The Story of Crypto
Chapter 1: The Birth of Bitcoin
On 31 October 2008, a mysterious figure using the name Satoshi Nakamoto published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. This paper, now considered the holy book of crypto, introduced the world to an exciting concept called the blockchain. A global financial revolution had begun.
A few months later, on 3 January 2009, Bitcoin was born when Satoshi created the genesis block. This was block 0, the first ever blockchain block. On block 170, the first Bitcoin transaction took place between Satoshi and Hal Finney, a developer and cryptographic activist. Soon, a rising tide of enthusiasts started flocking towards Bitcoin.
Bitcoin started a revolution, because it is the first ever decentralized currency. This means it is not controlled by a central bank or government. Bitcoin’s supply and all the transactions on its network are controlled entirely by software. For the first time ever, we could send money without the need to trust a middleman.
Back in 2009, the financial crisis was showing its teeth. Trust in banks was falling, along with the global economy. Back then, the early adopters worked together to make Satoshi’s idea a reality, because they saw it as an opportunity to fundamentally change the world. Decentralization is the dream, blockchain is the key and Bitcoin is its prophet.
The final step in the birth of Bitcoin was for Satoshi to hand over the keys to the kingdom. Satoshi’s final master move was to disappear. His last known message was sent in April 2011. After that, the visionary simply vanished. There have been many attempts to discover his identity, but none were ultimately successful. The code he wrote for Bitcoin is so well constructed that many people believe it could not have been done by a single person. Satoshi is either a group of experts, or a generation-defining genius.
Every user on the Bitcoin network is equal to everyone else. There is no company that controls and develops the protocol. Anyone is free to review the code, play with it, and propose changes. It is up to the community of users running the Bitcoin software, the developers and the miners to agree which changes to the code they will accept. The result is a global, decentralized, peer-to-peer system for transferring value. What that means and how it works will be explained in the next chapter.
Crypto has entered the mainstream. But while everyone has at least heard of Bitcoin, the innovation that made it possible remains shrouded in mystery. At its core, the blockchain is just a way of storing information. The magic behind it is that information is almost impossible to change once it is added to the chain. What makes it work is an elegant blend of cryptography, coding and game theory.
It looks exactly like it sounds. The blockchain is a chain of blocks, which are added one on top of another. When your friend sends you crypto, that transaction is packed into a new block, along with hundreds or thousands of other people’s transactions. All these transactions take up just a few megabytes of space… any smartphone could easily process that. But before a block can be added to the chain, it must be secured with monumental amounts of processing power.
Cryptocurrency mining transforms electricity into a block lock. Miners compete against each other to solve a complex cryptographic puzzle. The first one to solve it gets to create a block and is rewarded with newly created coins. This competition consumes a lot of energy, but that is exactly the point. In order to change any information contained in the block, you would have to mine that block and every block after it all over again. The energy cost would be greater than the amount of coins you could possibly steal.
Because of mining, you can trust that no one will change the information stored on the blockchain. This makes it impossible for anyone to spend the same coins twice. Double spending was the main problem of pre-Bitcoin digital currencies. Blockchain solved it. But mining alone is not enough to cut the middleman from the equation. As long as information is stored on a server, the person in charge of the server controls the information. The solution? Keep your database on thousands of servers instead.
Instead of a central server, blockchains use a network of nodes. Anyone with a decent computer can download the entire blockchain and become a node. Nodes don’t just store information, they also send transactions to miners and automatically check that every transaction follows the rules of the blockchain. Where once there were banks, now there are nodes. If you run your own, you are one of the thousands of people making sure no one abuses the blockchain.
Once nodes broadcast a transaction through the network and miners pack it into a block, the coins appear in your crypto wallet. They never actually leave the blockchain, but the only way to access them is with your unique pair of cryptographic keys. The public key functions as the door to your safety deposit box and the private key is the… key. Everyone can see your public key, but the private key should remain secret.
Everyone can see you just received some new coins. But don’t worry, even though all the transactions on a blockchain are public, no one knows the identity of the person behind the address. That’s why we say blockchains are pseudonymous. Or at least most of them are. A lot has changed since Satoshi created the first blockchain. Today, there are almost two thousand cryptocurrencies. Some of them don’t use mining, others don’t use blockchain at all. The final chapter will explore the state of crypto today, after the crypto boom.
Where once there was one, now there are many. Some say too many. The crypto boom of 2017 is drawing parallels to the dot com bubble of the early 2000s. It is an open secret in the crypto community that most of the current cryptocurrencies will ultimately fail. Those that remain, however, may become digital giants.
New cryptocurrencies are surprisingly simple to create. The hard part is creating something that will have true value. When you invest in a cryptocurrency, you are investing in the idea behind it. If the idea doesn’t solve a real problem, the project will probably fail over time. That doesn’t mean you can’t turn a nice profit on it by trading. It just means that, as amazing as blockchain is, not every cryptocurrency will change the world the way Bitcoin did.
The crypto economy is developing so quickly that the all-time highs of early 2018 seem like a century ago. But it is important to remember that crypto is still just a baby. Today, blockchain is where the internet was in the 90s. There are a lot of projects being built, but only a few have proven to have real value. What keeps dragging more and more investors in is the massive potential of the underlying technology.
Right now, everyone investing in crypto is still an early adopter. But we’re past the stage where every new cryptocurrency will make its investors millions based on nothing more than hype. That was a unique moment in history and a lot of people got very rich, very easily. Today, things aren’t that simple any more. Investing in crypto could get you a Lambo, but your investment could also be a total bust. That’s why, now more than ever, it’s important to trade what you understand.
We’ve been through it all. When Bitstamp opened its doors in 2011, Bitcoin was the only cryptocurrency. Back then, you only had one choice to make: buy bitcoin or don’t buy it. Every other exchange from that time has collapsed. We stuck around, because we always place our customer’s interests first. Now, we want to continue that legacy by providing you with the knowledge to succeed in the crypto universe.
The road to crypto riches is paved with many dangers. But the extreme volatility of this market is exactly what makes it so exciting. The key is to make decisions based on understanding, not hype. Take the quiz on this page to see if you can tell crypto myths from reality and earn a starting fee bonus along the way! When you feel ready to go for the cryptocurrency stars, the shuttle is waiting for you at bitstamp.net – the world’s most reliable gateway into the crypto universe.