12c. shortening of O.E. ic, first person singular nominative pronoun,
from P.Gmc. *ekan (cf. O.Fris. ik, O.N. ek, Norw. eg, Dan. jeg, O.H.G. ih, Ger. ich, Goth. ik),
from PIE *eg-, nominative form of the first person singular pronoun (cf. Skt. aham, Hitt. uk, L. ego (source of Fr. Je), Gk. ego, Rus. ja, Lith. aš).
Reduced to i by mid-12c. in northern England, it began to be capitalized mid-13c. to mark it as a distinct word and avoid misreading in handwritten manuscripts.
The reason for writing I is ... the orthographic habit in the middle ages of using a 'long i' (that is, j or I) whenever the letter was isolated or formed the last letter of a group; the numeral 'one' was written j or I (and three iij, etc.), just as much as the pronoun. [Otto Jespersen, "Growth and Structure of the English Language," p.233]
The form ich or ik, especially before vowels, lingered in northern England until c.1400 and survived in southern dialects until 18c. The dot on the "small" letter -i- began to appear in 11c. Latin manuscripts, to distinguish the letter from the stroke of another letter (such as -m- or -n-). Originally a diacritic, it was reduced to a dot with the introduction of Roman type fonts.