam – it seems they are here to stay. Will it succeed in doing what many early adopters and evangelists claim it is destined to – replace government-controlled, centralised money with a distributed and decentralized alternative, controlled by nothing besides market forces? Well, 2018 may yield some clues but we are unlikely to know the answer for some time yet.

To discuss your financial planning needs please contact me at Argents Wealth Management adam.tebbutt@argentswealth.co.uk 01603 666132. (Just don’t ask me to invest into bitcoin)!