I have observed BitCoin from afar for several years now. Like many people on this planet, I have hated myself at times for doubting its value. I even wrote a blog about it years ago (when it was trading at $130 USD) where I trashed its future prospects.
But after BitCoin recently hit a price of over $3000, I realized maybe my foot was already far lodged in my mouth. I figured, maybe it was time to check out this network at least try to understand how it operates. Up until this point, I had never actually owned any bitcoin or even seen any bitcoin transactions. I always found it was even hard to find a YouTube video that demonstrated what to expect from a bitcoin transaction. I had so many practical and technical questions. How would I integrate it into a website as a payment mechanism? How long to transactions take? Are the fees worth it?
You find all kinds of conflicting answers to these kinds of questions online with language that is as foreign as a conversation between two Scientologists (what exactly is a “confirmation” and a “block chain” and what do “miners” actually do?). Rather than read a bunch of outdated misinformation, I figured I would get my hands on just a little bit of Bitcoin to observe, hands-on, how BitCoin actually operates. I decided to take the plunge when I discovered a service called “ShapeShift” which allows for cryptocurrency trading between 60+ types of cryptocurrencies. I really wanted to be able to trade Bitcoin for other emerging currencies for maximum growth potential.
The first step was, of course, to get my hands on a BitCoin wallet. In BitCoin, a “wallet” is a computer program that metaphorically represents your wallet, it is not something you buy at Hot Topic, with Harry Potter detailings. I opted for BitCoin Core, which took 2-days to synchronize before it could be useful for anything and took up 120GB of disk space. I also got my hands of a few other wallets that were supported by ShapeShift including , ReddCoin, LiteCoin, DogeCoin, Ether, ZCash (linux only), and DashCoin. Waiting, Waiting, Waiting….
While I was waiting for the wallets to synchronize, I built a database to store quotes and transactions that I would ultimately be making against the ShapeShift API. My goal was 100% automated trading. Unfortunately the ShapeShift API does not publish a history of its own trade quotes, so I figured I’d have to collect them over time and build up my own database of relevant information. Waiting, Waiting, Waiting…
While I began collecting quotes, I still needed Bitcoin. Turns out that getting BitCoin in the USA is not a painless process. It is made even more painful in Minnesota, where I live. I was lured into a number of websites, including CoinBase. But all these sites did not disclose that I had to provide them onerous personal details until after I signed up. They required some pretty invasive documents proving residence, photo ID… in addition they required me to wait several days to get my accounts approved…. Waiting… Waiting … Waiting…. this waiting was starting to get annoying.
I began searching for some way to buy BitCoin without going through “The Man”. I found some services that would pair you up with a thug on the street to do a cash transaction. It seemed a little shady… no thanks. Eventually I found a “BitCoin ATM” in the Ghetto of Columbia Heights, MN, in the lobby of a check cashing business. It seemed a little shady as well, but at least it was a legit business. Supposedly this route wasn’t going to be so invasive… put cash in, get bitcoin out… unfortunately, it was all a trap again. The system wouldn’t let me make transactions without 1) Scanning my Driver’s Licence into their system (I’m giving them cold hard cash… WTF!?) and 2) Waiting for some flunky to approve my account. I decided to indulge them, scanned my shit… and went out to my car. Thankfully the account was approved in minutes instead of hours, so I soon went back inside, stood inline behind a drug dealer who was clearly selling some of the smelliest weed I’d ever encountered in my lifetime, put cash into the system, and just seconds later my phone when “cha-ching!” and FINALLY… I had Bitcoin. I asked for a receipt and took a look at it… and to my utter shock, noticed the exchange rate… $3300!!!! WTF!!! The market rate for BitCoin was $2800!! This was utter robbery!
I left pissed off, but at least I only put $100 into the system. But now, after the exchange rate I had $80 in BTC so I could at least buy some weed in the parking lot of the check cashing joint, or play around with the APIs and understand how they functioned and do a few test transactions… etc…. I opted for the latter.
Despite getting ripped off, I was impressed by how quickly money appeared in the wallet app on my phone…. this, unfortunately, was the last time that BitCoin would impress me.
