Wana Le: The Rise and Fall of Bitcoin

From birth to success

On November 1, 2008, a man who called himself Satoshi Nakamoto posted a research report on a secret cryptography discussion group, which described his new concept of electronic currency - Bitcoin was born! The old birds in the discussion group had never heard of him, and there was very little information about him, which was obscure and even contradictory. The online profile showed that he lived in Japan, his email address came from a free service site in Germany, and there was no relevant information about his name on the almighty Google. Obviously, "Satoshi Nakamoto" was a pseudonym. But even if Nakamoto may have become a mystery, his invention has "dispelled" a problem that has plagued cryptography for ten years. Since the birth of the Internet, electronic currency has become a hot topic because of its convenience and difficulty to track, and its ability to be out of the supervision of governments and banks. In the 1990s, a code-breaking organization called "Cypherpunks" was committed to creating electronic currency, but the efforts made did not produce any results. Also in the early 1990s, cryptographer David Chaum created an anonymous system called "electronic cash", which also failed, partly because it relied on the existing infrastructure of governments and credit card companies. After that, various electronic currency attempts continued to emerge - bitgold, RPOW, b-money..., but all failed without exception.

One of the core challenges in designing electronic money is the problem of double spending. If electronic money is just information, free from the tangible limitations of paper and metal, how can we stop people from copying and pasting it as easily as copying text and spending it however they want? The traditional solution is to use a central bill clearinghouse to aggregate all transactions into a real-time ledger, so that if someone has just spent an electronic currency, he cannot reuse it. The real-time ledger makes it difficult for fraudsters to exploit, but it also requires a reputable third-party institution to manage it.

Bitcoin uses a public distributed ledger to get rid of the constraints of third-party institutions, which Satoshi Nakamoto called the "regional chain". Users are willing to contribute CPU computing power and run a special software to become a "miner", which will form a network to jointly maintain the "regional chain". In the process, they will also generate new currency. Transactions also spread on this network, and computers running this software compete to crack irreversible cryptographic puzzles, which include several transaction data. The first "miner" who solves the puzzle will receive a 50 bitcoin reward, and the relevant transaction area will be added to the chain. As the number of "miners" increases, the difficulty of each puzzle also increases, which keeps the bitcoin production rate of each transaction area at about one bitcoin every 10 minutes. In addition, every time 210,000 areas are reached, the reward will be halved, from 50 bitcoins to 25, and then from 25 to 12.5, and so on. In this way, by 2140, Bitcoin will reach the predetermined upper limit of 21 million.

Satoshi’s paper was published in 2008, when the ability of governments and banks to manage the economy was questioned and credit was at rock bottom. The US government injected large sums of money into Wall Street and Detroit auto companies, and the Federal Reserve launched a policy of “quantitative easing”, which essentially printed a large amount of US dollars to stimulate the economy, and the price of gold rose. Bitcoin does not need political and financial guarantees (which are what ruined the economy) - it only relies on Satoshi’s clever algorithm. Bitcoin’s public ledger seems to not only make it impossible for fraudsters to hide, but also keeps the supply of Bitcoin under control by determining the amount of issuance, which ensures that the inflation tragedy of the unlimited central bank printing money and the Weimar Republic will not happen to Bitcoin.

On January 3, 2009, Satoshi Nakamoto became the first person to mine Bitcoin - he mined 50 Bitcoins from the Genesis Block. For about a year, his invention was limited to a small group of early adopters. But gradually, Bitcoin's fame surpassed the isolated island of the cryptographic community. It was appreciated by the "predecessors" who had previously studied electronic currency. Wei Dai, the inventor of b-money, called it "epoch-making"; Nick Szabo, the inventor of Bit Gold, praised it as "a great contribution to the world"; Hal Finney, the outstanding codebreaker behind RPOW, believed that Bitcoin had the "potential to change the world." The Electronic Frontier Foundation, a digital privacy advocate, finally began to accept donations in the form of Bitcoin.

Early Bitcoiners Small groups of open source software engineering. New England coder Gavin Andresen bought 10,000 bitcoins for $50 and created a website called "Bit Faucet" to give people bitcoins for no reason, just for fun. Florida programmer Lars Haunetz, who was the first person to use bitcoin in the real world, ordered two pizzas from Papa John's for 10,000 bitcoins. (He sent the bitcoins to a volunteer in England, who received a credit card order from across the Atlantic.) A Massachusetts farmer named David Foster began accepting bitcoins for alpaca socks.

