It is March 2000, the new millennium has begun and the Y2K bug has not led to the feared computer problems. But there are other problems. In the late 1990s, the share prices of technology companies rose rapidly, despite a lack of profitability and realistic business models. Completely overvalued technology and internet companies on the stock market were the result. What was bound to happen happened - the dotcom bubble burst. The NASDAQ Composite Index, which at the time listed over 5,000 companies in the technology sector (in comparison, today there are around 3,000), plummeted by 75%.
The US central bank, the Federal Reserve (Fed), responded to this collapse and the threat of recession with an expansive monetary policy. Key interest rates were lowered from 6.5% in 2000 to 1% in 2003 in order to stimulate lending. And it worked. Even people on low incomes were able to take out loans easily. They were given mortgages without having sufficient collateral. Sometimes even several. Banks, which exploited loopholes created by the deregulation of previous decades, engaged in increasingly risky business, bundled these mortgages into complex and difficult to understand financial products (mortgage-backed securities and collateralized debt obligations) and sold them worldwide. They sought ever higher profits. The risks did not matter, as they were passed on to other market participants.
Like eight years earlier, what had to happen happened in September 2008. The investment bank Lehman Brothers collapsed, causing a crisis of confidence between banks. As nobody knows which bank will go bust next, nobody grants any more loans. The result is a credit crunch and liquidity crisis, which led to a deep financial and economic crisis with noticeable effects worldwide.
Governments tried to save the ailing financial system. Countless rescue packages for banks and financial institutions were put together worldwide. How? By printing fresh money and - of course - cutting interest rates. Like the Fed, the European Central Bank (ECB) also lowered its interest rates. From 4.25% to 1.75%. Later even to 0%. Banks that were responsible for the crisis were injected with capital. State guarantees were granted for bank liabilities. Problematic securities were bought. Even government bonds were bought up.
"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"
In the middle of one of the biggest financial crises in history, something completely unexpected happens. Not that the British Chancellor is on the brink of a second bailout for banks, but the emergence of the first fully decentralized digital money. Alluding to the financial crisis, the Genesis block or Block 0 of Bitcoin is mined at 18:15:05 on January 3, 2009.
By Satoshi Nakamoto. The - still unknown - person or group of people who invented Bitcoin published the white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" on the cryptography mailing list on October 31, 2008, describing Bitcoin as a new electronic money system that works without trusted third parties and is therefore completely peer-to-peer.
The most important features according to Satoshi Nakamoto's first e-mail:
Double spending is prevented by a peer-to-peer network.
No central issuer or trusted third party.
Participants can be anonymous.
New Bitcoin is generated using a hashcash-like proof-of-work process.
The proof-of-work process also secures the network and prevents double spending.
Although the mailing list included experts in cryptography with experience in the creation of digital money, reactions were initially restrained. They could not begin to see what Bitcoin would one day become and even doubted that Bitcoin could work at all. One notable exception was Hal Finney: "this does seem to be a very promising and original idea, and I am looking forward to seeing how the concept is further developed”. He was one of the few who recognized the potential of Bitcoin early on.
Bitcoin builds on decades of research and development work. It was only possible to create Bitcoin through the failed attempts of e.g. David Chaum (eCash), Adam Back (HashCash), Wei Dai (b-money), Nick Szabo (Bitgold) and the merging of their various concepts. Satoshi Nakamoto did not really invent anything new, but ingeniously combined the existing components to create a perfect balance of economic incentives and cryptographic guarantees.
More on this in the next issue of the ₿itcoin Insights newsletter
How did you like the first issue of the newsletter?
I look forward to your feedback in the comments!
If you want to dive deeper into the initial concerns as well as questions and answers, I recommend reading the email correspondence between the people on the Cryptography Mailing List and Satoshi Nakamoto. The emails between October 31, 2008 and January 25, 2009 are collected here.