It happens when a man named Satoshi Nakamoto posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called Bitcoin in November 1, 2008.
His research has not been heard by anyone at that time, but his creation solved the problem that addressed cryptographers since the birth of the internet.
The idea of digital money - convenient and untraceable, liberated from the oversight of governments and banks - had long been a topic. Since the 1990s, Cypherpunks, a libertarian cryptographers had dedicated themselves to the project has failed because Ecash, their founded virtual cash, was dependent on the existing infrastructure of the government and credit card companies.
Other proposals followed such as bit gold, RPOW, b-money, did not succeed either.
One of the core challenges of designing a digital currency involves something called the double-spending problem. If a digital dollar is just plain information, free from strictures of paper and metal, what's to prevent people from copying and pasting it, spending it as many times as they want? The answer involved using a central clearinghouse to keep a real-time ledger of all transactions - ensuring that, if someone spends his last digital dollar, he can't then spend it again.
The ledger prevents fraud, but it also requires a trusted third-party to administer it.
Bitcoin did away with the third party by publicly distributing the ledger, a public database and sequential record of all transactions that Nakamoto called the "block chain." Users willing to devote CPU power to running a special piece of software would be called miners and would form a network to maintain the block chain collectively. In the process, they would also generate new currency. Transactions would be broadcast to the network, and computers running the software would compete to solve irreversible cryptographic puzzles that contain data from several transactions.
When Nakamoto's paper came out, trust in the ability of governments and banks to manage the economy and the money supply was at its lowest point. Bitcoin required no faith in the politicians or financiers who had wrecked the economy. Not only did Bitcoin's public ledger seem to protect against fraud, but the predetermined release of the digital currency kept the Bitcoin money supply growing at a predictable rate, immune to printing-press-happy central bankers and Weimar Republic-style hyperinflation.
Nakamoto himself mined the first 50 Bitcoins, called the genesis block, on January 3rd, 2009. For a year or so, his creation remained the province of a tiny group of early adopters. But slowly, word of "Bitcoin" spreads like wildfire and won accolades from some of digital currency's greatest minds. Wei Dai, inventor of b-money, calls it "very significant"; Nick Szabo, who created bit gold, hails Bitcoin as "a great contribution to the world"; and Hal Finney, the eminent cryptographer behind RPOW, says it's "potentially world-changing." The Electronic Frontier Foundation, an advocate for digital privacy, eventually started accepting donations in the alternative currency.
When the word "Bitcoin" became famous, the name of its founder Nakamato was also brought along to fame. People start to do research on the name, and found out that it was actually a pseudonym. People also argued that Satoshi Nakamoto is a name of a single person. They had said that the name is actually a group. Bitcoin seems awfully well-designed for one person to crank out.
There are no records of Nakamoto's identity/identities prior to the creation of Bitcoin. Satoshi is a male, Japanese name, whose meaning is variously given as "wise", "clear-thinking", "quick-witted", or "intelligent history". Nakamoto is a Japanese family name.
On his P2P Foundation profile, Nakamoto claimed to be an individual male at the age of 37 and of Japanese origin, which was met with great skepticism due to his use of English and his Bitcoin software not being documented nor labelled in Japanese.
Nakamoto revealed little about himself, limiting his online visibility to only technical discussion of his codes. On December 5, 2010, after Bitcoin users started to call for Wikileaks to accept Bitcoin donations, the normally terse and all-business Nakamoto weighed in with uncharacteristic vehemence. "No, don't ‘bring it on," he wrote in a post to the Bitcoin forum. "The project needs to grow gradually so the software can be strengthened along the way. I make this appeal to Wikileaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage."
Then, as unexpectedly as he had appeared, Nakamoto vanished.
At 6:22 pm GMT on December 12, seven days after his Wikileaks plea, Nakamoto posted his final message to the Bitcoin forum, concerning some minutiae in the latest version of the software. His email responses became more erratic, then stopped altogether.
Through 2009 and early 2010, Bitcoins had no value at all, and for the first six months after they started trading in April 2010, the value of one Bitcoin stayed below 14 cents. Then, as the currency gained viral traction in summer 2010, rising demand for a limited supply caused the price on online exchanges to start moving. By early November, it surged to 36 cents before settling down to around 29 cents. In February 2011, it rose again and hit $1.06 before settling in at 87 cents.
