If you’ve been caught up in the recent popularity of cryptocurrencies or are just curious about how they work, it’s important to understand the history of cryptocurrencies and how digital currencies like Bitcoin and the underlying blockchain technology emerged.
The Digital Currency Challenge
Digital currencies face a unique challenge compared to traditional currencies like the dollar and euro, which are referred to as “fiat currencies” in the cryptocurrency community. This is because digital currencies exist only in the digital realm and cannot be exchanged and tracked like the dollars and cents that can be physically exchanged and tracked.
Digital assets are inherently difficult to secure. Just as you can copy a picture of your dog or children in an email to your parents or friends, most digital files are easily replicable and can be sent around the world.
Creating a digital currency means creating a digital asset that cannot be duplicated and traced back to a single, trusted owner. While your bank may hold dollars on your behalf, you cannot copy those dollars to double your accounts. They are safely held in the bank. You, the bank, and the U.S. government all agree that what is in a bank account is your money. With digital currencies, you will need to recreate many of those systems from scratch. This has led to numerous attempts in the cryptocurrency space before the current versions, which rely on a technology called blockchain.
Early Concepts of Cryptocurrency
Before the current iterations of cryptocurrencies, many attempts did not achieve widespread success. These ideas began in the early 1980s in the Netherlands and the United States. The oldest notable digital currency may be DigiCash, which failed in the 1990s.
Later, PayPal and competitors emerged and adopted a mixed approach that dealt with digital transactions in established currencies. These companies still play a significant role in online and international trade.
Other attempts at cryptocurrency or its underlying technology include B-Money, Hashcash, Flooz, and Bit Gold. One of the prominent names in early cryptocurrency is David Chaum, a computer scientist and mathematician who created DigiCash and may have had a role in later cryptocurrency developments. However, the true origin of Bitcoin remains somewhat mysterious.
Blockchain and Bitcoin
Modern cryptocurrencies were first described in 1998 by author Wei Dai. The idea fully materialized in 2008 with the release of a white paper explaining the foundations of blockchain and Bitcoin. The author of the white paper is “Satoshi Nakamoto,” which is assumed to be a pseudonym for a person or group of people.
Bitcoin operates on a technology called blockchain, often referred to as a triple-entry accounting system. Each time a new transaction occurs, the sender, receiver, and a third party must confirm and agree upon the transaction. Every Bitcoin transaction is recorded in a digital ledger called the “blockchain” – any Bitcoin transaction can be identified on this digital ledger.
This allows for a combination of trust and a certain level of anonymity, as you can trace each transaction back to a specific Bitcoin wallet but do not necessarily know who owns that wallet. This is great for privacy advocates but poses challenges for anti-terrorism and anti-money laundering officials who want better ways to track digital currency transactions worldwide.
The total value of all Bitcoin, known as “market cap,” surpassed $1 trillion in March 2021 and was around $800 billion in March 2022. The currency is highly volatile and often experiences significant fluctuations within short periods.
Explosion
Cryptocurrencies
Bitcoin is not the only player in the cryptocurrency game. With the rising popularity of Bitcoin, other currencies have been issued using the same blockchain technology. The most prominent Bitcoin alternative is Ethereum, which has the second-largest market capitalization in the cryptocurrency market. There are many other currencies to choose from. The following list shows the cryptocurrencies with the largest market capital available for trading on the popular exchange platform Coinbase as of May 31, 2022:
- Bitcoin
- Ethereum
- Ethereum 2
- Tether
- USD Coin
- Binance Coin
- Cardano
- Ripple
- Binance USD
- Solana
This list includes currencies whose values fluctuate with market demand, such as Bitcoin and currencies pegged to the US dollar. Tether and USD Coin are two major digital currencies that track major fiat currencies.
The Future of Cryptocurrencies
Cryptocurrencies seem to be on their way to gaining wider acceptance. Although there may be some changes and obstacles along the way, cryptocurrencies and blockchain technology are likely to continue growing in popularity.
They have attracted attention and garnered support from major investment banks like Goldman Sachs and JP Morgan. It’s not just a crazy meme for online enthusiasts. It’s a risky investment opportunity that combines interest and recognition worldwide.
Matthew McDermott, the CEO of Goldman Sachs’ digital assets team based in London, told Financial News that we have “crossed a line” into an era where cryptocurrencies are widely accepted as a store of value and protection.
We cannot say whether cryptocurrencies will outperform traditional assets or not. But there is no doubt that Bitcoin and other cryptocurrencies are here to stay.
The Balance does not provide tax, investment, or financial advice. Information is provided without considering the investment goals, risk tolerance, and financial circumstances of any specific investor and may not be suitable for all investors. Investing involves risks, including the risk of loss of capital. Investors should consider consulting a financial professional to determine an appropriate strategy for retirement saving, taxes, and investment.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts found in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
H. T. M. Gamaj, H. D. Weerasinghe, and N. J. J. Dias. “Survey on Blockchain Technology Concepts and Applications and Issues,” page 2. SN Computer Science.
David Chaum. “Blind Signatures for Untraceable Payments,” pages 199-203. Advances in Cryptology. Springer, 1983.
Wei Dai. “Bitcoin,” pages 1-9. Decentralized Business Review.
Cynthia Wei-Kai. “Triple-Entry Accounting with Blockchain: How Did We Get Here?” Accounting and Finance.
NASDAQ. “Market Value of Bitcoin.”
Yahoo Finance. “Bitcoin-USD.”
Coinbase. “Cryptocurrency Prices, Charts, Daily Trends, and Market Value.”
National Bureau of Economic Research. “What Keeps Stablecoins Stable?” page 10.
Financial News. “‘We Have Crossed a Line’: Why Goldman Sachs Says Cryptocurrencies Are Here to Stay.”
Source: https://www.thebalancemoney.com/history-of-cryptocurrency-5119511
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