About a year ago I wrote an article, published on this site, titled "Understanding Bitcoin". It was an attempt at introducing Bitcoin technology and analysing its social implications. Now Bitcoin markets are trading at record prices of over $40. This increase, along with a series of recent developments, marks a new overall state of affairs for this project. To make better sense - beyond the mere market numbers - of the current state of the Bitcoin economy, it is worth it to make a brief recount of the way Bitcoin has evolved in recent months.

Perhaps the most obvious milestone reached during the last few days is the surpassing of the previous top valuation of U$31.9, achieved by mid-2011. Bitcoin now trades at historically high prices above U$40 per coin. Is the bubble about to burst again? Those who expect a similar crash ought to consider that bitcoins from 2011 are hardly like bitcoins of 2013.

Let's recap. In early 2011, the project started to get attention beyond a very reduced circle of people interested in cryptography. Due to its design (scarcity and floating value), bitcoins do tend to be the object of speculation, and a few online news articles was all it took at the time to drive prices, within a few weeks, from zero to over $30 per coin. However, there was no backing economic substance, no actual economic activity, markets with significant depth or use for the currency. This is why at the slightest sign of trouble - in this case, the hack of one of the exchanges - investors backed away, and the bubble popped. By late 2011, the price had retreated back to $2.

The context in 2013 looks dramatically different to the one during the huge rally-and-crash of 2011. During the last year, the pace of development and adoption by merchants and the NGO sector has steadily accelerated, and the Bitcoin ecosystem in general advanced in many fronts. Recent events in the Bitcoin world announce that a qualitative shift is taking place.

Celebrating protocol

One of the more subtle but profound events that took place in the past few months is a reduction by half in the rate at which bitcoins are produced. It is a characteristic of the Bitcoin protocol that such a change takes place every four years. This transition was baptised by the community of Bitcoin enthusiasts as "Halving Day". It was a significant event at several levels. Symbolically, "Halving Day" is a reminder of the built-in coin scarcity that is at the core of the Bitcoin economy. There was a general sense of excitement in online forums devoted to Bitcoin discussion in the days and hours previous to the "halving". Remarkably, "Halving Day Parties" were held in several cities: nothing less than the social celebration of a software function. A ritual was born from the code.

In economic terms, though, the halving did in fact result in a drastically reduced number of new bitcoins, from 300 to 150 per hour. This severe cutback in production of new coins is likely to have been a factor, among many, in the recent price rises. This is why, in a remarkable demonstration of foresight, Bitcoin miners actually celebrated that their "pay" was being cut in half.

Another reason why the "halving" was a significant event is that, being the first one since Bitcoin's 2009 inception, there was some expectation about how it would unroll, technically. Would the network assimilate the change seamlessly, or would it cause unexpected bugs to emerge, wreaking havok in the whole economy? The technical uneventfulness of this change at the protocol level of the Bitcoin network reaffirmed the confidence in the overall soundness of its design.

Three kings

Large numbers of merchants and organisations have adopted the Bitcoin system since last year. Among the new adopters are three high profile internet companies that have announced implementation of Bitcoin as a payment option: Wordpress, Reddit and Mega. Wordpress, one of the largest global providers of online publishing services, forcefully explained in November the importance of Bitcoin for press freedom worldwide:

PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don't think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can't control. Our goal is to enable people, not block them. Bitcoin is a digital currency that enables instant payments over the internet. Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept Bitcoin payments can do business with anyone.

Similarly, two other big internet players, with millions of users, have made the Bitcoin nod in recent weeks. Reddit, an epicentre of internet culture, as well as rebellious Kim Dot Com's recently launched data storage service, Mega, released corresponding announcements in recent weeks. The internetist (if I may invent this term) nature of Wordpress, Reddit and Mega has led to exposing millions of new users to Bitcoin. Their adoption spread far and apart seeds for a new "generation" of Bitcoin users, advocates, and developers.

Metal gear

The hardware side of the Bitcoin system has also shown new developments, especially in the field of Bitcoin mining. Originally, it was possible to "mine" bitcoins with a consumer PC, but as more people joined to compete for the 300 new bitcoins being awarded every hour, increasingly powerful computers were required to earn coins using this method. "Mining Rigs", computers built from off-the-shelf parts for the sole purpose of 24-hour bitcoin mining, quickly appeared, some of them filling large rooms with such equipment. The protocol not only generated ritual social celebrations like the "Halving Parties" described above, it also started affecting hardware. Because of the protocol, mining computers started physically growing, spreading like moss, beyond their original boxes, even entering a new kind of relationship with architecture. Code - in this case Bitcoin protocol - changed metal.

The Stream

Brazil's Freedom March & Bitcoin Digital Currency

Approximately one year ago, a further development in mining was announced: a new kind of computer chip specifically designed to optimise the execution of the instructions required by the Bitcoin protocol for efficient mining. The first such machines (known as ASICs) were finally delivered in February, signalling the beginning of a new era of professional bitcoin mining and the increase, by an order of magnitude, in the robustness of Bitcoin infrastructure in terms of computing power.

