In November 2008, Satoshi Nakamoto shared his paper on a popular cryptography blog where everyone is identified only by their online names. “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.” It was an untraceable e-cash payment done directly and anonymously.
Users download the Bitcoin (BTC) software onto their computer and they get a digital wallet or account number that comes with a private key (like a password that only the user knows) and a public key that everyone uses to decode each transaction. All numbers are a random string of 26-35 characters, so they are hard to remember. The software also gives you a ledger to keep track of every BTC account and anyone in the network who wants to decode a transaction can update it.
To send BTCs, you use your account number, your private key, and a digital signature that is used only once for each particular transfer, and broadcast your payment online to other computers with a BTC software. After 10 minutes (it now takes longer) all the keys are decrypted. The transaction is verified and broadcast to the system. If everyone agrees, it is entered as a block into everybody’s ledger, which reflects the new amounts of BTC in each account. You can buy more BTCs with cash or credit card.
If you want to earn BTCs, your computer can be a miner or one that decodes BTC transactions using the public key and digital signatures to verify that the transfers are valid, meaning you only spend what you have and it is sent from an existing account to another existing account. Miners need massive computing power and electricity to outrun all other miners trying to decode the same block.
The first one to solve the code wins some BTC. Miners can also add a transaction fee to a block solved.
Once verified, your transfer is linked to a previous block in the ledger that shows all previous validated transactions of BTCs in general, and your own BTC transactions in particular.
This is known as the blockchain because every transaction refers to a previous transaction involving that particular BTC. This is how they safeguard against double payment since it is difficult to fake a BTC’s origin. Also, you would have to create your own succeeding blocks to make your fake BTC transfer seem valid. But it would be almost impossible to overpower the network of miners who are racing to decode your block after you broadcast your transaction.
Bitcoin accounts are identified by numbers but it is still possible to trace a particular transaction. Also, the public ledger allows everyone to see how much BTCs every account holds.
At first, Bitcoin struggled like a startup. Nakamoto gave away 50 BTCs to anyone who signed up in 2009. He was the only one who verified the transactions and created the first blocks. Some treated BTC as a joke when it was offered as payment.
In 2010, an online black market called Silk Road was the first to accept BTC as currency. Buyers used BTC to buy mostly drugs. The anonymity allowed buyers to pay for illegal activities. That’s when Bitcoin’s popularity spread and inexplicably, when Nakamoto disappeared. No one knows his identity.
In 2013, the FBI shut down Silk Road and seized nearly 30,000 BTCs. The owner is now serving life imprisonment for drug trafficking.
Early 2014, Japan-based Mt Gox, the only big Bitcoin exchange at that time, lost 740,000 BTCs, now likely worth over $3 billion. Some 2,000 BTCs were withdrawn from customer accounts stored in the exchange. Most of the money was never recovered and the owner was charged with embezzlement and data manipulation in 2017. Mt Gox filed for bankruptcy and sold over $400 million BTCs early this year.
At first, Bitcoins were worthless. Its price slowly climbed to $10 and stayed flat until 2013 when it rose to about $137. From then, it averaged about $200 until its explosive growth in late 2017 when it hit $19,000. Now it fluctuates around $8,000 depending on news and public hysteria.
Because of the meteoric rise in price last year, many individuals and private ventures bought and sold bitcoins and established cryptocurrency exchanges. Stories abound of fantastic crashes and overnight riches. Others made their own cryptocurrency to make their own initial coin offering (ICO) in the hopes of making money when their own coin price goes up.
You can easily create your own cryptocurrency in minutes. There are over 1,300 copycat currencies online, even joke ones that people still ignorantly buy. But in this case, being first matters. Bitcoin is still the highest priced and most recognized cryptocurrency.
Majority of cryptocurrency ICOs, exchanges, and wallets are just quick money-making schemes. They use the words bitcoin or blockchain and the unknowing public buys it up. There is no regulation to set up a website or wallet; nor to make an ICO or an exchange to buy or sell Bitcoins; or offer Bitcoin investment advice. So victims just assume that what they find online is legitimate. Often, the website later just goes offline and disappears with the “investor’s” money. There is no trace and no recourse.
Another scheme is to make an online Bitcoin digital wallet to keep it separate from an exchange which can be hacked, like Mt Gox. One bitcoin wallet, StrongCoin, claims only the user knows his private key as it is encrypted when he downloads their app. The user then buys or sends bitcoins to his digital wallet stored with StrongCoin. Then when the same user tries to use his private key, he is banned and there is no way for him to access his funds. There is no number to call and emails are ignored. But one customer used his 3G phone, which showed a different IP address from his current device, and he retrieved his Bitcoin. Others were not so clever.