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Bitcoin’s Early History

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Bitcoin’s history is colourful, more colourful than some received wisdom
might have it. Some Bitcoin proponents say ‘Bitcoin (the protocol) has
never been hacked,’ but they are wrong. Bitcoin has been hacked. Here is
a selection of events from historyofBitcoin.org120 and the Bitcoin Wiki121
with my personal comments about these events.
2007
A pseudonymous Satoshi Nakamoto began working on Bitcoin.
18 Aug 2008
The website bitcoin.org was registered using anonymousspeech.com, a
broker that registers domains on behalf of customers who can choose to
remain anonymous. This shows how important privacy was to the person
or group involved in Bitcoin.
31 Oct 2008
The Bitcoin whitepaper, written under the pseudonym Satoshi
Nakamoto, was released on an obscure but fascinating mailing list
metzdowd.com that is much loved by cypherpunks. Wikipedia has this to
say about cypherpunks:
A cypherpunk is any activist advocating widespread use of strong cryptography and privacyenhancing
technologies as a route to social and political change. Originally communicating
enhancing technologies as a route to social and political change. Originally communicating
through the cypherpunks electronic mailing list, informal groups aimed to achieve privacy
and security through proactive use of cryptography. Cypherpunks have been engaged in an
active movement since the late 1980s.
This short whitepaper is regarded by Bitcoin believers as sort of bible.
3 Jan 2009
The genesis (first) block was mined. At that moment, the first bitcoins,
fifty of them, were created out of thin air and recorded on Bitcoin’s
blockchain in the first block—block zero. The transaction that contains
the mining reward, the so called ‘coinbase’ transaction, contains the text:
‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’
The text refers to a headline of the UK newspaper The Times. This is
regarded as proof that the block cannot have been mined significantly
earlier than that date, and the headline was presumably chosen
deliberately for its implication: When banks fail, their losses are
socialized; here is Bitcoin—it doesn’t need banks.

So beware of people who say they were ‘in Bitcoin’ before 2009! I have
been on a number of panels where other panellists try to establish
credibility by saying just how early they were involved in Bitcoin.
Sometimes, in their enthusiasm, they try to convince eager listeners that
they were there before 2009…
An interesting aside: The 50 BTC mined in the first block are
unspendable. They sit in address
1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa, but the account holder,
presumably Satoshi, whoever he, she, or they may be, is unable to
transfer them to anyone else due to some quirk in the code.
9 Jan 2009
Version 0.1 of the Bitcoin software was released by Satoshi Nakamoto,
along with its source code. This allowed people to review the code, and
download and run the software, becoming both bookkeepers and miners.
Bitcoin was thus accessible to anyone who wanted to download and use
it. Developers were able to scrutinise the code and build on it if they
wanted to contribute.
12 Jan 2009
The first Bitcoin payment was made from Satoshi’s address to Hal
Finney’s address in block 170123, the first recorded movement of bitcoins.
Hal Finney was a cryptographer, cypherpunk, and coder, and some
people believe he was partly behind the Satoshi pseudonym.
6 Feb 2010
The first Bitcoin exchange, ‘The Bitcoin Market,’ was created by
bitcointalk.org forum user ‘dwdollar

Previously, people traded bitcoins, but in a relatively unstructured way in
chat rooms and message boards. An exchange is the first step towards
making it easier for people to buy or sell bitcoins and increasing price
transparency.
22 May 2010
Pizza day! This was the first documented time bitcoins were used to pay
for something in the real world. Laszlo Hanyecz, a programmer in
Florida, USA, offered to pay 10,000 BTC for a pizza on the bitcointalk
forum.

Another developer Jeremy Sturdivant (‘jercos’) took up the offer and
called Domino’s Pizza (not Papa Johns as frequently reported) and had
two pizzas delivered to Laszlo. He received 10,000 BTC126 from Laszlo.

Here is the transaction127:

Laszlo kept the offer open and, over the next month, received a number of
pizzas for 10,000 BTC each time, before cancelling the offer:

This is the first transaction where bitcoins were used for economic
activity other than a straight buy or sell.
17 Jul 2010
Jed McCaleb (who has more recently founded Stellar, a cryptocurrency
platform based on Ripple), converted his card trading exchange into a
Bitcoin trading exchange. ‘Mt Gox,’ usually pronounced ‘mount gox,’
stands for ‘Magic: The Gathering Online eXchange’. Magic: The
Gathering is a collectable card game, and the website was used initially to
trade cards before it was converted to a Bitcoin exchange. Initially, you
could fund your Mt Gox account using PayPal, but in October, they
switched to Liberty Reserve. Mt Gox would eventually collapse in Nov
2013–Feb 2014, but in its heyday, it was the largest and most well-known
and well-used exchange.
15 Aug 2010
Bitcoin’s protocol got hacked. Beware the popular narrative that says,
‘Bitcoin itself has never been hacked’. A potential vulnerability was
discovered, and someone exploited this vulnerability in block 74,638 to
create 184 billion bitcoins for themselves. This strange transaction was
quickly discovered and, with the consent of the majority of the
community, the whole blockchain was ‘forked,’ reverting it to a previous
state (we will discuss forks later).
So much for the immutability of Bitcoin’s blockchain: there are always
exceptions.
The bug was fixed. Bruno Skvorc has written a good explanation of how it
happened on his blog bitfalls.com128, and the bitcointalk forum has a
thread129 where key developers discussed the bug.

