The Great Recession took $70,000 from you. We now are coming up on the 10 year anniversary of the very bad day of September 15, 2008, when Lehman Brothers fell off a cliff and took the world’s economy down with it. But in the midst of this chaos, one intrepid tech-believer registered the domain bitcoin.org on August 18, 2008.
Without the Great Recession, we still might have something called Bitcoin. However, what we did with it and how an entire half-billion dollar industry grew from that would mostly like have been entirely different.
The earliest days of Bitcoin dictated our present moment. It’s worth it to revisit some of the stories that eventually framed the cryptocurrency world we’re in now.
There were attempts at digital money before. These names all sound stupider than “Bitcoin” now: Ecash (1982), Digicash (1995), Bitgold (2011). But that’s mostly because Bitcoin survived and they didn’t. However, none of them had the cauldron of the recession to stoke their fires. Bitcoin, cryptocurrency, and blockchain in general promised that they could exist in the absence of trust in financial institutions. And consumers’ trust in financial institutions burned away because the crash.
We very much live in a world created by the 2008 crash. According to Barry Ritholtz’ Bailout Nation, “The bailouts managed to spend far in excess of nearly every major one time expenditure of the USA, including WWI, WWII, the moon shot, the New Deal, NASA, Iraq, Vietnam and Korean wars combined.”
And what did we get for that? The “gig” economy, selfcare, “Airbnb for ___,” artisanal everything, bingewatching, and blockchain. Is it a coincidence that every major shift since we paid bankers for ruining the economy revolves around us taking care of ourselves for our own sake?
As New York Magazine put it: “The older folks hoovered up gold, which basically doubled in value in the four years after the crash. Younger folks dove into cryptocurrency.” Some quick back of the envelope math: if you put $100 into gold you’d have $200 after the crash. If you put $100 in bitcoin you’d be sitting on $433,333 by 2012. But that could be $11,666,666 by 2013.
Those are hate-yourself casino numbers. No rational part of your brain can handle that thought. Pretty much everyone who at least heard of Bitcoin more than six years ago has wrestled with that. Luckily, most of the original Bitcoin winners are a-holes.
It’s hard to imagine the current era without smartphones. The horrors of the recession weren’t the kind of thing you could read about in the paper the next day. Those out there pounding the pavement looking for new work couldn’t go home and check their answering machines.
The iPhone came out in 2007, but for the first two years of Bitcoin, you couldn’t reliably take a selfie;the front facing camera came out in the iPhone 4 in 2010. Before that, a smartphone just wasn’t the lifeline it is today. But it’s impossible to imagine a secure crypto future without it: two factor authentication, thumbprint ID, facial recognition. And that’s just to secure your account.
When using ApplePay at the bodega or Venmoing a friend from across the table, you don’t have to pull out your wallet. We don’t think of these as related to cryptocurrency, but they are. The future of digital money will look a lot more like giftcards than we might like.
Venmo, PayPal, ApplePay, Coinbase, Gemini, and other digital wonders we use instead of cash all depend on the same expensive system of banking that we’ve had since the ‘70s: They function best internally. If you and everyone you know, work with, and rent property from all use the same money transfer app, the transactions among yourselves are basically free for everyone, including the network.
Elon Musk was very candid about this to his biographer in Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future:
“Almost no one understands how PayPal actually worked or why it took off when other payment systems before and after it didn’t. Most of the people at PayPal don’t understand this. The reason it worked was because the cost of transactions in PayPal was lower than any other system. And the reason the cost of transactions was lower is because we were able to do an increasing percentage of our transactions as ACH, or automated clearinghouse, electronic transactions, and most importantly, internal transactions. Internal transactions were essentially fraud-free and cost us nothing.”
That last sentence is the entire business plan of the digital economy. How can we get to our digital cash future in a way that is fraud-free and also cost-free? Whoever can solve that problem internationally in the future will win. Getting transactions down to a point where they are fraud-free and lower in cost than with old traditional banking will turn crypto into a no-brainer.
Dr. Craig White is a well known libertarian. He is really into the privacy-nut idea that banks and governments who manipulate their holdings shouldn’t get a say in what you do with your money. The recession took hatred for the banks mainstream.
The idea that we shouldn’t trust governments who can print money has been around for a long time. But it took a bald-faced bailout to really drive the point home. Nonetheless, trustlessness doesn’t replace humanity. Dr. Craig Wright—who is either bitcoin’s pseudonymic founder Satoshi Nakamoto or the last guy who knows who he is—doesn’t put much faith in trustlessness. “Bitcoin is not trustless,” he once said. “It does not stop embezzlement nor most frauds. Enron would have happened if the world was using a blockchain and it would have been just the same.”
It’s interesting that bitcoin accounts were made up of only a few cents at a time when Millennials—held hostage by the recession—also had banks accounts that dwindled close to $0.18.
Just 10 years before bitcoin launched, you still needed to get a money order from the post office to buy something off eBay. The original boom in the dotcom boom was the idea that you could transact digitally. While those previous 10 years looks weird, they did create an entire generation who lives mostly in the digital world. In the era of dial-up internet, it was still quicker to drive to you local record store (remember those?) and purchase an album than to buy it on iTunes.