Bitcoin-logic ventures

During the course of 2012 and early 2013, the first significant investments of venture capital in Bitcoin-oriented startups started to pop up. BitPay.com and Coinbase.com, two Bitcoin payments processor startups, respectively secured U$500,000 and U$600,000 investments. That has allowed them to set up infrastructure to compete with PayPal, and among each other. CoinLab.com, a company initially created to blend online computer gaming with bitcoin mining, secured a similar amount. The long term significance of these investments has been highlighted by Vitalik Buterin from Bitcoin Magazine:

Late 2012 has been a pivotal period for Bitcoin. Although the main indicator of the "financial" size of Bitcoin, the Bitcoin price, the key difference between Bitcoin's rise in price now and its bubble then is that in 2011 the Bitcoin markets' trade volume was backed almost entirely by speculation. (...) investors interested in Bitcoin are starting to look beyond the Bitcoin markets, and are instead increasingly focusing their eyes on the underlying Bitcoin economy - substituting mere speculation with increasing investment into the businesses that make both Bitcoin adoption and the Bitcoin price go up in the first place.

In a move that amounts to Bitcoin's exit out of the legal grey area in Europe, a company called Bitcoin-Central announced in December integration of Bitcoin with French banking infrastructure:

Bitcoin Central account will have all of the core features of a standard bank account in Europe. Each account will have its own international bank account number (IBAN) with which anyone will be able to send money to that account via bank wire. On the withdrawal side, Bitcoin Central will soon issue debit cards similar to those now in the works by BitInstant that would automatically convert the holder's BTC balance to euros on the fly. And, finally, the euro balance of a Bitcoin Central account will be federally insured up to $100,000 by the French "Garantie des depôts."

Similarly, two US Bitcoin companies, Coinbase and CoinLab, now offer traditional bank account integration. In a move that has been described as "a key step towards going mainstream", CoinLab recently announced a partnership with Silicon Valley Bank.

New Bitcoin businesses, merchants and service providers pop up every day. There is intense experimentation with business models that are only possible because they follow Bitcoin logic.

For instance, Bitcoin-Proxy merchants. These services offer a way to bridge people who want to spend their bitcoins and the merchants who do not yet have bitcoins as a payment option. Bitcoin-proxies have already been set up for pizza, hotel bookings, and even the whole catalog of large retailers like Amazon, Ebay or Target.

In general, the field of Bitcoin payments processing is seeing intense activity, with several startups like BitPay, Paysius, BIPS and Coinbase competing for new costumers. Sector leader BitPay has reported having as much as 3,000 merchants.

Likewise, there are numbers of new Bitcoin-based ways to gamble. Some examples like Bitcoin Gem, Bitcoin Vegas (a Bitcoin casino set up inside the virtual world of the video game Minecraft), and Satoshi Dice show how once Bitcoin logic is applied to an economic activity, new and unexpected forms will emerge. This kind of Bitcoin experimentation intensifies as the Bitcoin economy strengthens, and is likely to produce diverse previously impossible business ideas that will further drive Bitcoin adoption.

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Virtuous spirals

High Bitcoin valuation means an empowered class of Bitcoin entrepreneurs. People who own Bitcoin in large numbers are increasingly in possession of no-strings-attached capital. They can, and they do, use this capital to implement further functionality for Bitcoin. In this way, many Bitcoin holders can increasingly afford to hire web services, programmers, designers and (crucially) top legal advice. All these activities add value to Bitcoin as a whole, resulting in yet greater empowerment for Bitcoin entrepreneurs. This virtuous spiral has actually been taking place since Bitcoin's beginnings, and the effect is an order of magnitude more powerful at today's Bitcoin price of about $40 rather than last year's $4.

The distributed nature of Bitcoin's economy means that right now there are thousands of enthusiastic Bitcoiners that can afford to self-fund their experiments and their visions for the next wave of Bitcoin applications and growth. Many will fail, but others will succeed; in the process of becoming of this global collective intelligence entity, every single Bitcoin holder benefits from the work of the rest. Enhanced Bitcoin usability means greater demand and a higher price. This upwards cycle is embedded in the design on the Bitcoin network.

Community foundations

The processes of maturation of a Bitcoin community spread through several countries, although mainly concentrated in Europe and the US. What started with a handful of people in a specialised online cryptography forum, sharing opinions about code and security, now spans thousands of active participants across diverse online platforms like the bitcointalk forums, the r/Bitcoin subreddit, and a number of IRC channels, of which #bitcoin-otc is perhaps the most active. In 2012, the community organised and launched the Bitcoin Foundation focused on development and advocacy efforts.

The community has also been active in creating physical meeting spaces and events, including meetups in most major cities around the world, and a series major of conferences. At least two of these large events have been planned so far for 2013. The first event, "Bitcoin 2013: The Future of Payments", is organised by the Bitcoin Foundation and will take place in San Jose, California in May. The second, unSYSTEM, is organised by activist Amir Taaki and will take place in Vienna, Austria, in November. Put together, these two events bring together all of the most influential names in the development of Bitcoin, and many of the most active actors involved in free software, freedom of the press, and online liberties.

This article does not pretend to predict the behaviour of the markets. Especially, Bitcoin is impossible to predict due to the existence of accounts that concentrate significant amounts of bitcoins. Because any actor might decide to make a big sale (or a big buy) at any point, it is perfectly possible to see extremely wild swings in market prices in the near future. However Bitcoin 2013 is certainly a much more robust animal than its 2011 version, and its future looks more promising now than ever before. Step by step, Bitcoin rises.

Disclaimer: The author holds some bitcoins he has received as payment for his work for Bitcoin Magazine and 2P Foundation.

Nicolas Mendoza is a Colombian scholar, artist and researcher in global media from the University of Melbourne, currently at City University of Hong Kong.

Follow him on Twitter: @nicolasmendo