In the spring, the price skyrocketed. From early April to the end of May, the going rate for a Bitcoin rose from 86 cents to $8.89. Then, after a published story on June 1 about the currency's popularity among online drug dealers, its price tripled in a week, soaring to about $27. The market value of all Bitcoins in circulation was approaching $130 million.
Bitcoin was drawing the attention. On his internet talk show, journo-entrepreneur Jason Calacanis called it "a fundamental shift" and "one of the most interesting things I've seen in 20 years in the technology business." Prominent venture capitalist Fred Wilson heralded "societal upheaval" as the Next Big Thing on the Internet, and the four examples he gave were Wikileaks, PlayStation hacking, the Arab Spring, and Bitcoin.
The future of Bitcoin seemed to shimmer with possibility. Amid the euphoria, there were troubling signs. Bitcoin had begun in the public-interested spirit of open source peer-to-peer software and libertarian political philosophy, with references to the Austrian school of economics. But real money was at stake now, and the dramatic price rise had attracted a different element, people who saw the bitcoin as a commodity in which to speculate. At the same time, media attention was bringing exactly the kind of heat that Nakamoto had feared: some of them are saying that Bitcoins are "the attempt to peddle drugs online", and "an online form of money-laundering."
Meanwhile, a cult of Satoshi was developing. Someone started selling I AM SATOSHI NAKAMOTO T-shirts. There was Satoshi-themed fan fiction and manga art. And bitcoiners continued to ponder his mystery. A few postulated that he was actually Wikileaks founder
Whatever humans have created, no matter how good it is, has to live in an impure world. Both the code and the idea of Bitcoin may have been impregnable, but Bitcoins themselves - unique strings of numbers that constitute units of the currency - are discrete pieces of information that have to be stored somewhere. By default, Bitcoin kept users' currency in a digital "wallet" on their computers, and when Bitcoins were worth very little, easy to mine, and possessed mostly by tech-minded people, that was sufficient. But once they started to become valuable, storing them on PCs felt inadequate. Some users protected their Bitcoins by creating multiple backups, encrypting and storing them on portable drives, on virgin computers without internet connections, in the cloud, and on printouts stored in safe-deposit boxes. But even some of these sophisticated early adopters had trouble keeping their Bitcoins safe.
As the price headed upward, disturbing events started to happen. The market forces conspired to thwart the scheme. The price plummeted, but as speculators flocked to take advantage of the fire sale, they quickly drove it back up, limiting the thief's haul to only around 2,000 Bitcoins. The exchange ceased operations for a week and rolled back the postcrash transactions, but the damage had been done; the Bitcoin never got back above $17.
In the public's imagination, Bitcoin went from being the currency of tomorrow to a dystopian joke. The Electronic Frontier Foundation stopped accepting Bitcoin donations. Two Irish scholars specializing in network analysis demonstrated that Bitcoin wasn't nearly as anonymous as many people had assumed. Nontechnical newcomers to the currency, expecting it to be easy to use, were disappointed to find that an extraordinary amount of effort was required to obtain, hold, and spend Bitcoins.
More disasters followed. Poland-based Bitomat, the third-largest exchange, revealed that it had accidentally overwritten its entire wallet. Security researchers detected a proliferation of viruses aimed at bitcoin users: Some were designed to steal wallets full of existing bitcoins; others commandeered processing power to mine fresh coins. By summer, the oldest wallet service, MyBitcoin, stopped responding to emails.
And nobody had been as trusted as Nakamoto himself, who remained silent as the world he created threatened to implode. Some Bitcoiners began to suspect that he was working for the government, the CIA or Federal Reserve. Others worried that Bitcoin had been a Ponzi scheme, with Nakamoto mining Bitcoins when they were worthless, then waiting for their value to rise.
But developers says that the most dedicated Bitcoiners have stopped trying to hunt down Nakamoto. "We really don't care". It's not who's the one behind the code that matters, but the code itself. And while people have stolen and cheated and abandoned the Bitcoiners, the code has remained true.