When they are not busy mining, the Bitcoin Party is trying to uncover the mysterious identity of Satoshi Nakamoto. In a Bitcoin chat channel, someone conceitedly believed that "Satoshi" means "wisdom" in Japanese, while others suspected that it was a "mixture" of the names of four technology companies - Samsung, TOSHIba, NAK Amichi and Motorola. Even his nationality was questioned because his English was so authentic and flawless.

Some have suggested that perhaps Satoshi Nakamoto is not a person, but a shadowy group with unknown agendas—a team at Google or the National Security Agency. “I exchanged several emails with a guy who called himself Satoshi Matsumoto,” said Honnetz, who was a member of the Bitcoin Core development team for a while. “I always thought he was not a real person. I got a reply about once every two weeks, just like someone checking their mailbox occasionally. Bitcoin’s design is so good that it doesn’t seem like it could be done by one person.”

Satoshi Nakamoto rarely reveals information about himself, and the topics he discusses online are limited to source code technology discussions. On December 5, 2010, after Bitcoin users began to ask WikiLeaks to accept Bitcoin donations, Satoshi Nakamoto, who used to be concise and only talked about business, participated in the discussion with unprecedented enthusiasm. "No, don't do this." He posted in the Bitcoin forum, "This project needs to grow gradually so that the software can be continuously enhanced in the process. I urge WikiLeaks not to accept Bitcoin. It is still a small test community in its infancy. At this stage, if it is not handled properly, it will only destroy Bitcoin.

Then, as mysteriously as he had appeared, Nakamoto disappeared. At 6:22 GMT on December 12, just seven days after he argued for a Bitcoin donation to WikiLeaks, Nakamoto made his last post on the forum, discussing a few inconsequential details of the latest version of the software. His email responses became more erratic and finally stopped altogether. Andresen, a former core developer, was one of the few people who had contact with Nakamoto. On April 26, Andresen told coders: "This morning, Nakamoto suggested that we should downplay the topic of the 'mysterious founder' when talking about Bitcoin publicly." In the end, Nakamoto stopped even responding to Andresen's emails. The Bitcoin Party was sad and puzzled by his departure. But in any case, his invention has been rejuvenated.

Bruce Wagner said: "Bitcoin enthusiasts are like evangelists. They see the charm of this technology. This is a huge movement, or it is not an exaggeration to call it a religious belief. In the forum, you will see this spirit. It has nothing to do with self. Everyone is working hard to improve Bitcoin."

Wagner, a loyal believer in Bitcoin

On a July morning, 50-year-old Wagner, with black hair that doesn't match his age, looks like an energetic young man. He is sitting in the office of his OnlyOneTV, a network TV company in Manhattan. In just a few months, he has become the main evangelist of Bitcoin. He hosted the program "The Bitcoin Show", promoting this new currency and interviewing well-known figures in the Bitcoin world. He is also in charge of a Bitcoin gathering group and plans to hold the first Bitcoin "World Conference" in August. Wagner said: "I was fascinated by it. I didn't eat or sleep for five days and five nights. It was like taking stimulants. All I could think about was Bitcoin, Bitcoin..."

Wagner made no secret of his obsession with Bitcoin, believing that it was the most exciting invention since the Internet, that "eBay is a giant blood-sucking company," and that freedom of speech is a "contemporary myth." He was excited when predicting the future of Bitcoin: "I know it's not a stock, it won't go up or down, it will keep going up."

For a while, he was right. From 2009 to early 2010, Bitcoin was worthless. In the first six months of trading in April 2010, the value of 1 Bitcoin was less than 14 cents. In the summer of 2010, Bitcoin trading entered its golden age. As supply far exceeded demand, the value of online transactions began to rise. By early November, Bitcoin had been silent for many days at 29 cents and soared to 36 cents. In February 2011, it continued to appreciate and the exchange rate with the US dollar reached 1:1. Since then, Bitcoin has stabilized at around 87 cents and has also risen to $1.06.

