Bitcoin: From Pizza Money to the Biggest Bubble in History

We started this whole series with a guy paying a house price for three flower bulbs in 1637. Forty-one chapters later, we end with a guy paying 10,000 bitcoins for two pizzas. Chapter 42 of Torsten Dennin’s “From Tulips to Bitcoins” (ISBN: 978-1-63299-227-7) tells the story of the biggest financial bubble in human history. Bigger than tulips. Bigger than gold. Bigger than anything we covered in this book. And it happened in our lifetime.

It Started With a White Paper

November 2008. The global financial system was falling apart. Banks were collapsing. Governments were printing money to bail everybody out. In the middle of all that chaos, someone using the name Satoshi Nakamoto published a white paper describing a new kind of digital money. No banks. No governments. No middlemen. Just math and code.

Nobody knows who Satoshi is. Could be one person. Could be a group. Could be someone famous hiding behind a fake name. Does not matter. In January 2009, the software went live as open source. Bitcoin was born.

For the first year and a half, bitcoin was basically worth nothing. You could not buy anything with it. It was a toy for programmers and cryptography nerds.

The Pizza That Changed Everything

May 22, 2010. Jacksonville, Florida. A programmer named Laszlo Hanyecz was hungry. He posted on a bitcoin forum that he would pay 10,000 BTC for two pizzas. Someone took the deal.

At the time, each bitcoin was worth about $0.003. Those two pizzas cost roughly $30 in bitcoin value. Today, 10,000 BTC is worth… well, you can do the math. That is probably the most expensive pizza order in the history of food.

By spring 2011, bitcoin reached $1. One bitcoin equals one dollar. That was a 33,000% gain from the pizza price. And the real craziness had not even started yet.

The Roller Coaster Years

2013 was when bitcoin showed the world what it was really about. Wild swings. In April, the price shot up to $230 and then dropped to $67 overnight. A 70% crash in 12 hours. It took seven months to recover.

Then in November 2013, bitcoin skyrocketed to $1,200. By December, it crashed to half that.

If you held on through all of this, congratulations. You had nerves of steel. Actually, there is a word for that. In December 2013, during one of these crashes, a user named “GameKyuubi” posted on a bitcoin forum. He was apparently drunk. The post title was “I AM HODLING.” He meant “holding” but could not type straight. The internet being the internet, it became a whole movement. HODL. Hold On for Dear Life. People still say it today.

Mt. Gox: The Exchange That Ate Everyone’s Money

Here is where the story gets ugly. Mt. Gox was a bitcoin exchange that started in 2010. It was founded by Jed McCaleb, who later went on to create Ripple. By 2013, Mt. Gox was handling over 70% of all bitcoin transactions worldwide. If you wanted to buy or sell bitcoin, you probably did it there.

The name itself should have been a warning. Mt. Gox originally stood for “Magic: The Gathering Online Exchange.” Yes, it was first built to trade cards from a fantasy card game. Then somebody repurposed it for digital money worth billions of dollars.

It got hacked in June 2011. About 2,000 BTC stolen. That was a small warning. Nobody paid enough attention.

February 2014. Mt. Gox suddenly suspended all trading. Then they filed for bankruptcy. The reason? About 850,000 bitcoins were missing. Gone. At the time that was worth hundreds of millions. At later prices, we are talking about $4.2 billion. They managed to find only 200,000 of those coins.

CEO Mark Karpeles was arrested in August 2015. In July 2017, a Russian named Alexander Vinnik was arrested for allegedly laundering the stolen bitcoins. Think about that. Over $4 billion in digital money just vanished from what was supposed to be the biggest and most trusted exchange in the world.

$20,000 and the Crash

Despite all that, bitcoin kept going up. In December 2017, the CME Group introduced bitcoin futures. This was a big deal. Futures meant that Wall Street was taking bitcoin seriously enough to create official financial products for it.

Bitcoin crossed $20,000 for the first time. People were euphoric. Your taxi driver was telling you about his bitcoin portfolio. Your uncle was asking you how to buy cryptocurrency at Thanksgiving dinner. Every news channel was talking about it.

Then it all fell apart.

Within weeks, bitcoin crashed to below $6,000. By December 2018, it tumbled under $3,500. That is a 13-month low. An 80% crash from the peak. Over $700 billion in total crypto market cap was wiped out since that December 2017 high.

