In its earliest days of 1859-1860, Colorado City was a major supply route of supplies for miners in the South Park, where a major strike in the Pike's Peak Gold Rush was found. Routes further north from present-day Denver's area proved more effective, and as only a few very minor gold finds were made in the Pikes Peak region, commerce instead shifted towards serving the agriculture of Colorado's eastern plains. (Eventually General Palmer's Denver & Rio Grande Railroad would snake from Denver into the South Park.)

Colorado City was the county seat of El Paso County until 1873, when the courthouse moved to Colorado Springs.

Colorado City also briefly (and unofficially) served as Colorado's territorial capital starting on July 7, 1862. By this time the town's fortunes were already waning. The territorial legislature met in a log cabin on Colorado Avenue, and on August 14, 1862 the legislature approved an act which named Golden as the territorial capital. Colorado City was never recognized by the Federal government as the territorial capital.

In 1891, major gold strikes were made in Cripple Creek and Victor, on the other side of Pike's Peak from Colorado City, and suddenly supplies were needed for this last major phase of the Colorado Gold Rush and the town's big boom was on. Eventually Colorado City was processing much of the gold ore as Palmer's railroads connected the areas.