Bitcoin is broken?

“Send any amount of money, to anyone, anywhere in the world, and for free!”

That used to be my rally cry when preaching the bitcoin gospel to anyone willing to listen.  To be honest I told a fair amount of people that had no interest in listening too.  Bitcoin is intended to be an inexpensive platform for sending money, however the average cost of a transaction spiked this year to over $55.  Not ideal for someone like me who pays my barber in bitcoin.  My $25 haircut would now be $80 at that transaction fee rate.  No thank you.

chart from

How did we get here?  Why are transaction fees so high?  To understand that you need to go under the hood and examine some Bitcoin fundamentals.

Alice wants to send 0.001 bitcoin to Bob.  Alice opens up her wallet, selects Bob as the recipient, and presses send.  When this happens the transaction is broadcast throughout the Bitcoin network.  A transaction is not finalized until it has been confirmed.  Best practice is to wait for a few confirmations before you consider yourself the owner of the bitcoins you have received.  Approximately every 10 minutes a confirmation takes place on the Bitcoin network.

Why are confirmations important?  Because confirmations are what secures Bitcoin!  Instead of trusting a third party such as Paypal, Venmo, or your bank to validate the account ledger Bitcoin uses mathematics.  Eureka!

Bitcoin is the first technology to solve the double-spend problem.  How can we be sure that Alice does not send the same bitcoin she sent Bob back to herself?  Confirmations!

Confirmations happen through a process called mining.  Mining serves a few purposes on the bitcoin network, but in this example we will focus only on confirmations.  The bitcoin mining process uses computer hardware and electricity to solve complex math problems.

Let’s jump back a few steps.  Transactions are broadcasts out to all nodes on the network.  When the nodes (also known as miners) receive the transaction they bundle those transactions into a block and begin working to solve the mathematical problem.  To drastically simplify let’s say I ask you to solve the below lock without knowing the combination?  How would you begin?

You would probably start with ‘00000’, then ‘00001’, followed by ‘00002’, and so on.  You get the idea.  Miners are competing against each other solve the lock and the first to solve the problem creates a block containing all of transactions they recently received.  The process takes approximately 10 minutes.  Once a block is created all the miners immediately begin working on solving the next “combination lock.”  As each block is created the new block is tied to the previous block using cryptography.  Do not worry.  I will not bore you today with cryptography, but this technology is used to secure Internet.  Block after block is created chaining the history of bitcoin transactions since it’s inception; hence the name blockchain and cryptocurrency.

If Alice tries to send the bitcoin she sent to Bob back to herself after it has been confirmed the network nodes (miners) will look at the blockchain history and see that the transaction is invalid.  What happens if Alice sends out two transactions to the network: 0.001 bitcoin to Bob and the same bitcoin to another wallet she controls?  This is where things get interesting.

Miners do not process transactions on a first come first serve basis.  Miners  keep the fees associated to a transaction so they process transactions with higher fees first.  If Alice sends Bob 0.001 bitcoin, but uses a transaction fee of $0.00 the transaction may take a while to be confirmed.  It might take months or never get confirmed at all.  Alice could then send the same bitcoin to herself using a transaction fee of $3 and it will confirm faster.  There are a few other attack vectors, but this is why a recipient must wait for a few confirmations.

Now you have a general understanding how bitcoin transactions are processed.  Let’s get back to why it is so expensive to send bitcoin: transaction fees.  Bitcoin has not scaled at the pace needed.  There are simply too many transactions currently happening on the network right now to keep up.  Supply and demand are at work here.  If you need a transaction to go through quickly a higher fee is required.  The transactions with highest fees get priority.

Does this mean Bitcoin is only destined for rich people moving massive amounts of money?  Not so fast.  Fortunately the fabulous bitcoin development community is hard at work on a fix.

Usher in the Lightning Network!

The lightning network is an extremely exciting bolt on to Bitcoin.  It improves upon the existing infrastructure by providing instant payments, low cost, and scales the network.  Waiting for confirmations will no longer be needed.  Transaction fees will shrink to an amount of less than 1%.  On December 25, 2017 release candidate one was delivered!

It will not happen overnight, but there is light(ning) at the end of the tunnel.

Thanks for reading.  Please leave a comment below.


When will the bubble burst?

Bitcoin memes on Instagram?  Tickers tracking the price on CNBC?  Bitcoin, Bitcoin, Bitcoin!

Bitcoin’s epic rise to $20,000 is attracting attention and everyone has Bitcoin on the brain.   Welcome to the show!  This surge will come with another correction downward, but when will it happen?

Before we get too much further I should let you know I am not a financial adviser and I do not play one on the internet.

Back in January 2013 the Bitcoin price jumped from $13 to $200 by April.  A whopping 1,438% increase.  As President Trump would say, “HUGE!”  Then on April 9th 2013 at 5PM the value plummeted.  It dropped from $200 to $76 in 48 hours.  Let that sink in.

The price did a yo-yo like sprint until November 2013 where it took off like a rocket!  In the month of November 2013 Bitcoin rose from $200 to $1,100.  Another giant order of magnitude jump! Up 450%!

With the good comes the bad.  In the next two weeks there was a sharp crash down to $576 followed by a two year slump to $177.  Yikes.  A very difficult pill to swallow for individuals who invested in Bitcoin at the peak prices.

Chart from

Think critically before jumping into Bitcoin.  You must be prepared to take a long position and ready to lose everything.  Bitcoin and cryptocurrencies are speculative and your average Joe can be extremely emotional with investments.  Right now if you can order an Uber you are tech saavy enough to buy and sell Bitcoin.  Buying low and selling high is much easier said than done.  The cryptocurrency markets operate 24/7 across the world.  The markets can swing 50% up and down in a day.  Government regulations, crime, software bugs, and  internal Bitcoin community disputes are a few factors that have impacted price historically.

If you are thinking about investing into Bitcoin or any cryptocurrency then do your due diligence.  Study how Bitcoin functions technically and learn how to store it securely.  Insurance for stolen Bitcoin is a rarity.  Learn about the technology behind Bitcoin instead of studying the price.  How does a person in Kenya use text message to send money to someone in Canada instantly?  Magic internet money you say?

Read the Bitcoin white paper.  Read it once, take a walk, then read it again with a pencil and paper.  Write lots of notes and keep a google page close by.  You will need it.  It took me over a year to understand and I work in the tech field.  Thankfully there are many Youtube explanations out there.  My introduction to Bitcoin was through Steve Gibson on the Security Now podcast.  Andreas Antonopoulos is another great resource for providing eloquent and technical information.  All his books I highly recommend!

Bitcoin can open up a new way of thinking for those interested.  You will learn about the economy, decentralized networks, cryptography, and game theory.

Now that you have done your homework it is time to get some Bitcoin!  But Bitcoin is trading at $18,000!  You don’t have that kind of cash laying around?  That is okay.  Purchase small denominations.

Understanding the price in relation to Bitcoin as a unit is important!

A Bitcoin can be broken down eight decimal points.  1.00000000 Bitcoin.  $18,000 will purchase 100,000,000 units.

Fun fact: in Bitcoin slang the smallest denomination of a Bitcoin is called a satoshi.   

If you purchase a Bitcoin for $18,000 you are pay $0.00018 for one satoshi.  We can do the math differently and instead say we paid $1.80 for 10,000 satoshis.

This means that you can purchase one Bitcoin for $18,000 or purchase a fraction of a Bitcoin at $5.  In-fact someone can send you less than a penny’s worth of Bitcoin.  Interesting, eh?  It gets more interesting the more you learn.

Thanks for reading and please leave a comment below.