On Monday, September 15th, 2008, tourists and locals stood outside and watched as employees of Lehman Brothers left the New York City headquarters on news that the bank would need to liquidate or file bankruptcy.
46 Days later, Satoshi Nakamoto posted the first white paper outlining Bitcoin.
Less than 3 months later, the first Bitcoin code was released and implemented.
In a world of mediocre commentary about whether cryptocurrency is garbage or gold, about whether it will collapse or else disrupt every aspect of our lives, it’s the story of how we got here that’s so often missing. If we want to be smarter about it, to make better long-term decisions, we need a map showing us where we’ve come from so that we can see where we’re headed.
Really, there are 3 histories – 3 stories – that show us not only how cryptocurrency has come about – but more importantly where it’s likely headed.
This is a story as old as time…
In the late 1500s in Spain, too much gold and silver was imported from New World conquests. And because currency in Spain was based on precious metals, the overabundance of supply led to a rapid and painful devaluation (in addition to excess spending on war).
About 50 years later, in 1621, the now-famous Kipper und Wipper (Tipper and See Saw) scandal occurred.
The Holy Roman Empire needed more money for wars, so that it could pay soldiers and mercenaries. Taxes didn’t yet exist, so the government started melting down base metals and counterfeiting the currency of surrounding states/areas.
But it came back to bite them. People stopped accepting the money, soldiers stopped fighting if they were paid with it, and eventually, the money came back to the Holy Roman Empire, where it created a level of monetary uncertainty and doubt that spiraled into an economic crisis.
In the 1870s and 1880s, Argentina was a hotbed for investment, development, and speculation, mostly on the part of European banks such as Barings Bank.
But when Argentina turned south around 1890 because of a drought, collapse of the wheat crop, and government coup, European investors saw the end coming. So, as was permitted at the time, they began converting US notes into gold and then moving the gold to Europe.
The US saw its reserves start to be depleted, so the government turned to JP Morgan to bail them out. JP Morgan put together a group of friends who bought nearly all of the remaining gold and vowed to keep it in the country. (They also made a handsome profit).
Fear, Uncertainty, and Doubt (FUD) is a common occurrence in history, although we believe each time that it’s either new or else worse than the last time.
However, the crises leading to FUD do appear to be speeding up in modern history. Typically, what happens in history is that people look to overthrow current institutions and replace them with new ones – new people, new governments, etc. They do this because trust is low when FUD is high.
Trust and FUD are inversely-correlated. They’re counter-cyclical.
This is important, because cryptocurrency has to overcome an initial trust hurdle. But that hurdle is much lower in times of Fear, Uncertainly, & Doubt – particularly during or shortly after an economic crisis.
This means that there is a lower hurdle at these times for a technology like cryptocurrency to overcome. In 2008, this was exactly the case.
Cryptocurrency might have caught on at another point in time, but not nearly so easily as during a time when trust in the economy and fiat currency was relatively low.
Countries like Venezuela and Zimbabwe are great examples of this. In those countries, cryptocurrency is even more popular (and often priced higher) because trust in the government, economy, and currency are incredibly low compared to many other nations.
A lower hurdle – although important – is still just a beneficial condition, and it doesn’t mean that a technology is immediately adopted. AirBNB and Uber both needed to overcome similar trust hurdles (for staying in a stranger’s home or for riding in a stranger’s car). Those hurdles are (perhaps surprisingly) a bit lower, but it still took those companies many years to garner the trust they needed.
For the future of cryptocurrency, this story is important. We’ll see FUD again many times. And during those times, cryptocurrency is most likely to thrive (absent an over-riding event, such as a major security breach).
In addition, the particular cryptocurrencies that are mostly likely to survive are those that garner the most trust, which is often a result not just of technological security, but also of network effects, which puts Bitcoin still in a great position.
However, if you expand the concept of privacy to include certain aspects of autonomy, the privacy is perhaps more prevalent in history. Such autonomy could include the ability to seclude yourself for a period of time or the ability to control certain aspects of your individuality within a broader societal context.
