A history of cryptocurrency, from gaming tokens to a $2tn market

Facebook’s decision, last month, to rebrand itself as Meta is actually quite retro. The metaverse might look like a cutting-edge concept, with people creating digital versions of themselves to interact with other avatars in a virtual world, but this is a nearly 20-year-old idea, only slightly updated.

The origins of digital assets — such as bitcoin and ether, non-fungible tokens, smart contracts and the thousands of “shitcoins” out there — can be traced back to video games where avatars played and sometimes worked, acting out fantasy lives imagined by their human creators.

It may seem unlikely today, when cryptocurrency markets are worth more than $2tn, that their ancestry lies in World of Warcraft and Second Life, the once-popular virtual-reality games. In the early 2000s, former child actor Brock Pierce, a US presidential candidate in 2020, realised that gamers were happy to buy tokens to reach the next level instead of completing tasks to earn them.

“Just because something is not tangible, it doesn’t mean it’s worthless,” Pierce says, recounting how he employed hundreds of people in China and South Korea to play video games and earn the in-game tokens, which he then sold to lazier customers in the west.

Together with William Quigley, now chief executive of the Worldwide Asset eXchange, the largest non-fungible token (NFT) platform, they created a market place for in-game tokens that is now worth $200bn. In the process, they laid the foundations for the cryptocurrency industry.

“After World of Warcraft gold, the intellectual leap required to recognise the value of bitcoin was very small,” Pierce adds.

Pierce was an early adopter of bitcoin, after an unknown author using the pseudonym Satoshi Nakamoto published a paper in October 2008 outlining proposals for a new technology called blockchain, which would rely on the agreement of users to operate, rather than work as a centralised entity. It would be the basis for a digital currency called bitcoin, which can be “mined” by deploying computers to solve puzzles. Bitcoin’s supply is capped at 21m units.

Nakamoto then mined the first bitcoin in January 2009, marking the date the blockchain network and digital coin went live. In May 2010, a man in Florida paid 10,000 bitcoin (the equivalent of more than $600m at today’s prices) for two pizzas, the first purchase with the digital coins.

To say this made a splash would be an exaggeration. Interest rates had plummeted in the wake of the global financial crisis and central banks had launched massive bond-buying programmes to shore up their economies. But, against this shaky macroeconomic backdrop, interest in bitcoin was starting to pick up.

First came libertarians and computer geeks, followed by currency traders and the wider financial trading community, some of whom were intrigued by the fact that the technology made it impossible to change or erase past transactions. Others, such as billionaire investor Michael Novogratz, were attracted to bitcoin because of its scarcity, with the 21m unit cap.

By 2011, bitcoin had become sufficiently popular for trading platforms to gain traction. These early exchanges — for example, Mt.Gox — were based in Asia, catering to retail investors in the region who had developed an appetite for the asset from their gaming background. They allowed early adopters to mine their own coins as well as trade them.

The launch of trading platforms triggered the first bubble in bitcoin’s price, when the exchange rate ballooned to $32 before collapsing to around $2 in 2011. The shortlived run in the price put bitcoin on the map, according to Max Boonen, the founder of B2C2, one of the largest trading companies in crypto today. He notes that the coin has been through a series of bubbles, with each top higher than the previous one.

“The big names we know as ‘whales’ [owners of large holdings] today got into bitcoin just before the 2013 bubble,” Boonen says. He notes that, at the time, Greece’s debt crisis and subsequent bailout spurred many wealthy investors to buy digital coins as a hedge of last resort. “It was the first time that bitcoin was influenced by macroeconomic events, so it was quite significant.”

But the wider world was still showing little interest, largely ignoring the launch of tether, the first stablecoin, which was created to link together the world of digital currencies and fiat money. It was also the time of the first ever initial coin offering, from Mastercoin.

The first filing to launch a bitcoin exchange traded fund — from the Winklevoss brothers — went almost unnoticed in 2013. And the arrival in 2015 of the Ethereum blockchain and ether, its native currency, the second cryptocurrency to be created, also failed to make waves in mainstream finance, despite its key role in crypto markets today.

Ethereum’s ability to carry data in its code was an important innovation and forms the basis for decentralised finance markets, where algorithms carry out transactions as well as settlement and other functions. This market is worth $236bn and, to many, it represents the cutting edge of finance.

Bitcoin’s profile then soared in 2017, when small-time investors around the world suddenly took an interest as the price moved above $20,000. Initial coin offerings also became popular. The following year marked the biggest crash so far, heralding the so-called crypto winter, in which bitcoin was written off by many as a gimmick with no future.

An influx of hedge funds and family offices into bitcoin made it the digital equivalent of gold for some

The crypto mood turned more positive in March last year, when the pandemic hit and triggered an influx of hedge funds and family offices into bitcoin, drawn by its limited supply. This shifted the narrative from bitcoin being an unsuccessful currency to it becoming the digital equivalent of gold for some. Billionaire hedge fund managers then added weight to the rally in the bitcoin price, drawing in other institutional investors, as well as banks and Tesla electric-car tycoon Elon Musk.

In the past 18 months, cryptocurrency markets have exploded in popularity and new assets such as NFTs are thriving. The hype has given rise to thousands of alternative coins, such as dogecoin, some of which have questionable value propositions. On the other hand, blockchains such as Cardano, Solana and Polkadot have also emerged, with the aim of making the technology more efficient.

Bitcoin has had a bumpy ride and remains exceptionally volatile. But the overall direction has been up: from around $0.08 in 2010, bitcoin hit a high of just below $67,000 in October this year. Not bad for a 13-year-old.