This spring, the price of Bitcoin experienced a "big explosion" growth, and the "Cryptocurrency" report by Forbes was one of the stimulants. From the beginning of April to the end of May, it rose from 86 cents to $8.89. Then, on June 1, it tripled in a week, reaching 1 Bitcoin to 27 US dollars. The market value of the entire Bitcoin Kingdom is about $130 million. A Tennessee man who calls himself Knight MB holds 371,000 Bitcoins, worth more than $10 million, making him the richest person in the Bitcoin Kingdom. The 10,000 Bitcoins that Haonetz spent on pizza are now worth $272,329. "I don't think it's a big deal. Those pizzas are really delicious." Haonetz said.

Bitcoin has received the kind of attention usually reserved for Silicon Valley IPOs and Apple product launches. On his online talk show, journalist and entrepreneur Jason Calacanis called it "a fundamental shift" and "the most interesting thing we've seen in the history of technology business in the last 20 years." Well-known venture capitalist Fred Wilson believes that the next big thing on the Internet is "social upheaval," and he cited four examples - WikiLeaks, cracking Photoshop, the Arab Spring, and Bitcoin. Coder Andresen accepted the CIA's invitation to come to its Langley, Virginia, headquarters to introduce Bitcoin. Rick Rockvind, founder of the Swedish Pirate Bay, said he would convert all his savings into Bitcoin.

Bitcoin's future looks promising. Mark Saps, who bought parts from eBay and built a thermonuclear reactor in his Brooklyn loft, got his hands on an old ATM and converted it into a device for exchanging cash for Bitcoin. On the secret Internet (accessible only through the Tor anonymity software), the gray market Silk Road allows Bitcoin transactions; here, everything from painkillers to machine guns can be bought. A young Bitcoin user, a modern-day Plato, documents a cross-country self-driving trip in the form of a photo blog, using only Bitcoin during his trip. Coin enthusiasts in the Bitcoin Party began to yearn for recoverable Bitcoins and wondered how much rare "Genesis Zone" Bitcoins were worth.

As prices soared, mining became more popular, competitors increased, and benefits began to decline. An "arms race" for computer configuration began, and miners rushed to find more advanced graphics cards for their computers. The first batch of miners used their existing computers, while the new wave of miners bought cheap computers with high-speed GPUs, cooled by noisy fans, and kept them running 24 hours a day to mine. This wave of miners set off a craze for showing off their equipment. Just like the previous gold rush, people rushed to tell incredible stories. A "miner" named Darrin in Alaska said that a bear broke into his garage, but thankfully it didn't destroy his equipment. Another "miner" was said to have a police raid on his house because of a surge in electricity bills, suspecting that he was growing marijuana.

Step down from the peak

In the midst of this euphoric atmosphere, the seeds of disaster began to grow. Bitcoin began with open source P2P software and the public interest spirit of liberal political philosophy, and also borrowed ideas from the Austrian School of Economics. But with real money at stake, the dramatic rise in the value of Bitcoin has brought a different reaction, with people viewing Bitcoin as a speculative commodity. Satoshi Nakamoto's previous concerns about the serious consequences of excessive media attention are finally becoming a reality. U.S. Senator Charles Schumer held a press conference and called on the Drug Enforcement Administration and the Department of Justice to shut down Silk Road, calling it "the most blatant online drug trafficking we have ever seen" and describing Bitcoin as "a form of online money laundering."

At the same time, the cult of personality of Satoshi Nakamoto began to sprout, and some people began to sell "I am Satoshi Nakamoto" T-shirts. The Bit Party demanded that the smallest unit of Bitcoin be named "Satoshi", and also launched fan fiction and comics of Satoshi Nakamoto. Some people speculated that he was dead, some believed that his true identity was Julian Assange, the founder of WikiLeaks, and more people believed that he was Gavin Andresen. Others believed that he must be an advocate of the "older generation" of cryptocurrency-one of Finney, Szabo or Dai. Szabo himself believed that Satoshi Nakamoto might be one of Finney or Dai. Stefan Thomas-Swiss coder and active member of the community, (click here to read the next page)