In the 19th and 20th centuries – particularly in the 1970s and 1980s – we saw a dramatic rise in the demand for more privacy.
New laws were passed in the 19th and 20th centuries protecting privacy, and groups were formed to campaign for privacy – all particularly in relation to the flow of information about individuals.
To a degree, this is a historical accident. In most of the world, individuals have more autonomy and freedom (on average) than at any time in the past. But suddenly, many people also feel like they have less. And this is critically important.
One privacy-focused group of important to cryptocurrency was the cypherpunks.
They’re important for 3 reasons:
1. They were early movers and early-adopters in cryptocurrency.
2. Although this group was more vocally ardent about protecting privacy, the sentiment they spoke about extended broadly throughout the general population – particularly in the US.
3. Finally – and perhaps more importantly – this group was generally tech savvy and able to start thinking about and designing the precursors that later became cryptocurrency.
In 1985, Dr. David Chaum started writing about DigiCash and published the paper “New Directions in Cryptography.
With asymmetric cryptography, you have both a public key and private key. The private key allows you to encrypt/sign messages or transactions. Then, when you send the transaction to someone else’s public key, they can verify that you signed it with the proper private key, but they can never figure out or find your private key – it’s a one-way transaction.
This revolution in cryptography made cryptocurrency possible, because without it, there would be no safe and anonymous way to continually sign and send transactions on the blockchain.
But there was also one additional technological advance that made cryptocurrency possible…
Although Satoshi didn’t invent proof-of-work, it was this aspect of the Bitcoin white paper that was perhaps most critical and innovative.
The concept was originally considered in 1992 in a paper by Dwork and Naor, but Adam Back’s paper in 1997 gave it more form and a name.
In short, a proof-of-work scheme requires that a certain amount of “work” be done, but that the “work” be easily verifiable.
This “work” is done by miners, and the brilliance of the system lies in its ability to incentivize miners to record the correct and proper entries in the blockchain (rather than trying to cheat). The way this happens is by ensuring that the work is hard enough to make it nearly impossible to change prior blocks. Also, the proof-of-work system ensures that a miner’s reward for correctly recording and solving a block is generally larger than the temptation to cheat, because cheating would effectively forfeit the value of any ill-gotten gains – particularly since the gains would be tokens based on the underlying and now corrupt blockchain.
You might not be as fascinated by the technical advances as I am, but this also makes a difference for the future of cryptocurrency.
In particular, it’s critical to remember just how new and rapidly-evolving this technology is, which also tells you just how unpredictable it is. That’s both exciting and cautionary.
If you’d generally known in 1995 what the internet would look like in 2017, you’d likely have invested in everything you could have. But then most of those companies went belly-up around 2000.
You would have been right about the internet, but at the wrong time and about many of the wrong companies.
It’s no different with cryptocurrency. The future is likely to be big, but in what way and for whom remains to be seen.
Jeremy Hendon grew up in Georgia, practiced law for a while, and then built several companies - from food manufacturing to magazines to digital events. Jeremy has also developed apps with 500,000+ downloads, co-authored multiple books, had his products featured on national TV, and has lived in 9 different countries over the last 4 years.
S01E12: Smarter Security and Precaution in Cryptocurrency with Thomas France
S01E11: ICOs, FOMO, and the Promise and Hype of Cryptocurrency with Brad Mills
S01E10: The Perils and Promises of Investing in Cryptocurrency with Teddy Wayne
S01E09: Investment, Finance, and Privacy in the Blockchain with Jack Gavigan
S01E08: Investment, Speculation, and The Future of Cryptocurrency with Spencer Bogart
S01E07: The Philosophy and Ethics of Cryptocurrency and the Blockchain with Dmitry Buterin
S01E05 - Privacy, Security, and the Blockchain (Arvind Narayanan)
S01E04 - How Cryptocurrency Will Be Used in the Future (Bernard Golden)