Read that number again. Seven hundred billion dollars. Gone.

The Scams and the Billionaires

By 2018, there were over 2,000 different cryptocurrencies. Altcoins, they called them. The top 500 coins had a combined market cap of about $500 billion, and bitcoin was still about two-thirds of that.

The concentration of wealth was insane. About 40% of all bitcoins were held by roughly 1,000 users. The top 100 bitcoin addresses controlled 17.3% of the entire supply. Remember, only 21 million bitcoins will ever exist. A new one gets added about every 10 minutes through mining. So a tiny group of people was sitting on a huge chunk of a fixed supply.

Where there is money, there are scams. Centra Tech ran an ICO (Initial Coin Offering) promoted by Floyd Mayweather himself. They raised $32 million. The founders got arrested. It was a swindle from the start. Modern Tech, a Vietnamese company, ran a scam that took over $660 million from investors. Just gone.

On the other side, some people got genuinely rich. The top crypto billionaires in 2018 included Chris Larsen from Ripple at $8 billion, Joseph Lubin from Ethereum at somewhere between $1 and $5 billion, Changpeng Zhao from Binance at $1 to $2 billion, the Winklevoss twins from Gemini at about $1 billion each, and Matthew Mellon who made about $1 billion on XRP.

China’s Love-Hate Relationship

China’s role in the bitcoin story is fascinating. In September 2017, trades between the Chinese renminbi and bitcoin made up over 90% of all bitcoin transactions worldwide. Think about that. Nine out of ten bitcoin trades on the planet involved Chinese money.

Then the Chinese government decided they did not like it. They banned crypto purchases. Banned ICOs. Imposed travel bans on exchange executives so they could not leave the country. In February 2018, the People’s Bank of China blocked access to all cryptocurrency exchanges and ICO websites in China. In April 2018, police raided a bitcoin mining operation in Tianjin and confiscated 600 computers.

China was simultaneously the biggest player in bitcoin and its biggest enemy. That contradiction tells you a lot about how governments feel about money they cannot control.

Wall Street Could Not Make Up Its Mind

The establishment was confused too. Jamie Dimon, the CEO of JPMorgan Chase, called bitcoin “a fraud” repeatedly from 2014 through 2017. Then in 2018 he said he regretted saying that. Meanwhile, Goldman Sachs was quietly setting up a crypto trading desk.

Steve Wozniak, the co-founder of Apple, said “Blockchain is the next major IT revolution.” And by January 2018, over 100 countries implemented automatic exchange of financial information to fight money laundering through crypto.

Nobody agreed on what bitcoin was. Currency? Investment? Scam? Technology? All of the above?

The Biggest Bubble in History

Dennin does not hold back in his verdict. He says the bitcoin craze is the biggest financial bubble in history. Bigger than the tulip mania we started this series with. Bigger than anything in between.

And the numbers back him up. From $0.003 per coin in May 2010 to $20,000 in December 2017. Then an 80% crash. The speed and scale of the rise and fall has no parallel in financial history.

But here is the interesting part. Dennin compares blockchain technology to the internet in 1992. Back then, the internet was clunky and confusing and most people thought it was a nerd thing that would never go mainstream. He says we need “another 10 years to reveal the full potential” of blockchain.

As for investing in any single cryptocurrency, Dennin has a sharp comparison. He says it is like “betting on 27 red in roulette.” You might win. But the odds are not in your favor.

What Stays With Me

This is the last chapter of the main series. We started with tulips in 1637 and ended with bitcoins in 2018. That is 381 years of people doing the same thing over and over again. Something new appears. Early people make money. Everyone piles in. Prices go to the moon. Then somebody asks “wait, what is this actually worth?” and the whole thing comes down.

The technology changes. The human behavior does not.

Tulip bulbs. Gold. Oil. Silver. Cotton. Diamonds. Rare earths. Bitcoin. Every single one followed the same pattern. Scarcity, hype, mania, crash. The names change. The story does not.

I spent 42 chapters retelling this book, and if there is one thing I took from all of it, it is this: the most expensive lesson in finance is the one nobody ever learns. That this time is not different. It never is.

Based on Chapter 42 of “From Tulips to Bitcoins” by Torsten Dennin (ISBN: 978-1-63299-227-7, River Grove Books, 2019).

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This is part of my From Tulips to Bitcoins book retelling series. New posts every week.