Progress pill
The Slow Emergence of Bitcoin

The Bootstrapping of Cryptocurrency

The History of Bitcoin's Creation

The Bootstrapping of Cryptocurrency

  • The First Miners
  • The first exchange service and the first price
  • The Beginnings of the Economy
  • The Origin of Bitcoin's Value
In the previous chapters, we observed how Satoshi Nakamoto implemented his idea and communicated about it to introduce Bitcoin to the world. However, not everything depended on him: people also needed to assign value to the unit of account. Since this allowed for the remuneration of miners through transaction fees and rewarded merchants through natural deflation, such appreciation was essential for the system's security.
However, the emergence of Bitcoin's value was not an easy task. It was about giving economic importance to an object that previously had none, for entirely subjective reasons. Hal Finney explained it very well in his email of January 11, 2009, addressed to the Cryptography mailing list, where he wrote:
"One of the immediate problems with any new currency is how to value it. Even ignoring the practical problem that virtually no one will accept it at first, there is still a difficulty in coming up with a reasonable argument in favor of a particular non-zero value for the units."
Thus, the monetary phenomenon required an initial assessment for a non-monetary reason. As Satoshi wrote to Martti, there needed to be a "spark" to ignite the combustion of a flammable material.
This economic bootstrapping of Bitcoin gradually took place from the start with mining activity. However, it did not truly manifest until October 2009 when the first exchange against the dollar occurred. In this chapter, we will seek to describe how this bootstrapping happened and what reasons led the different actors to assign value to the unit of account.

The First Miners

Starting from January 2009, the initiation of Bitcoin unfolded in several stages: the arrival of the first miners, the emergence of exchange with the dollar, and the development of the first services accepting bitcoin. Those who deploy generating nodes are thus the first to assign value to the unit of account indirectly. They indeed contribute their computing power to add proof of work to transaction blocks and therefore attach them to the chain, which is costly in time (due to software maintenance) and energy (due to the electricity consumed in the process). This effort is rewarded in bitcoins, so generating coins this way constitutes a form of economic exchange.
However, as we pointed out in the introduction, bitcoins have no market value. Therefore, miners need to find subjective reasons to make such an effort. The main reasons are technical curiosity, ideological motivation, and speculative interest.
The first reason, probably the least important, is technical curiosity. The early adopters of Bitcoin are indeed often computer enthusiasts, and most of the time work in professions related to programming or engineering. They like to know how things work "under the hood," which drives them to launch the software and generate some bitcoins. This is notably the case with Mike Hearn, who, after posing his questions to Satoshi on April 12, 2009, hurries to "try the application" on his computer and produce some blocks. (original: "I tried the app")
The second reason for mining is ideological motivation. Many early software users do it "for the good cause," because of their personal beliefs. They make their computing power available to contribute to the birth of a robust digital currency that relies on no central authority. Hal Finney is the first to highlight this concept on November 13, 2008, by writing:
"The Bitcoin system is notably aligned with the American libertarian movement, which champions an unfettered free market and is decidedly antagonistic towards the state, especially regarding its control over currency ("End The Fed"). This is why Satoshi responds to Hal Finney by stating that his argument is "very attractive to the libertarian viewpoint if we can explain it properly."
The third driving force behind the decision to start mining is speculative interest. As explained in the previous chapter, Bitcoin's monetary policy is one of its main selling points. If the amount of bitcoins in circulation is to approach a fixed quantity (21 million units), then their unit price could become very high as more people join the economy. This argument, in particular, convinces Dustin Trammell to start generating bitcoins very early on, as he shares with Satoshi in their private correspondence:
"This was one of the reasons that pushed me to start a node so quickly. My systems aren't doing much else when they're idle, so why not create BitCoins? And if they're worth something one day...? That would be a bonus!"
The last two reasons are much more significant as they motivate people to mine continuously. Thus, during 2009, several individuals driven by these reasons produced many blocks by contributing their computing power to the network. Among these individuals, notably:
  • Hal Finney ran his computer between the network's launch and March 2009, accumulating over 10,000 bitcoins.
  • Dustin Trammell, who mines an impressive number of blocks throughout 2009 and early 2010, thereby obtaining more than 70,000 bitcoins as evidenced by the activity linked to his address;
  • A British engineer named James Howells, who generates 8,000 bitcoins with his computer between February and April (he will send his laptop to the landfill in 2013 and realize his mistake a few months later; his case will then be publicized by The Guardian);
  • Martti Malmi, who contributes to the production of blocks on the network between April 2009 and 2010 and thus obtains more than 55,000 bitcoins;
  • A certain NewLibertyStandard generated many bitcoins in September 2009 to fuel his nascent exchange service...

