When Floridian programmer Laszlo Hanyecz craved Papa John’s pizza in 2010(1), he didn’t restrain himself. At the time, he had 10,000 Bitcoins to spare—just enough to convince then-19-year-old student Jeremy Sturdivant to take on his offer. So the deal was on: Sturdivant would deliver two pizzas to Hanyecz’s home and get paid around $41 worth of Bitcoins.
Today, each pizza would have cost around $90,000,000, but Hanyecz has paid his dues. Over 12 years of buyer’s remorse is insane and enough, though it can continue to sting as Bitcoin’s value continues to increase. In fact, the entire cryptocurrency market is growing exponentially. Even the Ethereum price is unstoppable. Hanyecz should have kept those cryptos.
On the flip side, the man got to birth Bitcoin Pizza Day on the 22nd of May that year, when he became the first to buy a commercial, physical good using cryptocurrency. Meanwhile, Bitcoin hasn’t been the same.
Through astronomical highs, embarrassing lows, and even the threat of regulation, Bitcoin is now the most important cryptocurrency in the world. But how did it come about, and what is its saving grace? Let’s dig up some history.
Laying the Groundwork
Long before Bitcoin, an American cryptographer named David Chaum had developed Digicash, a proto-cryptocurrency requiring software for cash withdrawals and encrypted keys for fund transfers.
Three years later, in 1998, another American cryptographer named Nick Szabo created what is now considered the direct ancestor of Bitcoin. He called it Bit Gold, a virtual currency earned by solving cryptographic puzzles using computer power.
Digicash and Bit Gold were geared toward decentralization and would have worked perfectly together if Szabo hadn’t hit a snag. Hard as he tried, he couldn’t solve the double-spending problem, which allows using one digital token or unit of value for multiple purchases.
Double spending is the Achilles heel of digital currencies, with digital data easily reproduced and falsified by nature. The only solution was to use a central authority for clearing transactions, but this was antithetical to the fundamentals of Szabo’s invention.
It would take at least ten years to break the deadlock with a Bitcoin and blockchain whitepaper published by a mysterious Satoshi Nakamoto. As quickly as he appeared, Nakamoto skedaddled from the public eye after three years of introducing and establishing Bitcoin as the world’s first cryptocurrency.
Many have claimed to be the Bitcoin creator but have yet to provide credible proof. Legend has it Szabo was Nakamoto, but the mystery only highlights the need to understand the motives behind Bitcoin.
The Great Mission
It’s hard not to draw conclusions when Bitcoin rose during one of the most tumultuous times in US financial history. From 2008 to 2009, the world sank into a financial crisis(2) that spiked Americans’ distrust of banks and central banks. Around this time, Nakamoto (or Szabo) tried to save the people by offering an option to traditional banking: Bitcoin.
The problem with banks
By design, banks store money and lend it to make their own money. While this may sound reasonable, there’s more to it than logic. Bank transactions can involve too much, too many!
Credit rating agencies, pension, and hedge funds investing in the securities provided by these credit ratings; investment banks issuing these securities; insurance companies protecting these banks against defaulters, etc.—and that’s only for mortgages.
More players and complicated financial products diminish transparency and sustainability and lead to massive losses when markets repair. What makes it worse is the incentivization of lending and other risky practices of these financial institutions.
Because banks get paid for doing what they do, they feel encouraged to engage in even more risky behavior. When systems break down and markets go haywire, consumers—not banks—pay the price.
And central banks
One of the intrinsic functions of central banks is conducting monetary policy, including changing the amount of money in circulation. There are many good reasons to do this, but Nakamoto’s problem begins when governments have the worst—for example, to pay off debt.
Printing new money can cause hyperinflation, and we already know that from the Civil War, when the Confederate government increased the money supply to pay for the war. Nakamoto probably forgave that, but not Zimbabwe from February 1999 to December 2006 or Venezuela from 2018 till early last year.
In hyperinflation, prices of consumer goods rise too fast for wages to catch up. People can barely pay for their needs, so their quality of life quickly turns south. Again, consumers take the brunt of centralization.
Crypto rescue
When people can no longer trust the value of their currency, Bitcoin can be the messiah. The cryptocurrency is not government-issued; hence, changes in supply can only come from Bitcoiners themselves. There will be no taxes, frozen wealth, or third-party seizures.
There is no central monitoring of accounts, no transaction costs, no chargebacks, and virtually no thefts. Stealing Bitcoin also requires direct physical access, which is harder than breaching the comparably lax authentication processes known to conventional currency systems today.
On a Roll
On the 3rd of January, 2009, Nakamoto mined the first block of the Bitcoin network(3)—the Genesis block—effectively launching the Bitcoin blockchain. The cryptocurrency was valueless then, but in 2010, people began buying, selling, and trading it on online exchanges.
About a year later, the price of Bitcoin exceeded the $1 threshold for the first time. One thing led to another—the 2014 attack on Mt. Gox (the world’s biggest Bitcoin exchange at the time); the appearance of early competitors Litecoin in 2011 and Ethereum in 2015; and Bitcoin’s meteoric high of almost $20,000 in December 2017.
Shortly after, cryptoland suffered a lull as financial regulations and security issues pulled Bitcoin’s value down to a shocking $3,236 by December 2018. But all’s well that ends well. The cryptocurrency bounced back into a renaissance of sorts in 2020 during the COVID-19 global health crisis. A business intelligence company purchased $250 million worth of Bitcoin, which set off a bull market. This was followed by Tesla buying $1.5 million worth of Bitcoin at the start of 2021.
Nine months later, the first Bitcoin exchange-traded fund (ETF), ProShares Bitcoin Strategy (BITO), launched on a key US exchange, followed by other crypto futures. In November of the same year, Bitcoin cracked its current all-time high of just a little under $69,000.
Crypto Winter
With consistent inflation marking the start of 2022, the Federal Reserve tightened its monetary policy and caused steep bargains of high-risk assets, including Bitcoin.
Eventually, this wiped out the $10 billion hedge fund Three Arrows Capital and crypto creditors Celsius and Voyager, as well as Luna and its stablecoin, Terra. Even the world’s most important stablecoin, Tether, lost its peg momentarily to the US dollar, among many other crypto disasters.
At least, big banks and investment managers are convincingly optimistic, predicting a Bitcoin recovery of up to $30,000 in the second half of 2023(4). They also think the crash of cryptocurrency exchange FTX last November will not be in vain and can only bring crypto closer to the mainstream.
Bitcoin Today: Are We Saved (Or Anywhere Near)?
Speaking of mainstream, the US Senate Republican Policy Committee believes cryptocurrency has emerged from the financial underworld, with Bitcoin behind 41% of the industry’s total market value(5). Even more remarkable is the growing interest in cryptocurrency from governments worldwide, especially in terms of regulation.
But Nakamoto wanted exactly to save us from regulation. Are we going to see him soon?
One Bitcoin is worth about $18,000 today—not its best, but well above its cringy lows of 2017. All we know is Nakamoto has done a pretty good job, and maybe he’ll come to save us again when the teeth of regulation start to sink.