Bitcoin, the world’s first and biggest cryptocurrency, is 10 years old today.
It has been a long journey from an abstract concept in a pseudonymous inventor’s 9-page white paper to a US$200bil (RM836bil) economy, with 2,000 types of cryptocurrencies, 15,000 exchanges, and the potential to overthrow the financial industry and beyond.
How does Bitcoin work?
The paper details the use of a peer-to-peer network to allow online payments to be sent from one party to another without relying on a financial institution. In the system each owner transfers bitcoin to another by creating a unique digital signature and timestamp. All transactions are published across the entire network, but users maintain privacy by keeping their Bitcoin addresses anonymous.
It’s like signing for a package at your doorstep before passing it on to the next address – with the entire delivery history recorded and encrypted securely. In this way, transactions can be verified without a central party and owners are blocked from sending the same digital coin to more than one recipient.
What is Bitcoin mining?
Ultimately the supply of Bitcoin is capped at 21 million coins, with new units being distributed into circulation over time – in this way it functions as a store of value, a bit like gold. Mining is the process of generating new coins as a reward for building and maintaining the gigantic public ledger of every Bitcoin transaction that has taken place.
Whenever someone sends a Bitcoin to another, the transfer has to be validated by miners, which can be any computer running the Bitcoin software. These computers compete against one another to be the first to approve a new batch of transactions by solving a complex maths problem as part of the Bitcoin code – with the fastest one ‘winning’ all the money. Right now there are over 17 million Bitcoin in circulation, and about 1,800 Bitcoin is created each day.
Bitcoin mining has evolved from a bedroom activity to mass-scale production, undertaken by specialised chips known as ASICs (application-specific integrated circuits). Miners typically gather computer power together in so-called mining pools to increase their odds of winning new coins. Beijing-based Bitmain, the world’s biggest maker of Bitcoin mining rigs and operator of the world’s two largest mining pools, has filed to go public in Hong Kong.
What are Bitcoin’s milestones and major events?
In January 2009, Nakamoto released the Bitcoin software as open source code, and created the first 50 unspendable Bitcoin, known as the “genesis block”. Embedded permanently in the data is a brief line of text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” It refers to the headline of a Times article about the UK’s attempt to prop up its economy.
In May 2010, Laszlo Hanyecz, a Florida-based programmer, spent 10,000 Bitcoin on two Papa John’s pizzas, in the first known commercial transaction using Bitcoin. At today’s rate those pizzas cost nearly US$64mil (RM267mil).
The first major users of Bitcoin were black markets such as Silk Road, which allowed users to buy and sell drugs including heroin, LSD and marijuana, and only accepted Bitcoin as payment. In October 2013 the FBI seized about 26,000 Bitcoin from the darknet marketplace during the arrest of its founder Ross William Ulbricht.
In February 2014, Mt Gox, once the world’s largest Bitcoin exchange, declared bankruptcy after the Tokyo-based company realised it had lost a total of 850,000 Bitcoin – worth around US$460mil (RM1.9bil) at the time – in an apparent hack. About 18 months later, Japanese police arrested Mt Gox CEO Mark Karpeles on charges of fraud and embezzlement.
In August 2017 Bitcoin split into two versions – one is the bitcoin we are familiar with, and the other is a new cryptocurrency called Bitcoin cash, which offers an eight-fold increase in transaction capacity. This was the result of rival arguments in the community over how to adapt the Bitcoin software to allow it to handle more transactions.
China, once the world’s largest Bitcoin market, banned cryptocurrency exchanges in September 2017 amid fears of financial chaos.
Bitcoin prices have been on a wild ride over the years, with some big ups and downs tied to major events. It was worth US$1 (RM4.20) initially in February 2011, passed the US$100 (RM420) barrier in April 2012, and hit US$1,000 (RM4,200) in November 2013. Late last year Bitcoin reached an all-time high of nearly US$20,000 (RM83,000) before shedding around US$127bil (RM531bil) in total market cap year to date, according to third-party data provider CoinMarketCap. It currently trades in a US$6,000-US$7,000 (RM25,000-29,000) range.
What’s next for bitcoin and other cryptocurrencies?
The decade-long history of bitcoin has featured scams, money laundering, cyber heists, wild speculation, and other risks. But this has not stopped everyday investors and Wall Street professionals alike from pouring their money into the cryptocurrency as it edges towards mainstream acceptance.
Developers are working to increase bitcoin’s limited transaction capacity – currently up to just 7 transactions per second – and among the popular solutions is a technology called Lightning Network, which builds a system on top of the bitcoin network to handle small payments.
Bitcoin’s invention has also highlighted the distributed ledger technology that underpins it – known as blockchain. Blockchain technology is now behind over 2,000 cryptocurrencies such as ethereum, ripple and EOS, which together have a market cap of US$200 billion, according to CoinMarketCap.
Developers are exploring applications for many of these blockchains, ranging from video games to social networks to data storage platforms. Governments and big institutions are also building their own blockchains to handle things like accounting, supply chains and identity management.
The signs are promising that bitcoin will be around for its 20th birthday in 10 years’ time.
*This post is credited to South China Morning Post