If anyone says Bitcoin hasn’t been hacked, ask them ‘What about the
integer overflow bug in August 2010 where someone sent themselves 184
billion bitcoins?’
18 Sep 2010
The first mining pool, Slush’s pool, mined its first block. A mining pool is
an organisation where multiple participants combine their hash power to
give themselves a better chance of winning a block. The participants split
the rewards between them in proportion to their hash power
contributions, a bit like a lottery syndicate. Mining pools have grown in
significance over time.
7 Jan 2011
12 BTC were exchanged for $300,000,000,000,000. This is probably the
highest exchange rate Bitcoin has ever achieved. The dollars in question,
however, were Zimbabwean dollars. The Zimbabwean dollar is a good
however, were Zimbabwean dollars. The Zimbabwean dollar is a good
example of what can go wrong in a failing economy, and a reminder that
fiat currencies need to be well managed.
9 Feb 2011
On the Mt Gox Bitcoin exchange, Bitcoin reached parity with the US
dollar (1 BTC = 1 USD).
6 Mar 2011
Jed McCaleb sold the Mt Gox website and exchange to a French
entrepreneur Mark Karpeles who was living in Tokyo. Jed sold it on the
premise that Mark would do a better job expanding it. Alas Mark did not
live up to these hopes. Mt Gox filed for bankruptcy in 2014 and Mark
eventually landed up in jail.
27 Apr 2011
VirWoX, a website that allowed customers to convert between fiat
currencies and Linden Dollars (the virtual currency for use within the
computer game Second Life), integrated Bitcoin. People could now
exchange directly between bitcoins and Linden Dollars. This was possibly
the first virtual currency to virtual currency exchange.
1 Jun 2011
WIRED magazine published a famous article, ‘Underground website lets
you buy any drug imaginable,’130 written by Adrian Chen. It described a
website called The Silk Road, launched in Feb 2011 and run by twentyseven-
year old Ross William Ulbricht under the nickname ‘Dread Pirate
Roberts,’131. The Silk Road was described as a kind of ‘eBay for drugs’—a
darknet market, only accessible through the special browser Tor132, which
matched buyers and sellers of drugs and other illegal or questionable
paraphernalia. Bitcoins were used as the payment mechanism.

Here is how the article describes Bitcoin:
As for transactions, Silk Road doesn’t accept credit cards, PayPal or any other form of
payment that can be traced or blocked. The only money good here is Bitcoins.
Bitcoins have been called a ‘cryptocurrency,’ the online equivalent of a brown paper bag of
cash. Bitcoins are a peer-to-peer currency, not issued by banks or governments, but created
and regulated by a network of other Bitcoin holders’ computers. (The name ‘Bitcoin’ is
derived from the pioneering file sharing technology BitTorrent.) They are purportedly
untraceable and have been championed by cyberpunks, libertarians and anarchists who
dream of a distributed digital economy outside the law, one where money flows across
borders as free as bits.
To purchase something on Silk Road, you need first to buy some bitcoins using a service like
Mt. Gox Bitcoin Exchange. Then, create an account on Silk Road, deposit some bitcoins, and
start buying drugs. One Bitcoin is worth about $8.67, though the exchange rate fluctuates
wildly every day.
This was the first time Bitcoin came to the attention of a wide audience.
The Silk Road was eventually taken down by US authorities in October
2013, though many copycats have taken its place.
14 Jun 2011
Wikileaks and other organisations began to accept bitcoins for donations.
Bitcoin is attractive for these organisations owing to its censorship
resistance. While is it relatively easy for a government to lean on
traditional payment systems (banks, PayPal, etc) to monitor transactions,
block assets and freeze accounts, cryptocurrencies provide an alternative
funding mechanism. Whether this is good or bad, of course, is a matter of
opinion…
20 Jun 2011
Possibly the first documented evidence134 of a physical brick-and-mortar
merchant accepting Bitcoin as a means of payment. Room 77, a
restaurant based in Berlin, Germany sold fast food for bitcoins.

2 Sep 2011
Mike Caldwell started creating physical bitcoins which he called Casacius
coins. They are physical discs of metal, each with a unique private key
embedded behind a hologram sticker. Each coin’s private key is linked to
an address that is funded with a specified amount of bitcoins, as depicted
on the coin.

These Casascius coins are the physical representations used in many
stock photos used for media articles about bitcoins. They are also prized
as collector’s items and cost much more than the value of the bitcoins
contained in them, especially the first edition, which had a spelling
mistake.
8 May 2012
Satoshi Dice was a gambling website launched on 24 April 2012. Users
could send bitcoins to specific addresses with a chance of winning up to
64,000 times their original stake. Each address had a different payout
and a different chance of winning. On 8 May, it became responsible for
over half the transaction volume on the Bitcoin blockchain. Satoshi Dice
was created by libertarian Eric Voorhees and was extremely popular.
Early adopters seemed to have a penchant for gambling, and there wasn’t
much else they could do with their bitcoins.

