Transferable Digital Notes Project

Title

I am always asked by friends what is Bitcoin. It turns out to be something a bit difficult to explain. Just saying that it is an interesting technology, a lot of (unfulfilled) promises and a whole lot of bull does not seems to be enough. Maybe this will be a bit more satisfactory.
Let’s take this scenario:

Mike, for whatever reason, wants to give Peter $100.

He has two possibilities:
  • Get $100.00 from this wallet and give it to peter in person, send it with a courier or place it in a “dead drop” (ex. under the door mat). He might come with other imaginative ways to do the transfer but what we have to get out of this is that no financial institutions are involved.
  • Note: This is not 100% true. Peter must make sure that the notes are issued by the Federal Reserves, the mother of all financial institutions.
  • Mike opens (or already has) an account with a bank, write a check for $100.00 payable to Peter and gives the check to Peter. Peter opens (or already has) an account with a bank and deposits the check. The banks involved in the transaction make sure that $100.00 is transferred from Mike’s account (assuming that he has the money in the account) into Peter account. A charge is assessed, sometimes hidden.
Some people find a lot of trouble with these transactions. Let’s mentions a few of the “issues”:
  • Mike and Peter are charge for the transaction by the Wall Street fat cats.
  • Mike and Peter wave their anonymity and trust their money with again the same cats.
  • The government can seize the money in the bank accounts.
  • Law enforcement can trace the transactions.
  • The government prints money at will endangering the economy and the livelihood of ordinary citizens.
  • Whatever……

Mike and Peter have read the Satoshi Nakamoto Bitcoin: A Peer-to-Peer Electronic Cash System paper and The Bitcoin Manifesto book by Allan J. Stevo and they decide to be part of the revolution. They did some research and most of the web searches lead them to websites where they have to open a nominal account, like a bank account.

Because this was not the idea they ask for help and they were told that they need a “digital wallet” each. Another search and they go to bitcoin.org same place from where they downloaded Nakamoto’s paper. They skipped the Get Started and went directly to Choose your Bitcoin wallet. They skipped ‘Help’ and from the next screen they selected 'Desktop wallet for Windows' and then again ‘Next’. The things got a bit more complicated. It seems that it was not as easy as going to the store and buying a wallet.

They opted for a ‘Control’ wallet and clicked ‘Next’ where thinks got even more complicated. Do they need “Two-factor authentication (2FA)” or maybe a “Bech32 is a special address format”. I’ll spare you of the rest of the details of purchasing a ‘digital wallet’ and explain what actually it is.

A Bitcoin Wallet is a software program storing the public, visible number used to initiate transactions and one secret, inaccessible number used by the Bitcoin system. Using the wallet's graphical interface the entity in its possession can initiate Bitcoin transaction.

The wallet does not identify an account as the bank account number does. They identify transactions initiated by the wallet and stored in a huge log of transactions on the Internet. All Bitcoin transactions are stored in this log.

Here are the graphical interfaces of a few Wallets.

You can always download a wallet for your iPhone or Android phone.
Now let’s perform the scenario using Bitcoins.

  • I. Mike installs a Bitcoin wallet on his phone.
  • II. Mike uses his credit card or a check to purchase Bitcoins from a Bitcoin dealer or exchange (the fed cats mention at the beginning). The dealer transfer $100.00 worth of Bitcoins to Mike’s wallet. (actually is just a very small fraction of a $10.000.00 Bitcoin)
  • III. Peter installs a Bitcoin wallet on his phone.
  • IV. Peter gives Mike his wallet address.
  • V. Mike transfers $100.00 worth of Bitcoins to Peter’s wallet.
  • VI. Peter has now $100.00 worth of Bitcoins in his wallet

So far everything looks kind of OK. If Peter want to spend his Bitcoins he has to find a merchant with a Bitcoin wallet (good luck) or some friend who may want to perform a Bitcoin transaction for whatever reason (what are the chances).

Here are three problems with the Bitcoins.

  • First there is always a fat cat sticking its tail. If you use a credit card to buy Bitcoins the transaction is considered cash advanced and there is a charge.
  • Second is the acceptance. If everybody had a Bitcoin wallet you will always find somebody to accept your Bitcoins. However this is not the case and for this we have to see the next steps.
  • Because the dealer who sold or bought the Bitcoins can be identified Peter and Mike’s identities are compromised and the promise of anonymity is just a promise.
Let's continue with the next step:
  • VII. Peter deposits all his dollars in his new wallet because in the area where he leaves there are a lot of merchants accepting Bitcoins and all his friends use Bitcoins. He can use Bitcoins instead of dollars.

Here is the biggest problem. All prices are in US Dollars. The wallet can easily convert the price in Bitcoins but the problem is that this conversion changes every day and so Peter's buying power. This means that Peter and Mike’s wallets are no holding digital cash. They are investment accounts.
Here is how the Bitcoin price history.

And this is why the Bitcoin attracted billions of dollars. And because this is an investment, Wall Street must be in. So you don’t need to carry around your Bitcoins on your phone, especially if you want to invest large amounts -p0, you open a traditional broker account and buy and sell Bitcoins instead of GM or Microsoft. So much for the democracy, independence from Wall Street and freedom of finances promised by Satoshi Nakamoto and the Bitcoin Manifesto!
The story with the guy who bought pizza with Bitcoins in 2010 and paid millions in today’s Bitcoins is very catchy. To be fare, there are a lot of guys who invested in Bitcoins and were left with just enough money to buy a pizza.

Bitcoin system is just an investment/betting game and everybody wants a piece. And not just gamblers, thieves and crooks; scientists, academics, governments, publications, software companies, beltway bandits, Arab sheiks, Swiss guards, a voice, the second butler etc… want in. This is not just a run of the mill investment bubble it is something for the twenty first century.

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