Bitcoin or Bit Con?  One Newbie's Adventures in Cryptoland

by XtendedWhere

Depending on who has your ear, Bitcoin is either the greatest invention for humankind since the Internet, or the greatest financial bubble since Tulip mania bloomed and wilted back in the 1630s.

Readers of these pages likely need no introduction to the infamous cryptocurrency, which first appeared in a white paper and software program released in January of 2009, shortly after the U.S. economic collapse and massive financial system bailout.  Authored by an enigmatic and still anonymous persona, Satoshi Nakamoto, Bitcoin solved the "double-spending problem" which had long hobbled systems of anonymous digital currency.  In it, a publicly shared ledger, or blockchain, records all transactions, and copies of the ledger may be maintained by anyone, with all copies raving to remain in perfect agreement.

I read about Bitcoin soon after its creation and found the technology interesting, but I had no use for it at the time, and gave it little further thought.  Fast-forward to the spring of 2016, when a speaker at a gathering of technology entrepreneurs in Los Angeles touted the wonders of cryptocurrencies and the amazing financial gains it had brought him.  Rather than trading for pennies, the price of a Bitcoin had climbed to around $700 each.  My curiosity piqued, I decided to dig in and learn more.

Searching the Internet for information and tutorials revealed much out-of-date, conflicting, and rather alarming information: tales of black market dealings and money laundering via the Silk Road website, the capture of its founder Ross Ulbricht and seizure of 144,000 Bitcoin by the U.S. Justice Department in 2013, and the collapse of Bitcoin exchange Mt. Gox and the disappearance of more than $400 million from its holdings in 2014.  The many suspicious sounding developments made me think twice about getting involved.  Yet, seven years after its creation, Bitcoin persisted.  What new and innovative technology doesn't face early hurdles and stumbles on the way to success?  So I persisted as well.

Reading How Money Got Free: Bitcoin and the Fight for the Future of Finance by Brian Patrick Eha (Oneworld Publications, 2017) put the many Bitcoin stories in perspective and showed me how it operated behind the scenes.  The primary drivers behind cryptocurrencies have great appeal: a decentralized system of exchange not controlled by any government or political group, the ability to make anonymous purchases and donations, worldwide reach, fast transactions, and minimal fees or "friction" in the system.  In all, Bitcoin seemed like a promising technology for our increasingly digital world.

At last I felt knowledgeable enough to take action.  Meanwhile, during my long "research" phase, Bitcoin's price had climbed from $700 to over $6,000!  Clearly I'd missed out on some amazing financial gains.

Because reading about how to ride a bicycle and actually learning to ride are very different things, my time had come to climb on the cryptocurrency bike and actually buy some Bitcoin.

The next phase of my education had three goals:

  1. Exchange some U.S. dollars for some Bitcoin.
  2. Purchase some "thing" with Bitcoin.
  3. Exchange some Bitcoin back to dollars (hopefully after the price went up).

The old saying goes "don't invest more than you're willing to lose."  Had I bought $700 of Bitcoin at the start of my research phase in the spring of 2016 it would have become over $6,000, and a purchase of $5,000 back then would have become nearly $43,000 now!  I'd watched the Bitcoin price climb steadily, so I picked a number I could live with losing - $5,000 - and went in search of a marketplace to take my money.

Although I made what I thought were the best choices at the time, I'm sure informed readers could offer endless alternatives.  Rather than writing a "how to" article with specific products, services, and website names, for the most part I will focus instead on my experiences and how they exposed the realities of the current system.

Day 1 - Mid-October 2017:  To start, I needed a software "hot wallet" to securely hold my future Bitcoin, and from which to spend it.  I downloaded several of the better-rated wallet apps, and set them up with secure passwords, main and backup email addresses, multi-word recovery phrases, and recovery hints.  They offered many different options for additional security.

Now that I had a place to store my cryptocurrency, I selected an online exchange where I could trade some U.S. dollars for Bitcoin.  The choices appeared quite varied, resembling everything from a money changing service at an airport to a shady character on a street corner.  I chose one that appeared to have a good reputation, and created an account.

Here's where the first cracks appeared in the Bitcoin facade.  To establish the account, I needed to provide a lot of personal information - just like when applying for a bank account or credit card.  They needed my full name, date of birth, full address, country, and phone number, all of which they accepted online.

