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The Origins of Crypto: Exploring the Early Days of Digital Currency

The Origins of Crypto: Exploring the Early Days of Digital Currency

Dive into the fascinating origins of cryptocurrencies, from the developing ideas that helped shape the industry to the first digital coins.

Cryptocurrencies have become a multi-trillion-dollar asset class over the past decade. While many regard Bitcoin as the first cryptocurrency, using cryptography to create anonymous financial transactions pre-dates the world’s most popular cryptocurrency by over two decades.

Let’s journey from the very first idea of using cryptography to create an anonymous transaction to the $2 trillion asset class cryptocurrencies have become today.

Ecash: The First Cryptocurrency

David Chaum, a computer scientist, cryptographer, and inventor, developed the world’s first cryptocurrency. In 1983, he published a paper describing anonymous electronic money transfer software, where users could store money cryptographically signed by a bank in a digital format. By using RSA blind signatures, there’s no link between withdrawal and spending transactions.

While Chaum raised $10 million to start DigiCash in 1997, only a handful of banks and a few thousand users tried the system before it dissolved in 1998. The concept’s failure to thrive is partly due to the rise of credit cards, which offer greater convenience and rewards that users prioritize over privacy and anonymity.

Wei Dai Coins the Term “Cryptocurrency”

Wei Dai, a computer engineer, expanded upon the idea of cryptocurrency with the launch of B-money in 1998. In a research paper, he described an anonymous, distributed electronic cash system and coined the term “cryptocurrency.” The definition and principles would set the stage for the cryptocurrency movement over the coming years.

Some of the core concepts included:

  • A requirement for computational work.
  • Verification by a community with a collective ledger.
  • Rewards for workers conducting verification.
  • Contract enforcement via broadcasting and signing transactions.

The original Bitcoin whitepaper referenced Wei Dai’s b-money, and today, a “wei” is the smallest unit of Ethereum’s ether. However, Dai notes that Satoshi Nakamoto only learned about b-money after developing Bitcoin and credited him in his paper.

The Great Recession Inspires Bitcoin

The 2008 global financial crisis resulted in a significant distrust in the global banking system. While we wouldn’t see Bitcoin formally introducted for another year, Satoshi Nakamoto makes it clear in his whitepaper that the Great Recession sparked his interest in Bitcoin and even referenced bank bailouts in Bitcoin’s genesis block.

The Great Recession Inspires Bitcoin
Bitcoin’s whitepaper outlines a decentralized network for cryptocurrencies in a way that’s easy for the public to understand. Source: Bitcoin

In October 2008, Satoshi Nakamoto released his groundbreaking paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” to the world. The nine-page document outlines a trustless system of electronic transactions, making it possible to transact without intermediaries. Unlike many other papers, it also breaks down these concepts into easy-to-understand terms.

New Liberty: The First Crypto Exchange

New Liberty Standard launched the world’s first crypto exchange in 2009. In addition to making it easier to buy and sell, the concept established a market value for cryptocurrencies by calculating how much energy was necessary to mine coins. While the business didn’t stick around for long, it set the stage for an entirely new market over the coming years.

More Cryptocurrencies Hit the Scene

Bitcoin started to experience competition around 2011 when other cryptocurrencies launched based on similar concepts. For instance, Litecoin became one of the fastest-growing competitors around that time with its faster algorithms and higher maximum cap on the number of outstanding coins, limiting the value growth.

In 2012, Peercoin introduced the idea of using a “proof-of-stake” consensus mechanism. By staking coins, cryptocurrency investors could generate income from their holdings while validating transactions without energy-intensive proof-of-work computation. These ideas would eventually set the stage for Ethereum’s transition to a proof-of-stake system.

Crypto Becomes More Accessible

Brian Armstrong and Fred Ehrsam launched Coinbase in 2012, making cryptocurrencies far more accessible to the masses. Using a credit card or bank account, users could easily purchase Bitcoin and other cryptocurrencies without worrying about the ins and outs of setting up software wallets or blockchain ledgers.

Crypto Becomes More Accessible
Coinbase makes it easy to purchase cryptocurrencies, borrow money, and even invest in DeFi projects from any computer or smartphone. Source: Coinbase

After a couple of years, Bitcoin’s rising value and the broader accessibility of crypto assets to the public led the Internal Revenue Service (IRS) to release its first tax guidance, saying it considers cryptocurrencies as “property” under tax laws. The classification means users who buy and sell would owe capital gains taxes, as with stocks and bonds.

Ethereum & the ICO Craze

Ethereum, the world’s second most popular cryptocurrency, launched in 2016. By introducing the idea of smart contracts, the cryptocurrency brought application developers onto the blockchain and unlocked a world of new possibilities. While initial coin offerings (ICOs) were an initial use case, the technology now underlies everything from NFTs to DeFi.

Initial coin offerings quickly caught the Securities and Exchange Commission’s (SEC) attention, which saw them as a vehicle to raise capital while skirting securities laws. At the same time, criminals began recognizing crypto opportunities and launched ICO scams, resulting in millions of dollars in losses for crypto users and investors.

Since 2014, the SEC has launched around 100 enforcement actions against crypto issuers, asset managers, exchanges, and other parties. These include everything from cease-and-desist orders for the unregistered sale of securities to disclosure requirements for public companies to hackers breaking into exchanges and manipulating the price of securities.

And the Rest is History

Cryptocurrencies have steadily become more popular since the launch of Ethereum.

Major financial institutions launched crypto investment funds, technology companies released blockchain projects, and the IRS added a crypto question to the top of IRS Form 1040. By 2021, the value of all crypto assets surpassed $2 trillion, transforming the once-niche experiment into a must-have asset class for investors and an increasingly popular medium of exchange.

However, cryptocurrencies would also have their pitfalls. In 2022, the “crypto winter” sent the value of cryptocurrencies down by more than half. Meanwhile, FTX’s implosion would lead regulators to pursue strict new rules on cryptocurrency assets. But still, these measures could end up solidifying the legitimate options in the market as viable products and solutions.

As 2024 approaches, cryptocurrencies are a nearly $1.5 trillion asset class that’s becoming increasingly mainstream. With Ethereum’s move toward a proof-of-stake consensus mechanism with sharding capabilities, they’re becoming greener and more efficient. And that could pave the way toward the mainstream adoption of payments rather than just investments.

The Bottom Line

Many of today’s most popular cryptocurrencies can trace their roots to breakthroughs in the 1980s and 1990s. Ecash set the stage for Bitcoin; New Liberty Standard helped inspire Coinbase; and Ethereum laid the groundwork for the vibrant altcoin ecosystems that we have today. By taking the time to understand the past, you can better understand crypto’s path today.

If you trade crypto assets, ZenLedger can help you prepare for tax time. By aggregating transactions across your wallets and exchanges, you can easily get a holistic view of your portfolio and generate the tax forms you need each year. You can even identify ways to save with our tax-loss harvesting tool.

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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Justin Kuepper