Created by a mysterious entity and anchored by mathematics, the cryptocurrency bitcoin has started to even out after a volatile past and widespread mistrust by the mainstream.
Microsoft has recently embraced bitcoin and data centers the world over are beginning to offer their computing power to keep the digital currency stable. While tech and financial heavyweights have started to gamble on the cryptocurrency, bitcoin started out as a radical idea that broke away from a currency backed with gold and other precious resources.
The digital currency is based on an algothrithm that uses crypotography for security, making it hard to counterfeit. Transactions are anonymous and transfers of the currency use public and private keys for security. A major drawback of cryptocurrencies is that because they are virtual and do not have a central repository, a user's digital balance can be wiped out if a back-up copy of the holdings does not exist. The price of a bitcoin or other digital currency is based on supply and demand, so their value can fluctuate widely. Currently, one bitcoin is valued at about $381 U.S. dollars.
No one has been able to definitively prove if he is a she or a they, but Satoshi Nakamoto is credited with conceiving bitcoin. Nakamoto's work in creating bitcoin's model is believed to have begun in 2007, then was followed by the 2008 publication of a paper titled "Bitcoin P2P e-cash paper."
Nakamoto fell off the radar in 2011, never offering much if any detail about himself before he disappeared. While economists are still trying to figure out who he or she is, the bitcoin innovator had collaborated with several engineers to bring the cryptocurrency concept into fruition.
In August 2008, three individuals filed a patent for the encryption algorithm bitcoin would use. None of them would admit to being Nakamoto.
Roughly a year later, bitcoin's first block was mined on Jan. 3, 2009, and the first version of the cryptocurrency's protocol was released roughly a week later. About 10 months into bitcoin's release, the New Liberty Standard published an exchange rate for the digital currency and it made a huge step in earning legitimacy and created its own exchange a few months later.
From there, bitcoin's popularity began to permeate the dark web. But with the digital currency's value spiking exponentially in a few days and its vulnerabilities exploited, the mainstream was still cautious and hesitant to get behind bitcoin.
The next few years were marked by periods of stability, rocked by bitcoin thefts and bursting bubbles. But as more merchants and financial institutions got on board, bitcoin's reach continued to expand and Bitcoin Central, the main exchange in France, even was licensed as a bank. In June, California legalized bitcoin and other digital currencies, and Microsoft, Dell and other large companies accept it in trade.
By March 2013, bitcoin's market capitalization reached $1 billion. Bitcoin is still growing and maturing, but Leon Li, CEO of Chinese trading hub Huobi, sees the cryptocurrency as approaching a fork in the road.
"[It] will either become a lower-cost channel of value transfer within the existing centralized financial system, or it will evolve into an entirely new financial system altogether, one that is lower-cost, more efficient, decentralized, and operates in parallel with the traditional system," says Li.
Check back for part two in this series as we turn our collective gaze away from bitcoin's past and peer into cryptocurrency's future.