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B is for Bitcoin (Chapter 4)

Picture of Seb Bunney

This is the final installment of the serialisation of the book B is for Bitcoin by Daz Bea and Seb Bunney.  

Link to:  Chapter 1 \ Chapter 2 | Chapter 3

Buy the Book:  Independent / Amazon

 

 

Chapter 4 - Section 1: Bitcoin in Action

 

Key Questions Answered:

  • What are some examples of Bitcoin in action?

To wrap things up, we will explore the hypothetical lifecycle of a bitcoin, following the journey of a newly-minted bitcoin from birth to cold storage and everything in between. This scenario will help cement some of the terms and learnings we have covered and give you a better understanding of Bitcoin, the network and bitcoin, the asset.

The Birth of New Bitcoin

If you recall from our example in "On-chain & Off-chain," we introduced Dan and Josh. Two avid Bitcoiners. What we didn't mention was that Dan and Josh are so enamoured by Bitcoin that they decided to set up a mining company. Based out of Texas, this mining company focuses on portable mining rigs and partners with oil companies to reduce methane and C02 emissions46 by capturing flared methane and using the heat to generate power for their miners.

With their miners successfully up and running in the first week of operation, they triumphantly mine their first Bitcoin block, #753,83547. This block contains 6.25 BTC of virgin bitcoin + 0.155 BTC in transaction fees for a total block reward of 6.405 bitcoin. This bitcoin is immediately sent to the company's self-custody address, which they included within the block information they broadcasted to the network.

Although Dan and Josh are thrilled about mining their first block, they laugh, wishing they had started this mining operation during the last Bitcoin halving. If they had, the same block would have contained 12.5 virgin bitcoin rather than 6.25. But Dan and Josh are still excited about what the future holds. And they are motivated to mine as many blocks as possible before the next halving in 2024.

On-Chain & Multi-Signature

With Dan and Josh operating a Bitcoin mining company out of Texas, their expenses are denominated in US dollars (USD). Therefore, at the end of the first month, they total their expenses, which come to $73,200. With Dan and Josh having used all their USD to start the mining operation, they need to convert some of their bitcoin proceeds into USD. 

Dan and Josh use a two-of-three multi-signature wallet, with Dan securely storing one private key, Josh another, and their silent partner with the final key. This means Dan and Josh combined have two of the three private keys and can, therefore, sign transactions on behalf of their mining company. 

With this in mind, they set up an account with a local centralized bitcoin exchange, create a transaction to send BTC to their exchange address and sign the transaction with Dan and Josh’s two cold-storage devices.

This signed transaction is now broadcast from their software wallet to the network, sending 3.26 bitcoin (~$73,200 at the exchange rate on the day) on-chain from their company's treasury to their exchange account. 

As Dan and Josh run their own node, not only are they involved in consensus for Bitcoin improvements, they can view the status of the transaction before their balance is visible on the exchange.

They, therefore, log into the backend of their node to view mempool.space privately, paste their transaction ID and see that the network has confirmed their transaction. They can also see that it cost them 7,131 sats (approximately $1.50 at the time) to send the 3.26 BTC. This leaves them with a balance of 3.14492869 bitcoin in their self-custody wallet.

Once the bitcoin arrives in Dan and Josh’s centralized exchange account, they immediately convert it to USD. 

Dan and Josh’s account now displays a balance of $73,200 USD, and the exchange receives the recently deposited 3.26 bitcoin. After the conversion is complete, they transfer this USD balance into their linked business bank account and pay their bills. 

Importance of Self-Custody

With the 3.26 bitcoin in the exchange's reserves, it is now available for purchase from other customers using that exchange. Within a few days, two customers, Dane and Sally, decide to buy some bitcoin and become the new owners of this bitcoin. 

Sally decided to invest her hard-earned savings, purchasing 0.25 BTC, while Dane invested a portion of his monthly income by purchasing 0.02 bitcoin. However, both take a slightly different approach to securing their newly purchased bitcoin.

Dane 

With limited knowledge of third-party custody risks, Dane is of the buy-it-and-forget-it mindset. Once purchased, he leaves his bitcoin on the exchange. 

