PUTTING A PRICE ON BITCOIN

What’s a bitcoin worth? Back in the beginning, just as today, it’s worth whatever the buyer is willing to pay for it. The trouble was that buying BTC wasn’t really possible to begin with. There were no fiat onramps, and so the only way users could acquire coins was by mining them – or by convincing other network users to send them some. 

This was fine at first, when Bitcoin had no fixed monetary value and there was no real clamour from speculators. But as its community grew and new members entered the scene, there needed to be a way to buy bitcoin. Not everyone wanted to be a miner, after all, particularly once network difficulty increased and competition to discover new blocks intensified.

The solution came in the form of a Bitcoin exchange. The concept was simple enough, but creating one was anything but easy at a time when fiat payment companies hadn’t even reached the stage of rejecting Bitcoin – they weren’t even aware of its existence.

Pseudonymous forum user “New Liberty Standard” wasn’t to be deterred, however, and set about constructing the first rudimentary Bitcoin exchange. The NewLibertyStandard exchange launched in October 2009, enabling bitcoins to be bought and sold for US dollars using PayPal.

Bitcoin Finds Its Price

The first bitcoin-fiat transaction is believed to have occurred on October 12th, 2009 when early Bitcoin evangelist Martti Malmi sold 5,050 BTC for a total of $5.02. At this point in time, the price of bitcoin was calculated using a basic formula derived from the cost of mining it. Martti was a software developer who collaborated closely with Satoshi in the early days, running the forum and helping to code early versions of the Bitcoin protocol. He didn’t sell 5,050 BTC because he needed the cash: he did it to support NewLibertyStandard and prove that the exchange worked.

Whereas modern exchanges have thousands of makers and takers, NewLibertyStandard had just one counterparty at first: its operator. The actual exchange process was handled via email or Bitcointalk private messages before payment was made through PayPal. Once a deal was struck, the operator would manually send bitcoins to the buyer’s Bitcoin address or vice-versa after confirming the PayPal payment. There was no exchange account system; everything was P2P, just like Bitcoin itself. Essentially, New Liberty Standard functioned as an OTC escrow and market-maker using his own dollars and BTC reserves.

The exchange itself went live on October 5th, with NLS setting the initial exchange rate at 1,309.03 BTC per $1. When Martti Malmi made the first bitcoin-fiat sale a week later, it was significant in a number of ways. It showed that NewLibertyExchange, rudimentary as it was, worked. More importantly, it established that bitcoins could be exchanged for real money, setting a precedent for Bitcoin’s economic value.