In recent years, the investment and technology worlds have become saturated with cryptocurrencies, blockchain apps, and related ventures and projects. In spite of the tidal wave of new digital currencies that has transformed the market, however, there has remained a single digital currency that has held the attention of the public more than any other: bitcoin (BTC). Many investors consider bitcoin to be the original cryptocurrency. Founded in 2009 by a programmer (or, possibly, a group of programmers) under the pseudonym Satoshi Nakamoto, bitcoin ushered in a new age of blockchain technology and decentralized digital currencies. Satoshi's whitepaper outlining bitcoin also describes the concept of blockchain technology for the first time, saying that "the network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work." While there is no doubt that bitcoin has had a revolutionary impact on the cryptocurrency space (as of this writing, it has spawned dozens of forks and imitators, and it remains the number one digital currency in the world by market cap and several other metrics), is it really the first cryptocurrency?
Early Attempts in the Netherlands
According to a report in Bitcoin Magazine, one of the earliest attempts at creating a cryptocurrency actually predates bitcoin's creation by about 20 years. Petrol stations in the Netherlands were suffering from nighttime thefts. Rather than post guards and risk their safety, a group of developers attempted to link money to newly-designed smartcards. Truck drivers who needed to access the stations would carry these cards instead of cash, and the stations would not have paper money lying around. This may have been the earliest example of electronic cash, which has links to digital currencies as we know them today.
Around the same time, or perhaps even earlier, American cryptographer David Chaum experimented with a different form of electronic cash. He conceptualized a token currency which could be transferred between individuals both safely and privately; again, the similarities to modern day cryptocurrencies are striking. Chaum developed a so-called "blinding formula" to be used to encrypt information passed between individuals. "Blinded cash" could thus be safely transferred between individuals, bearing a signature of authenticity and the ability to be modified without traceability. Chaum founded DigiCash to put his concept into practice several years later. Although DigiCash went bankrupt in 1998, the concepts the company put forward as well as some of its formulas and encryption tools played an important role in the development of later digital currencies.
In the 1990s, a number of startups made efforts at furthering the goals of DigiCash. Of these, perhaps the company with the greatest lasting impact on the broader financial world was PayPal (PYPL). PayPal revolutionized person-to-person payments online. It allowed individuals to quickly and securely transfer money via web browser. By connecting itself to the eBay community, PayPal secured a dedicated userbase which allowed it to grow and thrive. It remains a major payments service today. PayPal also inspired its imitators, including companies which attempted to provide a means for trading gold via web browser. One of the more successful of these operations was called e-gold, which offered individuals online credit in exchange for physical gold and other precious metals. This company ran into issues with various types of scams, however, and was eventually shut down by the federal government in 2005.
In 1998, developer Wei Dai proposed an "anonymous, distributed electronic cash system" called B-money. Dai suggested two different protocols, including one which required a broadcast channel that was both synchronous and unjammable. Ultimately, B-money was never successful, and indeed, it was quite different from bitcoin in many ways. Nonetheless, it was also an attempt at an anonymous, private, and secure electronic cash system. In the B-money system, digital pseudonyms would be used in order to transfer currency through a decentralized network. The system even included a means for contract enforcement in-network as well, without the use of a third party. Although Wei Dai proposed a whitepaper for B-money, it was ultimately unable to garner enough attention for a successful launch. Still, Satoshi referenced elements of B-money in his bitcoin whitepaper roughly a decade later, so the impact of B-money on the current digital currency craze is undeniable.
Not to be confused with the contemporary gold-based exchange of a similar name, Bit Gold was another electronic currency system which dates back to the same period as B-money. Proposed by Nick Szabo, Bit Gold came with its own proof-of-work system that in some ways is mirrored by today's bitcoin mining process. Through this procedure, solutions were compiled cryptographically and then published for the public in much the same way a modern blockchain would function.
Perhaps the most revolutionary aspect of the Bit Gold concept, however, had to do with its movement away from centralized status. Bit Gold aimed to avoid reliance on centralized currency distributors and authorities. Szabo's aim was for Bit Gold to reflect the properties of real gold, thereby enabling users to eliminate the middleman entirely. Bit Gold, like B-money, was ultimately unsuccessful. However, it too provided inspiration for a large group of digital currencies which would enter the market a decade or more after its introduction.
Developed in the mid-1990s, Hashcash was one of the most successful pre-bitcoin digital currencies, according to The Merkle. Hashcash was designed for a number of purposes, including minimizing email spam and preventing DDoS attacks, Hashcash opened up a wide array of possibilities which would only be realized nearly two decades later. Hashcash used a proof-of-work algorithm to aid the generation and distribution of new coins, much like many contemporary cryptocurrencies. Indeed, Hashcash also ran into many of the same problems as today's cryptocurrencies today; in 1997, facing an increased processing power need, Hashcash eventually became less and less effective. In spite of the fact that it eventually fizzled out, Hashcash saw a large degree of interest in its heyday. Many of the elements of the Hashcash system worked their way into bitcoin's development as well.
When bitcoin was developed in 2009, it launched a new generation of digital currencies. Bitcoin differs from many of is predecessors in its decentralized status and its development of blockchain technology. However, it's difficult to imagine the creation of bitcoin, let alone the hundreds of other digital currencies which have since launched, without the earlier attempts at cryptocurrencies and electronic cash in the decades before bitcoin was launched.
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