As safe as it initially seemed, unfortunately for Dane, the exchange finds itself in financial trouble. It had been lending out customers' deposits to secure some extra income. After one too many defaults on these loans, its customers caught on and started withdrawing their bitcoin. Initially unaware, Dane eventually contacts the exchange. But by this point, they have stopped allowing customer withdrawals. The exchange eventually declares itself bankrupt, and Dane loses his bitcoin. 

Dane’s example illustrates the importance of self-custody. In his case, he had third-party exposure by leaving his bitcoin on the exchange. 

“Not your keys, not your coins.”

Sally

Sally is a long-term bitcoiner that deeply understands the risks of storing her hard-earned bitcoin on the exchange. 

She, therefore, quickly withdraws her bitcoin from the exchange, removing any custodial risk. She sends 0.22 BTC to her secure, self-custody cold storage and 0.03 BTC to her mobile hot wallet in two separate on-chain transactions. 

Off-chain

In the coming weeks, Sally and her best friend Rosa will head to El Salvador to visit Bitcoin Beach. Sally’s initial thought is that as merchants in El Salvador accept bitcoin through the Lightning network, she could use her hot wallet to transact with them. 

Sally loves the idea of supporting local vendors with bitcoin. Not only does it reduce the merchant fees on the vendor's end, but it also eliminates her foreign exchange rates and exorbitant international ATM withdrawal fees. 

Figure 4.11: El Zonte a.k.a Bitcoin Beach48

When Sally arrives in El Salvador, the first thing she does is convert her hot wallet bitcoin balance into Lightning. Through this off-chain technology, she can quickly and anonymously transact with merchants for fractions of a cent. 

Seed Phrase Back-Up

Initially, Sally’s friend Rosa doesn't know much about Bitcoin, although she quickly recognizes its versatility after watching Sally interact with the local vendors. 

As Rosa purchased lunch during the first few days, Sally suggested that she pay Rosa back via bitcoin. Rosa is intrigued. She downloads a hot wallet app on her phone, creates a new wallet and is ready to go. Rosa hits receive via lightning which presents a QR code, Sally scans the QR using her hot wallet app, and Sally sends Rosa 200,000 satoshis for a total fee of 99 sats or $0.02. 

After the transaction is complete, Sally stresses to Rosa the importance of backing up her wallet when they return to the hotel that night to ensure she can always access her bitcoin balance no matter what may happen to her phone. 

When they return to the hotel, Rosa takes note of her seed phrase. After securely recording her seed phrase, Rosa chooses to top up her wallet with some more funds, so she heads down to a bitcoin ATM in the lobby. Rosa uses her credit card in the ATM and transfers an additional equivalent of $200 worth of bitcoin into her wallet. She scans the QR code with her hot wallet app, and in an instant, 898,836 satoshis arrive in her wallet, giving her a total balance of 1,098,836 sats.

Merchants

That night, Sally and Rosa head out and enjoy an amazing dinner and drinks at a local Argentine restaurant. When it comes time to pay the bill, Juan, the restaurant owner, quickly and effortlessly displays bitcoin and lightning payment options through his Bitcoin-integrated Point-Of-Sale (POS) system. Rosa chooses Lightning and pays the bill for 119,992 sats. Within a few seconds, they're ready to go. 

As Sally and Rosa leave, Rosa asks Juan about using Bitcoin as a business. Juan's face lights up as he explains, "Not only do I save the 2-6% transaction fee when it comes to processing traditional payment methods, but the transactions using Lightning are instantaneous, and I can obtain final settlement. Credit card payments, on the other hand, usually take 2-4 days for transactions to settle (he has to wait before he obtains access to these funds). During this time, there is the possibility for transactions to be reversed. That is not the case with Bitcoin's final settlement." Juan ends with the fact that he's been converted and fully supports merchant Bitcoin adoption.

Remittance

After Rosa and Sally leave, Juan closes up shop for the night. However, just before Juan heads home, he remembers his daughter back in Argentina, Isabella. It's her birthday. He wants to surprise her with money for her savings. Traditionally, Juan would send money through Western Union and incur fees upwards of 20%49. However, since adopting Bitcoin, the process has been much cheaper and easier.

