Bitcoin’s dominance has been on the rise this 2020-2021 bull run. As price increases and market capitalization gain traction, adoption is proliferating. Bitcoin now surpasses many huge companies in market share, and in the past year, investments in bitcoin as an asset class have gone mainstream.
In the midst of all the recent excitement, many have also taken time to reminisce BTC’s past. Bitcoin’s release in January 2009, was the culmination of ideas from brilliant minds. In particular Hal Finney, a cryptoactivist and engineer, dreamed of a P2P encrypted financial system which “puts the power into the hands of the individuals rather than governments and corporations” (Cypherpunk Mail 1992, Forbes). But has Bitcoin turned out the way Hal and other Cypherpunks envisioned?
In this article we inspect the current Bitcoin market. We then peek back at some of the suspected contributors to the coin, before looking forward at what’s to come for Bitcoin’s dominance.
Bitcoin’s Dominance Indexes
Bitcoin’s dominance index crested 70% in January 2021, a phenomenon not seen since the late 2017 bull run (TradingView). If you are unsure, the BTC dominance metric gives a sense of Bitcoin’s value relative to all other digital currencies combined. According to this measurement, Bitcoin’s total value is nearly three times that of all alt coins put together.
Interestingly, the Real Bitcoin Dominance climbed past 84% this month. The Real Dominance Index is based on Bitcoin’s market share of all Proof-of-Work coins combined, excluding ICOs, stablecoins, and centralized projects. PoW is considered to be the only consensus algorithm known to maintain secure decentralized networks. Without decentralization alt coins are no improvement to the current centralized banking system.
Below shows Bitcoin’s dominance index percent, compared to the BTC price, and market cap over time. Data adapted from TradingView and CoinMarketCap.
BTC’s Market Capitalization
The recent Bitcoin market capitalization figures, nearing a trillion dollars, create excitement. Market capitalization is calculated by multiplying the total number of a company’s shares by the current market price of one share. For Bitcoin this is the amount of BTC in circulation, currently around 18.6 million, times the price.
In January 2021, BTC’s market cap exceeded three-quarters of a billion dollars. Bitcoin also made history this month for surpassing Facebook’s market cap, leaving Tesla in the crosshairs. This phenomenon left the Winklevoss brothers elated. Cameron took to Twitter to share his satisfaction.
Although we are not there yet, Hal Finney imagined a day when Bitcoin equalled all the world’s wealth, becoming the dominant financial system. In 2009, he stated, “Current estimates of total worldwide household wealth … range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million” (Satoshi and Hal Communications 2009, MIT).
Alas, if Bitcoin became the main global currency in today’s world, it would be worth even more than Hal’s prediction. Following Hal’s logic: global wealth is currently $360 trillion, and there are 18.6 million coins in circulation, thus each Bitcoin could equate nearly $20 million. 🤩 … And the Hodlers cheer … 🎉
In order for Bitcoin’s dominance and price to continue to rise, adoption must drive these rates because BTC’s price is correlated to its demand. Adoption can be reasonably based on active wallets. Active wallets have twice shot up over a million, following the 2017 and 2021 bull runs. This dynamic is displayed in the graph below. Most importantly, Bitcoin’s overall adoption has doubled in the past three years. Data adapted from BitInfoCharts.
As this record setting January 2021 passes, many pay homage to the pseudonymous founder(s) of the 11 year old crypto coin. Bitcoin was not the first peer-to-peer electronic money system. Its predecessors span back four decades. Although the identity of Satoshi remains unknown, Bitcoin enthusiasts are certain that its protocol was based on previous designs by illustrious cryptographers, mathematicians, and computer scientists.
Up until the mid-1970s, America’s National Security Agency (NSA) had cryptographic monopoly. The US government openly considered cryptography software akin to munition, and did not want it in the hands of citizens. In spite of these allegations, a young Whitfield Diffie and Martin Hellman proposed the idea of a private key and a corresponding public key in 1976. This work was embellished by Ralph Merkle, who invented, among many things, cryptographic hashing (Wiki). This was followed long after by Paul Zimmerman’s 1991 Pretty Good Privacy (PGP) encryption tool for messaging. Combined, these inventions ignited flames in an underground movement of cyphers and crypto academics, ultimately leading to the loosely-affiliated 1990s Cypherpunk movement.
Often misunderstood, Bitcoin was carefully sculpted from ideas of various contributors over several years. Here are a few of the usual suspects whose work is directly reflected in Bitcoin’s core architecture:
David Chaum is an Angeleno computer scientist and cryptographer, who first described a digital money system in the early eighties (Wiki). His 1982 UC Berkeley PhD dissertation proposed all elements of the latter described Bitcoin, except the Proof-of-Work algorithm. In this theoretical electronic payment system, Chaum’s protocol relied on encryption-enabled anonymous communications and transactions. It also used a mechanism later mirrored in Bitcoin’s blockchain, in order to achieve consensus between nodes, document histories of blocks, and immutably time-stamp data.
In 1989 Chaum began developing the first-ever virtual currency, DigiCash, which operated as a company until its bankruptcy in 1998. Digicash shares Bitcoin’s anonymity and decentralization features. Furthermore, over the course of his academic and research career he invented eCash, as well as several cryptographic protocols including blind signatures, anonymous communications, trustworthy voting systems, and more.
Coincidentally, Chaum was also was the first to propose the idea of remailers. Cypherpunks, who emerged in 1992, used Mailing Lists to share ideas, academic research, and build new privacy tools within the budding crypto community of the early internet days (Wiki). Cypherpunks believed privacy and anonymity could only be achieved by widespread cryptographic technology, and their modus operandi was: If You Build It, They Will Come (Wired).