“My first novel, High Fidelity, is about the lost but fiercely snobby people who used to sell us our music,” author Nick Hornby said about the changes in tech since the 90s. “back in the day when music was something you could touch and see and probably smell, as well as hear. (If I had been told, when I was writing it, that within a decade you’d be able to email a song, I’d have presumed that this meant you could also email a sandwich.)”
Coincidentally, on May 22, 2010, the first recorded bitcoin transaction took place, but it wasn’t an emailed sandwich. On that day programmer Laszlo Hanyecz emailed 10,000 bitcoins to a stranger on the internet and the stranger send him two pizzas.
Young libertarian Ross Ulbricht graduated from Penn State directly into the 2009 recession. He was a bright kid, but he struggled to find good work. He soon started his eBay-for-drugs website The Silk Road in 2011. And then, one bitcoin just so happened to equal one dollar. For a couple of months there, users of the nascent website could transact in dollars the same way that U.S. and Canadian citizens do along the border. Users could buy and sell drugs, only instead of paying street prices or money launderers; they just used these funny digital Canadian dollars called bitcoins.
Ulbricht conceived and designed the entire operation himself. He even grew the mushrooms that became the website’s first product and posted about them in mushrooms forums.
Putting the drugs aside for a moment: what happened next would upend several industries. It was almost a side effect of crypto markets. Ross took a small commission from each sale—eBay style—and used it to run and debug the platform. As folks saw that you could actually do something with bitcoin, the currency went up in value. Suddenly people who would never buy drugs in real life—let alone online using these digital Canadian dollars—started hoovering up bitcoins as if they were served up on a pocket mirror in the bathroom of Studio 54 circa 1978.
It didn’t affect the Silk Road market at the time. As the price of bitcoin went up, people just adjusted how much they charged for drugs—and then later knives, guns and explosives.
Ulbricht did not decentralize the Silk Road. If the price of bitcoin dropped while your transaction was in process: he’d cover the loss. When drug dealers delivered bunk product, he worked as customer support, all while evading police and living like a backpacker in hostels all over the world.
According to the FBI, from “February 6, 2011 to July 23, 2013 there were approximately 1,229,465 transactions completed on the site. The total revenue generated from these sales was 9,519,664 Bitcoins, and the total commissions collected by Silk Road from the sales amounted to 614,305 Bitcoins. These figures are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates.”
Just to give you an idea about the quantity of drugs he moved: $1 billion in sales is almost twice the amount that people spent online shopping for Black Friday sales in 2011. The FBI was weary of the unstable coin and liquidated much of it by selling the bitcoins to a friend of Modern Consensus, Timothy Draper.
Sure, you would never buy drugs or five different hitmen on the internet. But if you owned $100 in bitcoin in 2011, you could have had as much as $100 million today if you got out in time. Did you invest in crime? Not especially. But your purchase of $100 in bitcoin would have performed just as well as someone who sold $100 worth of mushrooms and then didn’t touch their bitcoin account for five years.
Our whole crazy world of ICO’s is basically trying to rehash this on a legal level. Cryptoslate lists 27 different marijuana-based cryptocurrencies. To this day, plenty of people who don’t buy or sell weed still speculate on whether a system that does so could be worth money someday.
[Incidentally, American Kingpin: The Epic Hunt for the Criminal Mastermind Behind the Silk Road —the book about this—is killer. My favorite part is how Ulbricht went down. IRS investigator Gary Alford was born in New York in 1977 when the Son of Sam was on the loose during the city’s blackout. He was fascinated by how the police finally caught him. According to legend, the police decided to go through the records and see who had gotten a parking ticket at the time of the murders. The thinking being they weren’t going to catch a criminal mastermind at work. They were going to catch him for being careless. Alford was on the lookout for “a parking ticket on the internet,” which he eventually did by tracking the times Ulbrict failed to use a phony email or VPN while doing Silk Road business.]
The crash of Silk Road was so spectacular that even though it was one of the few uses of bitcoin at the time, the price of bitcoin went up after the site got shot down. It’s hard to imagine that we’d be talking about Bitcoin today if a bright programmer like Ross Ulbricht had graduated into a tech boom economy instead of a recession.
Everything else came much later. So while the crisis did not create bitcoin or cryptocurrency, it was an idea that could only function in the universe that followed.
What will the bitcoin world be in 10 years? “Bigger,” Wright told me today on Twitter (we’re internet friends; we chat mostly about wine). “and Bitcoin IS BCH.”
BCH, of course, is the controversial fork of Bitcoin known as Bitcoin Cash.
“The transaction will be a tokenized exchange in BCH.” Wright is bullish about the Bitcoin Cash ecosystem, which he probably helped develop.
On Halloween of 2008, someone—possibly even Wright himself—posted the Bitcoin white paper on a cryptographic mailing list. It was the first time the public got to read and share about Bitcoin. The banks were still in freefall when the white paper was published. Obama had yet to be elected and Bush had just signed the TARP funds act to bail out the banks. Three months later, the first block of 50 bitcoins was mined.
We don’t know who exactly broke the first block, but we do know that it was the first and that there wasn’t a shadowy person in the wings just waiting to cash in bitcoins he’d been mining in secret for years. Embedded in the coinbase of this block was the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” That was a reference to a headline that only went online a few hours earlier.
This story links to the fact that all the smartest people in finance and government had tried their best to right the ship after the September collapse. And it didn’t fully work. They were going to try again.
Maybe next time they’ll try a different strategy.