Juan calls Isabella. She opens her hot wallet app and creates a Lightning invoice which she sends over Whatsapp to her dad. He copies and pastes it into his wallet, adding the amount he wishes to send, and within an instant, 496,034 satoshis ($100) arrive in Isabella's wallet for a cost of 87 sats ($0.01). No intermediaries, no permission needed and all for a fraction of the cost of traditional money transfers.

Cold Storage

Isabella having spent the last few years studying the history of Argentina, is all too familiar with the fact that the government has defaulted on their debt obligations nine times50 in the previous 200 years. But, more importantly, she has lost confidence in storing her savings in the local currency with their rampant annualized inflation of 191% from 1944 - 202251. 

Isabella, therefore, opts to store her savings in bitcoin, knowing that her 0.1 bitcoin of 21,000,000 today will still be 0.1 of 21,000,000 in ten years. Isabella takes a long-term view of her savings. The short-term volatility does not worry her too much. In fact, she likes it when bitcoin’s price falls in USD terms as she can purchase more bitcoin for the same amount of money.

Isabella also feels comfortable knowing there is no way for a centralized body to dilute the currency by expanding the money supply. On the other hand, Argentina52, which had 200 billion pesos in circulation in 2012, now (August of 2022) has 3.234 trillion. A 1,512% increase over the last ten years. Putting that in perspective, if Juan had sent $100 worth of pesos rather than bitcoin to Isabella in 2012, she could only purchase $3 worth of goods today. A 97%53 reduction in purchasing power.

Knowing this, Isabella opens up her hot wallet and converts her off-chain lightning balance into bitcoin. She then creates a new transaction, enters her cold storage wallet address and sends over her balance of 0.00496034 BTC. Isabella then sighs with a sense of relief, knowing that she has minimized any third-party risks, with her bitcoin tucked away in cold storage as she heads off to bed. That night she dreams of all the things that her bitcoin may purchase in the future. She also imagines what a "hyperbitcoinized54" world may look like where people can be their own bank and trust that governments and central banks will not devalue their money through money printing.

Section Summary

With only one section left, the final conclusion, we just want to say a preemptive thank you for taking the time to read this book and joining us on this journey.

Hopefully, through this little fictional story, you can see how Bitcoin, the asset and the network work in conjunction with one another. But more importantly, how various individuals with different ideals and needs use bitcoin.

In this story, we followed some bitcoin from mining to entering the bitcoin circular economy, to being spent and then handed over from user to user until they reached their slumber in Isabella's cold storage, hopefully assisting her in building generational wealth. However, this is but one example of the path bitcoin might take, and we have only just scratched the surface of some of the many use cases bitcoin has to offer.

As you continue your Bitcoin journey, you'll encounter many stories like this, the only difference being that they will be real. 

If you come across any extraordinary stories, be sure to share them with us.


Conclusion

Congratulations on making it to the end. We hope you have enjoyed this journey through the world of Bitcoin. 

We have taken you along the journey that we, the authors, and many others, have been on in our quest to truly understand the ins and outs of this incredible nascent technology.

Typically, it takes hundreds if not thousands of hours to trawl through the plethora of phenomenal resources (books, podcasts and YouTube tutorials) explaining how Bitcoin works and why it is one of the fastest-growing assets in history.

What we have attempted to do throughout this book is to distill those 1000 hours of learning into a one-stop learning solution. Our goal was to take the reader through Bitcoin's inception and mysterious past. All while exploring the players, the protocol and the facts and figures that make Bitcoin the fully functioning and resilient asset it is today. 

We hope we have achieved this and you have gained some helpful insights and learnings. We would love to hear your thoughts and feedback, so do not hesitate to reach out.

If you enjoyed this book, the best thing you can do is to share it amongst your friends and family and on your favourite social media platforms. 

Lastly, we intend to keep as many of our educational resources free and available to budding bitcoiners everywhere! We, therefore, greatly appreciate any donations to help us create even more educational material for those who need this most.

Thank you for entrusting us with your learning experience and we hope to have even more content to share with you in the near future.  

Sincerely,

The Looking Glass Team

The future is bright!




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