I got home and decided to see if I could transfer my own cash from my phone wallet (where I didn’t want it), to the wallet on my server (which by this time was fully synchronized). This is the first time I would experience the peril of BitCoin transaction fees. My phone gave me 3 options. An “Economical” fee, amounting to about $0.50, a “Normal” fee of about $2.50 and a “Priority” Fee of $4.50. For the simple act of transferring money to myself, ALL of these fees seemed a little steep, so I chose “Economical”. I figured that I owed it to myself to see how long a low-fee transaction would take anyway. I emptied my phone wallet into my desktop wallet and the funds were deducted from my account immediately. Since I was impressed with how fast the ATM operated, I figured I’d expect a bit of a wait, but a bearable one. 15 minutes passed, no transfer… I started to get annoyed. I did some google searches to try and gauge what sort of wait I was in for. “Most transactions are confirmed in a few seconds or a few minutes” was the message I got wherever I looked. My transaction was now taking 45 minutes… 1 hour… 4 hours! I obsessively read forums where users were complaining about transactions taking days… even a week… and even failing after 1 week of being in limbo! I woke up the next morning, still no confirmations on my transaction…. 2 days… 3 days… finally on the 4th day my transaction went through. I definitely learned that my trading app was not going to survive on “economical” fees.
Why on earth does a peer-to-peer network have transaction fees anyway? Isn’t that contrary to the whole purpose of having a free, open, and rare currency? Furthermore, the way transaction fees are collected is completely contrary to the motivations of the market. If I send YOU money, I have basically zero incentive to ensure that you get your money quickly, therefore I’ll likely opt to pay the minimum fee that I can possibly pay. However, you, the receiver of this money, have the motivation to receive your money quickly, yet you have no option to pay or increase fees to encourage faster reception of your money. If that isn’t bad enough… there’s no user-friendly way to determine what kind of fee (read “bribe”) to offer the network to ensure safe passage of your funds. There’s a few websites out there that track what kinds of fees are being offered by senders… and those fees are all over the board… but if you’re paying for your coffee at Starbucks or toilet paper at Target… what are you going to do?… check this elaborate website to guess what kind of fee to offer these places so that they will get their money? I think not. You’re going to offer a fee a ZERO because you want the lowest price… and the fees everyone is paying amount to highway robbery anyway. Waiting, Waiting, Waiting….
After waiting 4 days for my funds to be transferred from my phone wallet to my desktop wallet… I decided to experiment with the fee system. I sent myself some small transactions with other fees… yet the network still held onto them for a long time. The command-line wallet makes choosing fees not exactly an easy task…. fees are calculated per-byte … as if your grandma knows what a byte is, let alone how much to pay for a byte on a peer to peer network. the bitcoin-cli.exe application allows you to set the fees with poorly documented command: “settxfee” which doesn’t even bother to go so far as to explain that it is a “per byte” fee. I thought it was a per-transaction fee, so I set it to a value that ultimately was way too low. I had to find this out by looking at the blockchain after I sent my transactions… and my money was, once again, stuck in limbo. After some playing around… I eventually got it to set the TX fee to 88,000 “satoshis” … as recommended by the fee tracking website as the “fastest and cheapest” fee I could pay at this time. My transaction, however, still took more than a day leading me to believe that the website was just plain wrong and not able to cope with the frenzied volume of bitcoin transactions that were occurring as BitCoin approached $3000 USD. Waiting, Waiting… Waiting……… Waiting…..
Finally, I got around to trying out this “Shape Shift” service. I wrote a bunch of code to interact with my BitCoin wallet. By this time, BitCoin was trading at $3000, but my data was showing that Ether (ETH) was gaining on BitCoin at a rate of 30%/day. I really wanted to move some of my BitCoin to Ether to take advantage of this upswing and began to get nervous about missing the window. So I decided to charge forward with my first ShapeShift transaction. I did a quick test and sent about $10 worth of BTC to ShapeShift for deposit in my ETH account… it saw the funds… churned for about 15 minutes, and then the funds appeared in my Ether wallet. 10-15 minutes was a bit slow for my taste, but I figured it was usable. Now that I “trusted” the system, I figured I’d put half my BTC funds into ETH. I setup a second transaction… 2 days ago. ShapeShift confirmed that they received my funds, but then the transaction went into an “Awaiting Exchange” state where it has remained for 2 days. I have emailed them… but the automated robot informed me to not expect a reply for 72 hours….. Waiting… Waiting… Waiting….. Trades that take 3-days to complete are definitely not usable for a day-trading app. For this I don’t fault BitCoin, but ShapeShift…. So far this experience has been utter shit.