Finney, like Chaum, was a California native. He was a cryptographic activist, posting regularly in the early 1990s Cypherpunk Mailing List and managing related remailers. Hal firmly believed that the computer could “be used as a tool to liberate and protect people rather than control them.” He once stated that P2P encrypted payment systems, like Chaum’s, could solve our universal “problems of loss of privacy, creeping computerization, massive databases, (and) more centralization” (Forbes, Wiki).
In 2007, Finney created a reusable proof of work system referred to as RPoW as a basis for electronic money. His idea was based on British researcher and Cypherpunk Adam Back’s Hashcash. RPoW differs because it permitted random token exchanges, without repetition of the hashing work required to generate tokens.
Furthermore, Hal believed a RPoW token guaranteed the value of the real-world resources required to mint a PoW token, reflected in the token’s value. In other words, the effort and financial cost required to create new tokens and record transactions is the base price of the token itself, just as fiat is meant to be underpinned by gold. Also, laborious PoW algorithms inhibit excessive use of the system, ultimately saving electricity and running costs, and preventing counterfeiting. Hal’s RPoW system happens to be the basis for Bitcoin’s SHA-256 mining algorithm, referred to as the Satoshi consensus. Albeit, his work is not cited in the Bitcoin white paper (2008).
Szabo is an American computer scientist, cryptographer, and legal scholar who was active in pre-Bitcoin technologies. He was a participant in the Cypherpunk movement, and is an economic history buff. He pioneered smart contracts in 1996, and in 1998 designed bit gold.
In Szabo’s bit gold network, cryptographically solved puzzles are sent to a Byzantine fault tolerant public registry to ensure decentralization and trust. Participating severs must agree information bound for the registry is correct before hashing the next puzzle. Solutions become part of the next challenge, creating a chain of data and properties. Like Hal’s RPoW motive, Szabo reasoned that “if a puzzle took energy to solve, it could be considered of value and used as a digital coin” (IEE Spectrum).
Nick created an offshoot of the Cypherpunks, the LibTech remailer. He reports that Wei Dai, Hal Finney, and others discussed ideas like b-money and bit gold there. Szabo sent an outline of bit gold to members of the group, who together tried to create a working version of his digital money system. Although, bit gold was never implemented as it did not adequately prevent double-spends. Despite his work seeming an obvious antecedent to Bitcoin’s architecture, Nick, like Hal, was not cited in the white paper (New York Times, What Bitcoin Did, Wiki).
Wei Dai (戴维) is a computer scientist who made several substantial contributions to cryptography and e-currency systems. Like Chaum, Finney, and Szabo, Wei participated in 1990s Cypherpunk remailers.
In 1998 after his graduation, Wei created a cryptocurrency system called b-money. His paper describes b-money as “an anonymous, distributed electronic cash system… a scheme for a group of untraceable digital pseudonyms to pay each other with money, and to enforce contracts amongst themselves without outside help”. In fact, Ether’s smallest subnet, wei, is named in his honor.
Dai described b-money as “impossible to regulate”, also a core concept of Bitcoin. Additionally, it shares other principles of Bitcoin, for instance, it includes a proof of computational work algorithm, a community consensus for verification, a ledger, cryptographic hash authentication, worker rewards, and digital signatures.
Bitcoin’s whitepaper cites Wei’s b-money. Furthermore, Satoshi Nakamoto reportedly contacted Adam Back and Wei Dai pre-release. Wei denies involvement in Bitcoin, stating: “I didn’t create Bitcoin but only described a similar idea more than a decade ago” (LessWrong).
So, Who is Satoshi?
Although imperative to understand the underpinnings of Bitcoin, it is oxymoronic to think that its founders wish to ‘be discovered’. It is an anonymous, decentralized, private, secure P2P payment system. If the system protects your identity, why bother to expose its founder(s)?
some people come into Bitcoin with a traditional banking mindset, looking for Bitcoin’s identity, not realizing that it doesn’t need one.– Szabo paraphrased, from the What Bitcoin Did podcast, Nov. 2019
The Way Forward for BTC
Bitcoin is a finite resource, like gold. This prevents value dilution by inflationary mechanisms commonly used in current financial systems. Yet, Keynesian economists, based on Paul Krugman’s babysitting co-op theory, feel Bitcoin’s value could eventually deflate. For example, individual or institutional Hodlers may make already-scarce supplies of Bitcoin scarcer, in turn driving down the usability/liquidity and value of the coin (Engadget).
But what economists may not grasp is that Bitcoin is a completely new economic system, not comparable to their own. Like gold, the culmination of supply, demand, and investors, drives Bitcoin’s price increases. It is volatile and will experience price swings, sometimes large, yet this feature strengthens its resolve, not its demise. Drops in prices could weed out the bad players, who speculate in order to maximize their fiat gains.
Bitcoin acts as a sort of Gold Standard asset, providing a secure, seamless, global first layer, without third parties like financial institutions controlling the flow and accessibility of money. To ensure optimal security and continued trust of the network, this base layer should not be altered.
Not altering a system is also a foreign concept to financials institutions, who risk the security of their entire system, in order to achieve greater usability of their services. Therefore, second layer solutions like Lightening Network, alt/forked coins such as Bitcoin Cash (BCH), or new inventions, could be more widely used for smaller coin settlements in the future. Alas, second layer solution architectures must also be carefully thought out.
In the end it doesn’t really matter what the white paper says, or who invented Bitcoin, it matters how people use it.
– paraphrased from Nick Szabo, What Bitcoin Did Podcast, Nov. 2019