Then, to actually transfer some U.S. dollars (my "fiat currency" in the lingo) into the account, I needed to get approved for a still higher level of account.  This involved providing my Social Security Number, a copy of a recent utility bill, a high-resolution scan of my driver's license, and a high-resolution selfie of my face with my driver's license and a signed handwritten note.  So much for the idea of Bitcoin anonymity!

After uploading all that, the site indicated that approval could take a week or more.  Meanwhile, I performed a few more security activities: setting up strong passwords, two-factor authentication, a master key for account recovery, and a global settings lock.  I felt ready and secure.  But I still had no Bitcoin.

Day 2:  A pleasant surprise arrived in my email with the approval of the higher-level exchange account.  I logged in, but the site showed that the process had not been completed.  After a day of back-and-forth with customer support, it finally came through.  Can I fund my exchange account now?  Not so fast.  The exchange site wanted my detailed bank account information.  Given the history of hacks and data breaches (I've been affected by Target, The Home Depot, and Experian - that I know of), I felt very uncomfortable putting my bank account number online.  Fortunately, my bank made it easy to set up a new account that I could use as a way station for transferring funds.  If that dedicated account were breached, I would stand to lose only the amount I had decided to risk on this experiment.

Day 3:  Actually moving my dollars into the new exchange account required a lengthy, multi-step process: I had to transfer money from my main bank account to my new way station account (no fee, and it happened right away), set up a wire transfer from my bank to the exchange website (no bank fee, but a $5.00 fee from the exchange), and reply with the bank's text verification code to authorize it.  Then, as an additional security measure, my bank called to review all the details before they finally released the transfer.  I then had to notify the exchange site to watch for the incoming funds, which they said could take up to five business days to clear.

So after three days of steady action and progress, I still had no Bitcoin in my account.

But now that I had fully tuned into the world of cryptocurrency, what should I find but a Bitcoin ATM sitting quietly in an entry to a local shopping mall.  Really?  Cash in, Bitcoin out?  No need to open an account, or show ID?  What could be simpler?  So I pulled out two fresh $20 bills and stepped up to the plate.

But yes, it seemed too good to be true.  The machine asked for a bunch of personal information, including mobile number and photo ID, then presented a long screen of terms and conditions.  I agreed, inserted my cash, and a few moments later it printed a slip of thermal paper with two square QR codes that represented the public and private keys for my first tiny slice of a Bitcoin.  Success at last!

Here's where the next cracks formed in the Bitcoin image.  I did the math and found that my $40 cash turned into 0.00614183 Bitcoin, worth (depending on which source you referenced - different sites quoted values as much as $1,000 apart) a total of $36.  What?  The Bitcoin machine took a $4.00 service fee?  Ten percent!  Wow!  What greedy bank charges that much to exchange foreign currencies?  So much for the promise of "low to no fees."  O.K. - so maybe I was optimistic to think that a lone machine in the mall hallway would be the gateway to vast riches.  But at last, I owned some Bitcoin, and the price continued to climb.

Day 4:  Another good email day.  The wire transfer cleared in less than 24 hours, and my dollars were finally ready to exchange for some Bitcoin.

I logged in to the exchange site and set up a purchase, much like buying shares of stock, by specifying the desired price and quantity.  After few moments, the site indicated my purchase had failed to be accepted.  I tried again, and that order failed too.  Finally, I set up a limit order offering to purchase 0.75573000 Bitcoin at the price of $6,598.90 per coin.  Boom!  That offer found a willing seller, and the trade went through.

The exchange site charged a fee of about $8 or 0.16 percent on the $5,000 trade, much better than the ten percent fee at the ATM, but still nearly twice as much as a discount brokerage charges for a typical stock trade.  Nevertheless, I now owned just over three-quarters of a Bitcoin!  Time to go out and buy something with it.  But what, and where?

Reviewing apps and websites that listed merchants who accepted Bitcoin, I was surprised to discover very few in the Los Angeles area.  The idea of spending my Bitcoin on a cup of coffee faded away, and the illusion of Bitcoin as a viable medium of exchange burst like a balloon.  How can I exchange it for useful goods and services when so few merchants accept it?

Meanwhile the price of Bitcoin kept rising.  In late November, it broke $10,000 for the first time.  Two weeks later it shot past $15,000, meaning that in less than six weeks, I'd more than doubled my money.  Should I have bought more?  How long could this go on?

I sold some Bitcoin to recover my original investment, after which the price dropped, and then I bought some more (paying fees each time).  Despite these multiple digital transactions, I still needed the experience of buying something "real" with Bitcoin.