He studied more than 500 posts by Satoshi on the Bitcoin forum and drew a chart based on the time of posting. The data showed that Satoshi rarely posted between 5 a.m. and 11 a.m. Greenwich time, and the same was true on Saturdays and Sundays, which shows that Satoshi was resting during this period, not working. (5 to 11 a.m. is midnight to 6 a.m. Eastern time.) Other clues suggest that Satoshi is British: the newspaper headlines he coded in the Genesis block came from The Times of London, and his forum posts and comments on the code all used British spellings such as "optimize" and "colour." Even the purest technology has to survive in a dirty world. Bitcoin's code and ideas may be indestructible, but Bitcoin itself - a unit of currency composed of unique numbers - must be stored somewhere. The default is to store Bitcoin in a "wallet" on the user's computer, which was sufficient when Bitcoins were not so valuable, easy to mine and limited to technicians. But once they start to become valuable, a PC is a bit overwhelmed. Some users protect their bitcoins by creating multiple backups, encryption, USB flash drives, “safe” computers that are not connected to the internet, cloud storage and safe deposit boxes. But even some experienced bitcoiners have trouble protecting their bitcoins. Stephen Thomas had three bitcoin backups, but accidentally deleted two and forgot the password to the third, which cost him 7,000 bitcoins, worth about $140,000 at the time. “I spent a week trying to fix it. It was a pain,” he said. Most people store cash in banks, an institution that bitcoin users view with suspicion. As a result, a primitive, unregulated financial services industry has developed for the new currency. Unreliable online “storage services” promise to protect customers’ digital assets and support the exchange of bitcoins for dollars or other currencies. Bitcoin itself is already very decentralized, but users are still blindly entrusting more bitcoins to third-party custodians, who the most radical libertarians claim are safer than federal insurance institutions. Most of these third-party institutions are online storefronts, and no one knows each other.

As expected, as the value of Bitcoin continued to rise, disturbing events began to plague Bitcoin users. In mid-June, a man calling himself Allinvain claimed that 25,000 Bitcoins had been stolen from his computer (to this day, no one has been able to verify whether this was true). About a week later, a hacker successfully planned a clever intrusion into Mt. Gox, a Tokyo-based trading site that controls 90% of the world's Bitcoin transactions. Mt. Gox then limited users to withdrawing only $1,000 worth of Bitcoin (about 35 Bitcoins) per day. After breaking into Mt. Gox's system, the hacker launched a massive sell-off, driving the Bitcoin exchange rate down to nearly zero, giving himself the opportunity to withdraw large amounts of other users' Bitcoins.

After the incident, market forces worked together to stop the hacker's plot. The value of Bitcoin plummeted, but a large number of speculators seized the opportunity to sell off, and they quickly drove the price back up, leaving the Bitcoin thief with only 2,000 Bitcoins. Mt.Gox stopped trading for a week and reversed the illegal transactions, but the loss was inevitable. The value of Bitcoin has never returned to above $17. Within a month, Mt.Gox lost 10% of its market share due to the sudden rise of Chilean exchange TradeHill. More importantly, the incident shook the confidence of the Bitcoin community and triggered a series of negative reports.

Bitcoin went from being the currency of the future to a dystopian joke overnight. The Electronic Frontier Foundation quietly stopped accepting Bitcoin donations. Two Irish network analysts argued that Bitcoin was not as private as many people thought: they could find clues to people who donated to WikiLeaks (the organization announced that it would accept Bitcoin donations in June 2011). New technology novice found Bitcoin easy to use, but were disappointed to find that it took extra effort to obtain, store and use Bitcoin. For a while, the most convenient way to buy Bitcoin was to first use Paypal to buy Linden Dollars (the virtual currency of Second Life) and then trade Linden Dollars to enter the virtual world of Bitcoin. As the tone of media coverage changed from previous praise to doubt, people also turned from excitement to resentment.

More disasters followed. Poland's Bitomat, the world's third-largest exchange, unexpectedly found itself rewriting its entire bitcoin storage program. Security researchers found that viruses targeting bitcoin users were spreading: some were used to steal all the bitcoins a user had; others were used to grab bots and use them for free mining. By the summer, MyBitcoin, a long-established bitcoin storage service site, stopped responding to emails. The site was created by a man named Tom Williams, registered in the West Indies. Tom had never posted on the forum, so the site had always been questioned. After a month of silence, New York Bitcoin evangelist Wagner finally admitted that the person who operated MyBitcoin had apparently swept away everyone's money and ran away. Wagner himself revealed that he had stored all 25,000 bitcoins on MyBitcoin, and also mobilized relatives and friends to use MyBitcoin. He also helped identify several suspects. The owner of MyBitcoin reappeared, claiming that his website had been hacked. Wagner became the target of a counterattack and was sued for mortgage fraud, which ruined his reputation in the community. “There’s a misconception that cryptocurrencies mean you can trust random people you meet online,” said Jeff Gajic, a Bitcoin Core developer.

