Why Was Bitcoin Created?
Learn about the creation of Bitcoin, the world’s first cryptocurrency.
- The concept of Bitcoin first emerged in 2008, during an ongoing financial crisis. It aims to address perceived issues of trust and stability in traditional economic systems by eliminating the need for corporate banks and centralised financial institutions.
- Bitcoin’s Proof of Work (PoW) consensus system and encrypted blockchain technology have provided a secure, transparent, and trustless transaction environment while preserving user anonymity.
- Innovations like Bitcoin mining have helped to incentivise the network’s growth, while halving has controlled the currency’s supply, ensuring scalability and sustainability.
- Bitcoin’s creation has significantly influenced the digital economy, demonstrating the potential for cryptocurrencies as both a store of value and medium of exchange.
Bitcoin’s beginnings are as mysterious as they are revolutionary. Coming to light in the aftermath of the 2008 financial crisis, Bitcoin’s initial aim was to provide a secure and independent means to hold value and transact with anyone around the world without the assistance of banks, payment processors, or currency exchanges. Below, we dive deeper into understanding why Bitcoin was created.
Why Was Bitcoin Created?
Despite introducing something genuinely groundbreaking to the world, Bitcoin’s creator (or creators) decided to go by a made-up name — ‘Satoshi Nakamoto’. In the mid-2000s, a computer programmer or group of people posted regularly in cryptography forums under that moniker, becoming known for their posts about cryptography and security. They exhibited frustration at how online transactions worked and concern about pressing issues in the global economy. Nakamoto felt that an alternative could help people preserve control over their money in the digital age. Considering the simplicity of person-to-person cash transactions, Nakamoto sought something similar for the internet.
A Peer-to-Peer, Trustless Cash System
Nakamoto’s idea was a ‘trustless’ cash system, meaning a store of value that works just like money but doesn’t require anyone to place their trust in a third party to hold their money or manage transactions for them. To help explain it, think of Nakamoto’s admiration of simple cash transactions. In a typical scenario:
- A shopper goes to a store, grabs an item off the shelf, and takes it to the clerk.
- The clerk rings up the total cost.
- The shopper takes out their wallet, grabs the appropriate amount of cash, and hands it to the clerk.
- The transaction is complete. The shopper leaves the store with their item.
In this example of a person-to-person cash transaction, nobody except for the buyer and seller are involved. No bank is needed to process the transaction, so it’s simple and easy. Compare that to paying with a credit card: There are several additional parties involved in this process. Multiple security checks occur on both sides to ensure the transaction request is legitimate. Because of this overhead, additional fees exist, so the credit card transaction tends to be more expensive and inefficient than the more straightforward cash-for-product exchange.
This simple cash transaction is called ‘peer-to-peer’ (P2P) in the context of Bitcoin and other cryptocurrencies. Nakamoto wanted the system to help people transact directly online without the need for a bank, like with a person-to-person cash transaction. Nakamoto’s idea went a step further than the cash transaction, however; namely, not using cash at all. The proposed system wouldn’t exchange value using dollars, euros, or other central bank-controlled currencies. Instead, it would use a novel currency with a fixed supply and no central organisation to manage it.
Why did Nakamoto want to introduce a unique currency for Bitcoin’s system? According to the Bitcoin white paper, it all comes back to the idea of trust. Nakamoto believed that the only trust required for most transactions was between the buyer and seller, so they set out to prove this could happen online without the need for a financial institution. A limited currency with no central manager would also let the market dictate its value without the possibility of intervention.
Bitcoin Increased Trust by Removing…Trust?
The actions of financial institutions leading to the 2008 financial crisis resulted in a lot of blame and distrust. Meanwhile, the actions of central banks made many experts feel that the global economy had become too dependent on financial institutions. Nakamoto’s alternative solution came along at just the right time, and it’s part of the reason that Bitcoin and other cryptocurrencies have skyrocketed in popularity.
Nakamoto’s idea was a reaction to the many challenges people were facing in the economy. The proposed solution to remove the concept of trust from the equation was both novel and enticing. While that may sound nonsensical, Nakamoto didn’t mean all forms of trust. The context for this thesis was Nakamoto’s view that there are challenges in trusting that central banks would sufficiently protect the value of a holder’s money. While there was plenty of scepticism at the time, with Bitcoin, Nakamoto suggested something more powerful to replace the traditional system with something people could trust more: proof.
The hash-based Proof of Work (PoW) system that Bitcoin and other cryptocurrencies use for consensus securely encrypts and distributes information, and the ledger of transactions isn’t behind closed doors like in the traditional banking system. Instead, it sits out in the open for anyone to see — every single transaction in the history of Bitcoin. Instead of limited access, the network protects its users and holders with anonymity, and while anyone can see the transactions, participants’ identities are not revealed.
Complete copies of the ledger exist on tens of thousands of Bitcoin nodes worldwide, making it practically impossible to defraud. This concept, called the Bitcoin ‘blockchain’, was so revolutionary that industries like healthcare and real estate eventually adopted it for securely managing information and transactions. Nakamoto’s idea to replace the older trust system with transparent and distributed proof is now ‘trusted’ for all kinds of secure data transfer.
Bitcoin’s Creation: From Concept to Reality
One of the groundbreaking ideas Nakamoto developed was Bitcoin mining, which manages the ledger and controls the available supply of new bitcoins. Mining also rewards those who participate in the mining effort, helping to keep the system widely distributed and secure. It is believed that, early on, Nakamoto was in possession of approximately 1.1 million BTC as a reward for mining 22,000 blocks.
Sensitive to worries about inflation, Nakamoto put plenty of thought into how Bitcoin would mature:
“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase. Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”
Nakamoto also knew that having a limited supply could result in problems should Bitcoin realise its potential as an asset, and thus introduced Bitcoin halving to keep supply and demand in check. Below is how Nakamoto described it:
“Total circulation will be 21,000,000 coins. It’ll be distributed to network nodes when they make blocks, with the amount cut in half every 4 years. [F]irst 4 years: 10,500,000 coins[,] next 4 years: 5,250,000 coins[,] next 4 years: 2,625,000 coins[,] next 4 years: 1,312,500 coins etc… When that runs out, the system can support transaction fees if needed. It’s based on open market competition, and there will probably always be nodes willing to process transactions for free.”
Nakamoto’s creation of a secure, decentralised currency and transaction system, while accounting for the scale and demand that would later come to pass, allowed Bitcoin to build a following and eventually thrive. Today, it remains the largest and most widely known cryptocurrency.
Bitcoin’s most successful function to date is as a decentralised store of value independent of national currencies.
However, Bitcoin’s future looks set as a legitimate asset for traders and holders. Reflecting its spot in the global economy, Bitcoin often experiences price reactions to macroeconomic events and data. CNBC, Bloomberg, and other financial media now regularly cover Bitcoin news and price movements.
Bitcoin’s innovative nature long went beyond that of a digital store of value and medium of exchange. It has expanded to a whole blockchain ecosystem that enables uses for multiple functions, from creating non-fungible tokens (NFTs) to digital transactions, with additions like Ordinals and the Lightning Network.
After understanding why Bitcoin was created, there’s plenty more to learn at the Crypto.com Bitcoin Hub. For additional educational content about Bitcoin and other cryptocurrencies, visit Crypto.com University. With the Crypto.com App, trusted by over 80 million users worldwide, traders will find Bitcoin, Ethereum, and 250-plus other cryptocurrencies to add to their portfolios.
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