Then I remembered - I'd always wanted to subscribe to 2600 Magazine, rather than rely on the hit-or-miss encounters at the local magazine stands.  Visiting the 2600 website, I put a one-year subscription into my shopping cart ($27.00), entered my address, and selected their Bitcoin service as the payment method.  Now, their site uses a different wallet system than the one I'd been using, so I downloaded that app, set up an account, and moved the old $40 ATM purchase (really $36 after fees, but now worth more than $80) to the new digital wallet.

And here came three bullets that completely shattered the Bitcoin facade.  First, moving the funds from my existing wallet app to the new wallet app deducted a fee of more than 16 percent.  Free app with a huge cost!!  Second, when I placed my subscription order, Shopify, which runs the 2600 store, added a "network fee" of nearly $13 (which seemed like the amount they would need to pay to convert my Bitcoin back to dollars.)  Third, the wallet app charged their own fee of nearly $13 for the transaction.  Finally, on top of all that, since I'd chosen the lowest-cost network transaction verification method (!), the system warned me that my payment might take longer to confirm, or may not confirm at all.  So much for the illusions of Bitcoin's low cost and high reliability!

Typically, a merchant who accepts credit cards pays two to four percent of each transaction to the credit card processor and then absorbs those fees.  But when a fee is nearly half the subscription price, obviously a vendor such as 2600 can't eat that amount, so they pass it on.

Looked at from one point of view, I paid nearly $39 in fees for that $27 subscription - 140 percent!  Normally I would consider myself an idiot for being taken like that.  But this is scientific research, and the costs were part of the experiment.  Looked at from another point of view, the $40 cash I put into the Bitcoin ATM became, a few months later, a $27 subscription and about $15 worth of Bitcoin, so I actually made $2 in profit - but only thanks to the outrageous rise in the Bitcoin price.

Despite the warnings, the transaction cleared in under an hour, and I soon had a nice email from 2600 indicating my new subscription had started.

But the absurdly high fees charged for every Bitcoin transaction became a deal breaker for me.  I was done.  After hitting a peak of $19,000, Bitcoin had been almost continually falling and I wanted out.  I returned to my exchange account and placed a sell order, which went through promptly.  I set up a wire transfer back to my bank (another $5 fee from the exchange, zero fee from my bank).  Six days and several emails to the exchange later, the funds finally appeared back in my bank account.  Success, and end of experiment!

Conclusions

Maybe I made some ignorant errors along the way.  Maybe I didn't do enough research, locate the most efficient services, or the best methods of exchange.  I've since learned that transaction fees can vary greatly due to network demand, which had been very high during the time of my experiment.  Like a tourist with an unfamiliar currency, I may have grossly overpaid and not understood the local customs.

In summary, I got lucky.  I achieved all the goals of the original plan and I learned a lot.  I put a total of $5,045.00 into the experiment.  With all the buying, selling, and wallet transfers, I paid about $90 in fees.  At the end of the project I had:

None of the promises of Bitcoin turned out to be true in any way. Bitcoin is not anonymous, not instantaneous, and not low cost.  The outrageously variable transaction fees and lack of wide adoption make it a poor medium of exchange.  Its outrageous volatility makes it a poor medium of investment.  And, compared to racehorses or sports teams, its unpredictable behavior makes it a poor medium for even gambling!

Bitcoin's price has continued to fall, dropping below $9,000 just before I handed this story to the publisher.  So where is it now?  By the time you read this, Bitcoin may have crashed-and-burned, as many have predicted.  Or it may still be crawling along, luring the curious and uninformed to put their money into its edacious system.

But as hackers know, success comes with persistence and the willingness to revise one's plans in service of achieving the greater vision.  The fundamental concepts behind Bitcoin seem useful and necessary, and the blockchain technology offers great promise.  It remains to be seen how to best implement it all.

Maybe Bitcoin will morph into a more capable version of itself.  Perhaps it will be replaced by one of the many alternate cryptocurrencies, or one yet to be created, which will find the right combination of anonymity, security, low-cost, ease of use, consistency and efficiency.  Clearly someone needs to come up with an easy, all-in-one solution that serves the needs of the masses, and lets cryptocurrency become omnipresent, much in the way that America Online's ease of use helped email soar in popularity in the 1990s.

Perhaps a successful "AOL of Crypto" service will come from a reader of these pages.  Either way, I'll be watching and ready to experiment again when it happens.
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