The first exchange service and the first price

At the end of September 2009, an individual using the pseudonym NewLibertyStandard (which we will abbreviate as NLS) discovered Bitcoin. He tries the software and starts mining. The first block he produces is block 23,940. He is a Linux user and therefore uses the "emulator" Wine to run the software. He is interested in political freedom and precious metals, as evidenced by his avatar on the forum, which depicts an American Eagle on which the word "liberty" is inscribed. He thus sees Bitcoin as an equivalent of gold in the digital world: on his personal page, he presents Satoshi Nakamoto's creation as "an economic revolution" and as "the gold standard of digital currency."
In October 2009, the first currency exchange service was established, allowing people to convert their dollars into bitcoins and their bitcoins back into dollars. The creator registered on the Bitcoin-dedicated forum on SourceForge and announced the opening of his service there. To estimate the exchange rate, he based it on the energy cost required to obtain a unit, considering the price of electricity at his location and the frequency of his production. On his page, he wrote:
"Our exchange rate is calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU usage for a year, 1331.5 kWh, multiplied by the average residential cost of electricity in the United States for the previous year, $0.1136, all divided by 12 months, divided by the number of bitcoins generated by my computer over the past 30 days."
Here are the indicative exchange rates of the NLS service, also published on NLS's personal page:
Transactions are settled via email at [email protected]. Dollar transfers are made exclusively through PayPal, and fees are charged for the operation.
On October 8, Martti Malmi informed Satoshi about the existence of the NLS service. The creator of Bitcoin reacted positively to this news, as he had been considering for some time establishing a means to guarantee the value of bitcoins to reward mining and kickstart the economic dynamics of the system. On October 16, he wrote to his right-hand man: "It's encouraging to see more people taking an interest such as that NewLibertyStandard site. I like his approach to estimating the value based on electricity. It's educational to see what explanations people adopt. They may help discover a simplified way of understanding [Bitcoin] that makes it more accessible to the masses. Many complex concepts in the world have a simplistic explanation that satisfies 80% of people, and a complete explanation that satisfies the other 20% who see the flaws in the simplistic explanation."
Following the announcement of NLS, Martti Malmi got in touch with him. The two agreed to make an exchange. On the night of October 11 to 12, 2009, the first sale of bitcoins for dollars was finalized: Martti transferred 5,050 bitcoins from his mining efforts to NLS, who then transferred $5.02 to his PayPal account. This corresponds to a unit price of about $0.001.
In the following weeks, NLS accumulated more bitcoins to supply his service. On November 19, someone bought some 22,500 bitcoins he owned, closing his first bitcoin sale. A few hours later, Satoshi was thrilled about this financial operation in an email written to Martti Malmi.
In the following months, the NLS service became a central element of Bitcoin's economic development, offering a benchmark for the exchange between bitcoin and the dollar. However, it began to face competition in the first half of 2010, with other, more efficient exchange services emerging.