In the kingdom of Bitcoin, no one is more trustworthy than Satoshi Nakamoto, but even as the world he created is on the brink of collapse, Satoshi himself remains silent. Some Bitcoin users have begun to suspect that he may be working for the CIA or the Federal Reserve. Others worry that Bitcoin is another Ponzi scheme, and that Satoshi is Madoff—hoarding Bitcoins when they are worthless, waiting for them to appreciate. Only die-hard Bitcoiners still hold on to their beliefs, not only in Satoshi Nakamoto, but also in the system he created. But there is no doubt that the things behind the paranoia and infighting are more fragile and almost desperate. What Bitcoiners want to ask most is: Why did Satoshi Nakamoto create this world but abandon it?

Even though Satoshi Nakamoto has abandoned his followers, they are not about to let his invention die. Even as the value of Bitcoin continues to fall, they are still injecting money into the fragile economy. Wagner encouraged those who occupied Wall Street to use Bitcoin. As the mining boom ended, some miners began to sell off the high-end equipment they had accumulated. "People are tired of high electricity bills, high heat and high noise. Mt.Gox transformed into developing POS hardware, and other companies began to do online merchant services similar to PayPal. Two guys in Colorado launched a Bitcoin trading service, offering "more than 1 million items." Bitcoin's application in the gray market is also becoming more and more mature: Silk Road has become a trading center, and trading sites such as BlackMarketReloaded are gathered here.

"You could say Bitcoin follows Gardner's 'halo curve,'" said Emil Taki, a London-based core developer. This is a theoretical curve of technology adoption and maturity, divided into "technical embryonic stage," "peak of expansion," "trough of disillusionment," "recovery" and "plateau of production." By this theory, Bitcoin is coming out of the trough as people recognize the value of this reliable code and give up the speculation mentality.

But this comparison is unreliable. Bitcoin’s Achilles’ heel is its reliance on unregulated, centralized transactions and network storage operations. In fact, most miners are concentrated in a few large mining farms. In theory, if they unite, they can hijack the entire Bitcoin network.

In addition to Bitcoin's diehards, there are increasing doubts about Bitcoin. Nobel Prize winner Paul Krugman wrote that Bitcoin's volatile trend is encouraging hoarding. Stephen Blanks, a former electronic cash system consultant and digital currency pioneer, called Bitcoin "smart" and was reluctant to pursue it, but he believed that its infrastructure was like a "pyramid scheme." He said: "I think the biggest problem is the trust issue. It has no support. It is not a legal currency, and trust is established through legal mechanisms."

I was curious about what Satoshi would think of the current state of Bitcoin, but he never spoke again. He didn't reply to emails, and those who were believed to be Satoshi denied it. Andres flatly denied that he was Satoshi. "I don't know his real name. I look forward to the day when he will no longer hide behind the scenes and hide his name, but I don't think it will happen." Szabo and Day also denied that they were Satoshi. And the eloquent Finney, after being diagnosed with amyotrophic lateral sclerosis, also denied it via email: "Given my current physical condition and the limited life, I have no loss in losing my anonymity, but I am indeed not Satoshi." Both The New Yorker and Fast Company have launched investigations on this, but both ended in failure.

Vague clues point to Satoshi being a university teacher with old-fashioned training. (Satoshi’s tagging style was popular in the late 1980s and early 1990s, and he is probably around 50, give or take 10 years.) A digital currency expert said: “It’s clear that he is one of the Bitcoin developers. Maybe Satoshi is Gavin, just look at his background information.”

"I suspect Satoshi is a small group of financial institutions," said Dan Kaminsky, a white hat hacker. "I have the feeling he may be working with some friends."

But Gajic believes that even the most die-hard Bitcoiners have stopped chasing after Satoshi Nakamoto. He said: "We really don't care." The person who wrote the code is not important, what is important is the code itself. Even if someone steals, cheats, or abandons Bitcoin users, the code is there and it really exists.