Cryptocurrency Part 1: Its Origins
Nivedita Patnaik
Sep 1 · 4 min read
Elon Musk, Ray Dalio and Raghuram Rajan have mentioned one piece in common in recent months.Cryptocurrency is here to stay.I stayed indifferent to the concept of cryptocurrency till now given it was in news for the immense volatility of prices and its value is not pegged to anything.However, the concept of digital currency continues to evolve and it’s about time to learn what this means for economy in future!
There are three parts to the history of cryptocurrency — the origin till 2017, the years from 2017 till 2020 and then post 2020 pandemic.
The chart shows the price history of Bitcoin.While I have mapped it based on the price history, the story of the cryptocurrency has also evolved in the same time periods.
Bitcoin price history 2013–2021 | Statista Bitcoin (BTC) was worth over 60,000 USD in both February 2021 as well as April 2021 due to events involving Tesla and… www.statista.com
My article will also be a 3 part series — I will probe a little into the history and concept of cryptocurrency in this part.
In the next 2 parts I will cover how cryptocurrency get its value (post 2017 period) & what it means for a nationalized digital currency in India (looking ahead).
Origins (Pre 2017) Many of us would know cryptocurrency started in 2009 and the first “Bitcoin” was “mined”.The origin traces back to a paper that was mysteriously circulated via email explaining a peer-to-peer currency.
The currency would be decentralized and will rely on a public ledger to document transactions.The first trade of the Bitcoin was executed in 2010 when programmer Laszlo Hanyecz used 10,000 Bitcoins to buy 2 Pizzas.
Until then the Bitcoin was never traded.The story goes that Laszlo reached out in the Bitcointalk community to trade 10,000 Bitcoins for the pizzas and the first trade experiment was successfully executed.
How Was Bitcoin Created? A Look at Its Performance Since Bitcoin rallied to an all-time high in April and brought a windfall to early investors.
Those who had not invested in… gadgets.ndtv.com
After Bitcoin, the idea of a decentralized digital currency caught up and many such currencies were launched.Presently there are 1000+ crypto currencies in circulation.The more popular ones being Ether and DogeCoin.
Bitcoin, Ethereum, Tether: A Look at Top Cryptocurrencies and Their Worth Cryptocurrency, a form of digital asset that is based on the idea of distributed ownership, is the newest craze in… gadgets.ndtv.com
Of these DogeCoin has a very interesting origin.For those who want to read more on origins of DogeCoin, I am sharing a link below.
https://www.forbes.com/advisor/investing/what-is-dogecoin/
In the rest of the article, I will however be using Bitcoin to refer to cryptocurrency.
Players in the world of Bitcoin Bitcoin Miners.
They generate new Bitcoins.Generating new bitcoins is a complex process involving a verification process of the sales of bitcoins.Every time there is a new transaction, the miners provide “proof of work” to prevent “double-spending”.This process is extremely complex and needs very high computing power.
This has lead to some criticism for the high energy usage in Bitcoin mining.
But we will not get into it here.
Bitcoin Exchanges.These are marketplaces where you can buy and sell Bitcoins.You might have heard of Coinbase IPO in April 2021.This is one of the earliest exchanges for cryptocurrency founded in 2012 and is now a listed company.
Coinbase would source Bitcoins from “miners” and then sell on its platform based on an exchange rate.
Check the below interesting article on how the price of Bitcoin is determined on the exchange Coinbase.
This is what determines the price of Bitcoin Just like a hiker hoofing up and down across a jagged mountain range, anyone who follows the price of Bitcoin is… www.popsci.com
Bitcoins can only be “Mined” I need to be sure that the currency I am using is not already in circulation.
In the world of fiat currency, this role of ensuring no duplicates is played by a bank today.Every currency note printed by a bank is unique.I can check specific markers on the note to be certain its genuine.In case of online payments, the bank ensures there is no fraudulent transactions.Likewise, the process of mining a Bitcoin ensures that there is no duplication in the use of a Bitcoin.
What makes it so complex? For providing “proof of work”, miners need to encrypt a “block” (a Bitcoin transaction), such that when the right encryption key is generated the block cannot be changed.
Once more blocks get appended to this with the right encryption, then changing any one chain of blocks will mean decrypting a series of ledgers and then redoing the encryption.The time taken for this activity increases exponentially given all the blocks are processed in series.The blockchain which is the longest, is expected to be the most genuine.
This process increases the security of the peer-to-peer network.Any hacker who intends to break the chain will need to have extremely powerful computers to be able to redo the entire chain with the right encryption.
Bitcoin network – Wikipedia The bitcoin network is a peer-to-peer payment network that operates on a cryptographic protocol.Users send and receive… en.wikipedia.org
How does the Cryptocurrency Economy work? What’s so special about this currency?
I don’t need a bank to use this currency.
I can buy Bitcoins via an exchange.
Once I have a few bitcoins, I can use this to purchase items wherever the currency is accepted.Given the humongous effort to “mine” a Bitcoin, and that it is limited in circulation, some equate it to assets like gold.The real question is how does it get its value?
We talk more about this in Part 2.
Reference
Here is a link to the original paper.I hope you understand the paper better after reading my piece above! https://bitcoin.org/bitcoin.pdf.