The Beginnings of the Economy

The beginning of 2010 is marked by the initial steps of commercial exchanges in cryptocurrency. NewLibertyStandard, the first to accept receiving bitcoin in exchange for another economic good (dollars in this case), is also the first promoter of this economic boom. On January 19, 2010, just after signing up on the new forum, he wrote the following text:
"People have bought bitcoins from me and sold bitcoins to me. Supply and demand, even if they are low, already exist and that's all that is really needed. Proposing to exchange bitcoins for another currency is ultimately no different from exchanging bitcoins for goods or services. Currencies are goods and exchanging them is a service. I have tried to think of something to buy or sell with bitcoins, besides US dollars, but I couldn't find anything. Please feel free to keep us posted on what you decide to sell for bitcoins. Regarding the issue of depleting funds, I have planned a daily donation in my budget. You can buy all my dollars or bitcoins today, but there will always be more tomorrow and the day after. Everyone who buys or sells goods using bitcoins, including exchangers, is advancing the Bitcoin economy. Let everyone do their part. Buy or sell something in exchange for bitcoins!"
The coordination effort is primarily conducted on the forum. On January 27, a Dutch user going by the name giik created a thread titled "We accept Bitcoins" in which he proposed to list the various services that accept bitcoin. Around this time, the new forum began to gain popularity, and messages multiplied. On February 7, Satoshi pointed out to Martti Malmi that "the forum sure is taking off. I didn't expect to have so much activity so fast."
On February 5, NLS suggested that bitcoin, like currencies traded on the foreign exchange market, adopt the ticker symbol BTC and the symbol of the Thai baht (฿). Until then, there was no established practice: for example, Satoshi and Martti used the letters bc to describe units in their correspondence. The use of the BTC symbol quickly became standardized. On February 24, the currency symbol (the capital B crossed by two vertical bars) was designed by Satoshi, who then created the first real Bitcoin logo.
Gradually, people began to accept bitcoin. This was the case for the user SmokeTooMuch in December 2009, who had just arrived and reported the existence of a paysafecard gift card sales service named BTC 2 PSC. The service was later mentioned positively by Satoshi on February 4, 2010. This was also the case for NLS who, on February 9, opened his own online store, the Liberty Swap Variety Shop, where he offered stamps and stickers for sale.
The exchange with the dollar also developed, and within two months, no fewer than three platforms opened their doors:
  • BitcoinFX (bitcoinfx.cz.cc), a service for selling bitcoins in Liberty Reserve dollars, which is announced on February 15th;
  • BitcoinExchange (bitcoinexchange.com), Martti Malmi's platform, which uniquely gauges supply and demand by considering the euros and bitcoins deposited by users, and which is opened to the public on March 2, 2010;
  • Bitcoin Market (bitcoinmarket.com), a peer-to-peer marketplace using PayPal that is launched by someone named dwdollar on March 16, and which will see significant success before the emergence of Mt. Gox in July.
Capture of the Bitcoin Market interface later on (August 2011)
On March 11, the first poker game involving bitcoins is organized by the administrator of BitcoinFX, inaugurating the strong relationship that will exist between gambling and cryptocurrency. The game is won by dwdollar, who earns 600 BTC.
Other services accepting bitcoin emerge, such as the voice over IP service Link2VoIP on March 16, the web hosting service Vekja.net on April 23, or the domain name seller Privacy Shark on April 30. This proliferation of services leads Martti Malmi to eventually host a page listing merchants on the Bitcoin.org website.
The first dedicated Bitcoin custodial service also appears: MyBitcoin, a web application that enables easy and serene use of cryptocurrency, especially on mobile. Thanks to this service, users do not need to download the complete chain data to send and receive transactions, nor do they need to keep their bitcoins themselves by saving their private keys.
At that time, lightweight wallets (known as "SPV") did not exist, so Satoshi Nakamoto himself deemed it acceptable to use this type of software, even though this use went against the principle of disintermediation at the heart of Bitcoin. On May 18, 2010, he wrote on the forum:
"In the meantime, sites like vekja.net and www.mybitcoin.com have been experimenting with account-based systems. You create an account on a website, keep your bitcoins there, and transfer them in and out. Creating an account on a website is a lot easier than installing software and learning to use it, and it's a more familiar method for most people. The only disadvantage is that you have to trust the site, but that's fine for small amounts intended for micropayments and miscellaneous expenses. It's an easy way to get started, and you can switch to the actual bitcoin software if the amounts received become more significant."
Finally, on May 19, a user going by the name Teppy began to accept bitcoin for the massively multiplayer game he administered, A Tale in the Desert.

The Origin of Bitcoin's Value

In the spring of 2010, bitcoin acquired value in many people's minds. Even though the system's use was in its infancy, the demand for bitcoin was present, whether from the perspective of mining, exchange with the dollar, or the sale of services. A symbolic event on May 22 definitively sealed this economic bootstrapping: the first purchase of a physical good with bitcoins, specifically a pizza, which we will recount in the next chapter.
Many people have struggled to explain the origin of Bitcoin's value. This emergence of value particularly disturbed the proponents of the Austrian school, who had a narrow interpretation of Ludwig von Mises' regression theorem. This was the case for a certain individual, xc, who on the forum sought to base the transmission of value in the conversion on the dollar.
However, this question never bothered Satoshi, who saw the bootstrapping of a new currency as a challenge that was certainly difficult to overcome but not impossible. He thus expressed his viewpoint on the forum on August 27, 2010, in response to xc:
"As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose and with one special, magical property: - can be transported over a communications channel If, for one reason or another, this metal acquired any value at all, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it. Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, or any random reason, could spark it."
Quiz
Quiz1/5
Which miner from 2009 lost all of his bitcoins by throwing his computer away at the dump in 2013?