It was an interesting gambling system. Unlike other online casinos where
users have to trust that the house is not cheating, Satoshi Dice was
provably fair, using deterministic cryptographic hashes as the random
number generators. Of course, the house had an edge, but the edge was
small, known (1.9%), and was demonstrably adhered to.
This development started the debate about what ‘spamming’ a network
with transactions means when there are no terms of service. It also
started the community thinking about what fair transaction fees should
be.
28 Nov 2012
Bitcoin’s first block reward halving day: On block 210,000 the block
reward halved from 50 BTC to 25 BTC, slowing the rate of generation of
bitcoins. Transaction fees then were insignificant, so this halving day
reduced by half each block’s financial reward for miners.
2 May 2013
The first two-way Bitcoin ATM was launched in San Diego, California.
This was a machine where you could buy bitcoins or sell your bitcoins for
cash. This sparked a wave of one-way Bitcoin vending machines (cash in,
BTC out) and two-way Bitcoin ATMs being installed around the world.
Many were found to be unprofitable, as demand didn’t meet expectations.
At some stage in Singapore there were more than twenty machines, but
there are very few in evidence today.
Jul 2013
The first Bitcoin ETF (Exchange Traded Fund) proposal was filed with
the United States Securities and Exchange Commission. Tyler and
Cameron Winklevoss, twins made famous in the film The Social Network
about Facebook, were responsible for this filing. An ETF could make
investment into Bitcoin more accessible to the public, as many funds are
allowed to buy ETFs but not bitcoins directly. A number of other Bitcoin
ETFs, have been filed for approval but as of mid-2018, I am not aware of
any Bitcoin ETF anywhere in the world136. Other instruments exist that
trade on traditional financial exchanges and provide exposure to the price
of Bitcoin.
6 Aug 2013
Bitcoin was classified as a currency by a judge in Texas, USA. This was
one of many arguments and determinations of what Bitcoin is: Currency?
one of many arguments and determinations of what Bitcoin is: Currency?
Property? A security? Some other financial asset? A New Thing? There is
still no global definition, and there may never be a globally consistent
one.
Bitcoin’s categorisation has tax and other implications that differ by
jurisdiction. The classification of bitcoins and cryptocurrencies may mean
the difference between zero or punitive tax rates in any given tax regime,
and therefore may have an impact on its potential adoption and usage
(see below, 20 Aug 2013).
9 Aug 2013
Bitcoin’s price became searchable through Bloomberg software, which is
popular with traders in traditional financial markets. Bloomberg used the
ticker ‘XBT’ to represent Bitcoin, consistent with ISO currency code
standards. With ISO currency codes (e.g., USD, GBP, etc), the first two
letters denote the country and the third letter denotes the currency unit.
The symbol ‘BTC,’ if adopted, would indicate a currency of Bhutan137.
Precious metals such as gold (XAU), silver (XAG), palladium (XPD), and
platinum (XPT) are also considered a ‘currency’ but start with X as they
are not associated with a country. Bitcoin follows the currency standard
for precious metals.
20 Aug 2013
Bitcoins were ruled as private money in Germany138, with tax exemptions
if held for more than a year. The tax treatment of bitcoins and
cryptocurrencies is a major point of contention, especially in the USA
where the buying and selling of bitcoins attracts capital gains. If you
bought a Bitcoin at $100, then, after its price had risen to say $1,000, you
exchanged it for Ether, another cryptocurrency, then you would have to
record that as a capital gain of $900 and pay tax on that capital gain, even
though your assets were still in cryptocurrency and you hadn’t realised
that gain in USD. So, depending on jurisdiction, tax authorities may well
consider the exchange of cryptocurrencies as selling and buying with fiat
currency and want to see those transactions taxed.
22 Nov 2013
Richard Branson, owner of Virgin Galactic, announced he would accept
bitcoins as payment for a flight to space. Bitcoins and space travel—what
a great time to be alive!
28 Feb 2014
After a long saga of hacks, glitches, poor management practices, lost
coins, suspended withdrawals, failed banking transactions, and other
incompetence, Mt Gox finally filed for bankruptcy protection in Japan in
Feb 2014. The company said it had lost almost 750,000 of its customers’
bitcoins and around 100,000 of its own bitcoins, together worth around
$473 million near the time of the filing. There are numerous theories as
to what happened, the most compelling being a combination of hackers
draining the Mt Gox hot wallets and management incompetence. The
whole escapade, including the bankruptcy proceedings, was in such
shambles and even the full creditor list (containing full names and
amounts claimed) was leaked. The story of Mt Gox deserves its own book,
but for a summary it is worth reading the Wikipedia entry139 about this
sorry story.
After Mt Gox’s implosion, Bitfinex became the world’s largest exchange
for a while.
Creditors to the bankrupt estate have not yet been compensated, and if
they ever will be, it will be in Japanese yen at a rate that roughly equates
to $400 per Bitcoin—less than a tenth of Bitcoin’s value at time of
writing.

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