How Bitcoin grew up and became big money

Depending on how you count its birth, bitcoin turned 10 years old today. The first lines of code were committed to the bitcoin blockchain on January 3rd, 2009, a few months after the publication of the original whitepaper. These lines of code, known as the “genesis block,” are credited to the person or persons known as Satoshi Nakamoto.

On January 12th, Nakamoto sent 10 bitcoin to Hal Finney, and a new finance counterculture was born. At this point, the bitcoin’s worth was negligible. Users essentially gave each other bitcoins as rewards for good comments in forums. The first “real” transaction took place on May 22nd, 2010. Laszlo Hanyecz bought two pizzas for 10,000 bitcoin, or about $30. (At current prices, 10,000 bitcoin would be worth $38 million. I hope that pizza was tasty.)

For most of its life, bitcoin drew from three main overlapping communities: the small community of original investors and true believers, the blockchain technology aficionados, and the speculators who are just here to make some money, ma’am. Lately, another community has emerged: old-fashioned stodgy finance types.

Originally, bitcoin was money with a philosophy: instead of a central bank, it had programming and Nakamoto’s whitepaper, both of which suggested skepticism about ordinary financial institutions. But Nakamoto vanished. As the digital currency took off, the system that was supposed to work without trust developed trust issues. And as the bitcoin’s price has risen, it’s become another investment vehicle for the financial system it was meant to replace. 10 years later, bitcoin is part of the system it was meant to overthrow.

BORN FROM CRISIS
If you had asked me 10 years ago, I would not have imagined finance could have a counterculture. But in 2008, as the banking crisis was in full swing, a group of anarchists, libertarians, and other dissatisfied tech-savvy true believers created one. (There had been other attempts at digital cash, but none of them truly took off.) In August 2008, someone registered bitcoin dot org as a domain; on Halloween that year, a paper went up describing a decentralized system for electronic transactions that didn’t rely on trust. The original Satoshi Nakamoto white paper begins (emphasis mine), “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

You can see the influences of the banking crisis on bitcoin’s ideology: first of all, it’s a specific distrust of financial institutions. Beyond any number of other breaches of trust that took place during the financial crisis, a money market fund called the Reserve Primary Fund did something very scary: it broke the buck. If you had invested $1, you’d get 97 cents back. This was because the money market fund had invested in Lehman Brothers, a financial firm that had just gone belly-up.

Money market funds, at the time, were considered as safe as an actual savings account; $3 trillion had been invested in them as of September 2008, according to USA Today. But they aren’t as safe as savings accounts, which is why they had better rates of returns â€" as investors found out, to their surprise and dismay. (Regulations around money market funds have subsequently changed.)

Contamination from the Lehman bankruptcy spread into the wider financial markets, making it clear how closely banks were tied together. There are several ways to respond to this: one is to strengthen financial regulations, tweak the system, and leave it running, hopefully in a more stable way. Another response is to create a new system without these specific hazards. Suddenly, a lot of people were in the mood to take bitcoin seriously.

Bitcoin highlights how fundamentally bizarre money is. In some sense, money isn’t “real” in the way that a tree is. It’s a human invention, a value token that makes exchange easier. But it’s real enough â€" people fight and die for it, empires fall for lack of it, and I would personally go homeless if I did not use it to pay my rent. Money is like Tinkerbell in Peter Pan: it’s real if enough people believe in it. And in 2009, a lot of people were looking for alternatives to the mainstream financial system that had catastrophically failed. The core of banking, as most people understand it, is money. But what does money look like when the bankers are taken away? Of all the previous attempts at internet-based currency â€" and there were many â€" bitcoin was the one that broke out as the best possible alternative to society’s collective anxieties around the financial system.

Read more: https://www.theverge.com/2019/1/3/18166096/bitcoin-blockchain-code-currency-money-genesis-block-silk-road-mt-gox


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