Bitcoin Evolution (Article 4)
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Bitcoin started in 2009 and for one and a half years, its native currency bitcoin had no value. In May 2010, programmer and Bitcoin-enthusiast Laszlo Hanyecz made the first ever real-world bitcoin purchase. Hanyecz bought 2 pizzas for 10,000 bitcoins and thus was the first to set some value to bitcoin. Although this value was below $0.01, it was a major milestone in the history of cryptocurrencies, since for the first time ever, a cryptocurrency not backed by any financial asset had been converted from being valueless to a valuable item. Hanyecz’s purchase encouraged others to trade and exchange bitcoins, and by 2011, bitcoin reached parity with the US dollar.
The only method to generate bitcoins is mining. Initially, a value of 50 bitcoins was awarded per mined block. The Bitcoin blockchain implements a halving mechanism, so that after every 210,000 blocks mined (which corresponds to roughly every 4 years) the mining-reward is halved. This halving was later dubbed the Bitcoin cycle, as it was possible to observe that with every halving event, increased activity on the Bitcoin blockchain occurred, followed by a subsequent spike in bitcoin-price. The spike-prices after the three halving events that have occurred thus far have been as follows: the bitcoin price crossed above $1,000 in 2013 after the 2012 halving, then it spiked to almost $20,000 in 2017 after the 2016 halving and finally, bitcoin rose above $60,000 in 2021 after the 2020 halving.
The price spike after the halving event can be attributed to 3 factors:
- Reaching the halving event indicates that there has been rather ardent activity on the blockchain for the past 4 years as it means that 210,000 more blocks have been added to the blockchain. This increase in the blockchain length and the continuing utilization of the blockchain result in Bitcoin becoming a bigger and a more secure network of nodes.
- Halving means that half of the remaining bitcoins since the last halving have been mined. This increases the scarcity of the remaining bitcoins, hence, increasing their value.
- Mining a block just prior to the halving and just after the halving consumes the same power and incurs the same cost. Therefore, the halving of the reward can be equated to doubling the value of each coin.
For a computer to be able to participate in the network, a specific software needs to be installed to be able to interact with the blockchain. After installation, the computer is able to function as a node within the network, taking on the role of either a validator or a miner. The first edition of this software was released by Nakamoto in 2009, but since then, over 70 updates with various improvements have been released. Even the name of the program changed: while initially known as simply ‘Bitcoin’, the software is now known as ‘Bitcoin Core’. When Bitcoin started, the software was used to mine and validate blocks as well as storing bitcoins. With the goal to increase the security of the system, the functionality of the software has been further enhanced and improved upon, and the software is now split into two components: ‘node actions,’ which performs tasks such as block mining and validating and ‘crypto wallets,’ which stores bitcoins. The activities can be performed separately from each other. Crypto wallets exist in several forms: there are online, software and hardware wallets. Furthermore, an alternative to individual mining (or ‘solo-mining’) emerged as well: pool mining, in which multiple nodes coming together to solve the hashing problem.
As the price of bitcoin kept increasing, so did the interest in mining it. Individuals, groups and businesses started investing in more powerful CPUs (the CPU is, simply speaking, the computer’s ‘brain’ and responsible for doing the calculations). As more computer scientists and cryptographers got interested in Bitcoin, a number of both academics and independent researchers have published papers that offer analyses of the blockchain technology, potential improvements to the Bitcoin software, as well as tips and tricks to increase a computer’s hash-rate. The Hash-rate indicates how many hashes the computer can check per second, or in other words, how fast the computer is able to solve the hashing problem. Through the research, it was discovered that the computer’s GPU (graphics card) has higher hash-rate than the CPU. As the competition grew more and more heated, computer engineers eventually came to the realisation that our computers are not optimised for hashing. This discovery, coupled with the increased interest in mining bitcoin, encouraged businesses into developing dedicated ASICs (Application Specific Integrated Circuit). As miners got more competitive, they started expanding their computational power, and ‘Bitcoin mining farms’ came to life. A mining farm is like a supercomputer, or a giant server room filled with very powerful ASICs, and is built specifically to mine bitcoin. It is estimated that (all current) bitcoin mining computing power is equivalent to millions of supercomputers, or billions of laptops.
The increase in the price of bitcoin went hand-in-hand with the increase in the number of active bitcoin wallet addresses. It is probably very difficult to decouple bitcoin price action from the increase in the number of active wallets in order to establish which of these two factors was the driver of the other. But it is safe to assume that bitcoin price and the number of wallet addresses have created a vicious cycle: if the price increases, then the interest in bitcoin increases, which translates into more wallets, leading in turn to a further increase in the price, which brings even more interest and wallets, so the price increases again, and on and on and on…
