One of the first virtual currencies to have emerged was called WebMoney. This virtual currency was a result of the “collapse of the Russian Banking sector in 1998” (Small). There is a common trend of virtual currencies popping up after an economic crisis and Bitcoin is no exception to that. During the 2008 global financial crisis, many people felt distrust towards the banking systems. This “undermined the popular trust in and the legitimacy of government institutions and the mainstream financial system” (Swartz). For this reason, people looked towards other options like Bitcoin which promised a decentralized system that didn’t rely heavily on one particular institution. “With trust in banks and traditional financial institutions at a record low, it was easy to see Bitcoin as a solution to the woes of the world economy” (Dickson). Bitcoin wouldn’t have been as popular as it was if it weren’t for the faltering trust people had in the current financial system.
The creator of Bitcoin, Satoshi Nakamoto, published his whitepaper on Bitcoin in October of 2008. It was an outline of what Bitcoin would eventually become. In January of 2009, Bitcoin finally made its debut with the “mining” of the first bitcoin block. Although Bitcoin’s first appearance wasn’t until 2008, virtual currency in general has been around for longer. During the 1990’s, a wave of Cypherpunk and Crypto-anarchy surfaced. Individuals who belonged to these movements believed that “money as a technology” was important to each of their ideologies (Swartz). The “crypto-anarchist view that a money authorized by something other than governments was the key to a new, liberated market society”, and the cypherpunk view was “namely the desire to build shared decentralized infrastructures for transactional privacy” (Swartz). Both of these movements spawned several other virtual currencies from which Bitcoin was derived.
Bitcoin functions through blockchain, “a distributed-ledger technology that lets users store and exchange data without going through a third-party service” (Dickson). In order for this to work, the use of encryption keys and a wallet is needed. A public and private key is issued to each user, and with those keys they are able to complete their transactions. The way these keys work during a transaction is by using the other person’s public key and your private key to “digitally sign” the bitcoin you wish to use (Hutchinson and Dowd). One can download a wallet to store their bitcoins either on their mobile phone or computer. Some users opt to use companies like Coinbase exchange to keep track of their keys for them, but they risk the company being breached and their keys stolen or lost. Once having these items, a user can purchase bitcoin however they’d like and store it into their wallets. Due to the fact that there isn’t a third-party system to keep track of bitcoin spending history, the Bitcoin community itself is responsible for the validation of each transaction (Hutchinson and Dowd). Bitcoin users vote on whether or not a transaction can be deemed as valid. Voting is incentivized by there being a possibility of the voter earning a bitcoin. “For this reason, the process of validating the bitcoin transactions blocks is usually referred to as ‘bitcoin mining'” (Hutchinson and Dowd). Bitcoin mining then becomes vulnerable to exploitation. A Bitcoin “miner” can earn bitcoin on their own, but the probability of them striking gold goes down after each one they find. Therefore, miners get together and form pools which earn more bitcoins.