(Update: after 3 days of waiting for my ShapeShift trade to complete, the status of my transaction went back to “waiting for funds”. I lost approximately $50 worth of bitcoin into their system and have not heard any word from them regarding a support ticket I filed with them… which brings up a whole other problem with BitCoin… if you give money to someone to buy and they don’t deliver their goods, the only way to get your money back is to hope that they are reputable enough to do the right thing and refund your money. There are no charge-backs and no regulations and reporting agencies overwatching this stuff… you just have to be careful to do business with reputable people. But of the 3 shapeshift trades I made so far, only 2 went through without issue, I really hope I don’t end up having to call them every day hunting down lost money.
Update #2: I finally got my funds back on Saturday for the Transaction made on Tuesday…. 90 or so hours after the initial transaction, after trolling the hell out of them on reddit and other places… they owe me an explanation of why my trade failed and why correcting and detecting a failed trade took so much time and manpower.)
There’s plenty of talk on the web, even among BitCoin’s original creators about the future of BitCoin. BitCoin is regarded by many to be a failed experiment, both socially and technically. From a technical perspective, a financial system that can only handle 5-10 requests per second cannot sustain the financial system of the entire world. And from a social perspective, BitCoin’s goal of removing financial institutions from the equation has also failed, as almost all of BitCoin is now owned and controlled by a handful of miners in China. In effect, these Miners have become “The Man”. If they don’t want to accept your fees, they don’t have to process your requests… and the smaller players in the market cannot affect what they do because it would lead to conflicts of consensus that would be overruled by these Chinese billionaires..
Furthermore, BitCoin has failed as a user experience. Even the terminology is all wrong. A “wallet” in bitcoin is really a key… like a key to a safety deposit box. Anyone can stand in the room full of boxes, but unless you have the key, you can’t get inside.
Even worse, “Miners” don’t really mine BitCoin. They mine paper for the BitCoin ledger and are rewarded with BitCoins. This is an important terminology disconnect to understand because it helps to describe why Bitcoin will ultimately collapse. This ledger is becoming harder and harder to mine and taking up more and more computing resources. The reason that fees exist, are charged per-byte, and are so unbearably high on BitCoin right now is because you pay that fee based on the amount of space that it consumes on a ledger that can only hold so much data. The “miners” decide which transactions get included on this ledger… and they tend to put the ones that pay the highest fees on the ledger first…. but when the ledger is full… they need to “mine” a new block… in effect creating more paper. It was estimated that one single bitcoin transaction (approximately 250 bytes) now requires enough electricity to power a house for 1.5 days. This is just unsustainable and not at all environmentally friendly. Paying for your coffee will consume 1.5 days worth of electricity of a typical house as it is passed to all the computers mining and maintaining the ledger (at a pathetic rateof 5-10 transactions per second) around the world while you wait. Endless waiting… waiting… waiting….
This is unsustainable on so many levels. The network is not only on the verge of collapse, but it is expensive to participate in. This is why there is much talk about another cryptocurrency taking over and taking over soon. It will be over for Bitcoin once the news starts talking about something else. Unfortunately, “Ether” and “ZCash” are not brands that roll off the tongue quite as well.
After writing this, I went back and read that original blog I wrote in 2013 entitled: “, entitled “BITCOIN IS NOT GOLD, AND IT’S VALUE WILL DECREASE TO PENNIES ON THE DOLLAR WITHIN A DECADE“…. I gave it a decade. I think I still stand by my assessment. By 2023, BitCoin will be as dead as Guitar Hero, Garbage Pail Kids, and the Pogo Ball.