The Bitcoin Bedtime Story (ELI5 On Bitcoin & Stablecoins)

The Bitcoin Bedtime Story – By AmericanScream

Once upon a time there was this technology scheme invented called, “bitcoin” that was supposed to be a type of “digital currency.”

This supposedly futuristic “digital currency” was built around a complicated mathematical computer model that created a de-centralized database of transactions people called a, “blockchain.” This was not new technology. It had been around since the 1960s and had limited practical commercial use due to its inefficient design.

Nonetheless, this “Bitcoin” system was created as a proof of concept of a new way to transfer value from one person to another over the Internet, using data stored online, and verified by computers (called miners) who waste tremendous amounts of energy arguing with each other over who’s copy of the database is the right one; eventually someone wins the argument and everybody starts over.

That’s what a blockchain is: a bunch of computers running around in circles trying to solve math problems, and along the way they keep track of some transactions.

The early adopters of this concept mainly consisted of tech people, mostly libertarians who were upset they had to pay taxes for things like roads, schools, parks and running water, and liked the idea they could hide value in the blockchain while still using government services they preferred to not pay for. They tried to get more people on board and “legitimize” Bitcoin by encouraging other people/merchants to use it as an exchange of value.

It went largely unnoticed for several years until various criminals realized it could be used to facilitate dark money transactions and laundering. These criminals’ early adoption of the technology fueled an increased interest, and various other criminals and people involved in less than ethical business ventures climbed on board.

Unfortunately, Bitcoin never made a good currency. It was slower, less secure, harder to use, had more elaborate resource requirements, wasted tons of energy and was difficult to even properly explain to others how or why they should use it? Also its price was highly volatile and merchants soon found it wasn’t worth it to accept Bitcoin for real world goods and services.

Now we come to a time in Bitcoin’s history where perhaps it should have been clear it wasn’t what people said it was, and instead, just an odd proof-of-concept that didn’t have practical use.

Instead of acknowledging this reality, Bitcoin holders instead decided to “re-brand” their crypto, not as a currency, but as an investment. Then they started calling it, “digital gold.”

The problem with promoting Bitcoin as an investment is… it has no intrinsic value. Even gold has material use. But Bitcoin is just a number in a computer. How can you convince someone that number actually has value? Bitcoin marketers would answer that by saying, “The same thing can be said about the dollar.” which isn’t really true, and is a distraction and doesn’t answer the question, but they liked hearing that and kept repeating it.

Still, their “digital gold” needed some way to be tied to something of more recognizable value. So they invented what they called, “stable coins” which are other crypto currencies that are supposed to be 1:1 backed by fiat (ironically the same “dollars” they claim have no intrinsic value, they now used as evidence their crypto has value — don’t try to make sense of it, just roll with me).

Various exchanges began to invent their own “stable coins”. These served as proxies for real fiat, and they treated the transactions as if they were in dollars, euro or whatever they were supposedly backed by. The most popular stable coin has become Tether, known as USDT in trading.

The developers of these stable coins claimed they were asset-backed. The problem is, like everything else in the crypto industry, there’s very little oversight or transparency. In many cases, even the actual people behind these schemes or where they were physically located was unknown! Normally you might think that would tip people off that something is fishy, but to crypto enthusiasts, who think, “trustless money” is the future, this seemed kinda cool and edgy, and in their minds, it wasn’t really something to be concerned about.

Being free from evil “regulation”, these exchanges, like Bitfinex, casually blew off attempts to be legitimately audited — something that is a standard practice in the “totally corrupt” normal finance and investment industry. Instead they just issued occasional press releases saying, “Everything is ok. Nothing to worry about.” And crypto enthusiasts took them at their word, because why wouldn’t you assume a crypto exchange’s press releases weren’t legit? It goes against the whole notion of trustless, de-centralized monetary systems, amirite?

So now, with the full confidence of the industry (as long as prices keep going up), companies like Bitfinex and their shadowy executives, continue to print and produce more USDT, claiming that, “It’s backed… by something…. did we say ‘dollars’… well if not dollars, then ‘dollar like stuff’, which is basically the same thing. We wouldn’t even tell you this except we got in a little trouble with the New York Dept of Justice and they started asking a bunch of inconvenient questions that we don’t think we should have to answer. Everything is ok. Nothing to worry about.

Fast forward to 2020, where USDT is the most traded security in the entire crypto industry. There’s more USDT being traded than actual BTC. How did that happen?

Because number needs to go up.

Best way to make number go up, is to make sure there’s “demand” for crypto. Best way to have demand is to create demand. When you create your own demand, it’s much more reliable than waiting for “the market” itself to decide they want more crypto. So you print USDT, and then you trade the USDT for various other crypto currencies, back and forth, forth and back, back and forth. And the next thing you know, it looks like there’s a ton of interest in buying crypto!

This children, is what some people call “wash trading.” But people in the industry claim it’s natural demand.

How exactly does it work? Let’s explain:

Imagine if you have a teddy bear that you paid $3 for. I offer you $4 for it. Now it’s worth $4.

But then you offer $5 to buy it back. Now where you had a $3 teddy bear, you now have a $5 teddy bear.

Awesome huh? Wait, but didn’t you just lose $2 in that transaction?

Not with StableRocks!

Pick up some rocks, decide those rocks are now worth $1 each!

Use them to trade back and forth with your friend.

When you run out of rocks, pick up some more.

At the end of the day, your teddy bear is even more valuable! And when people ask what’s backing up the $1 value rocks, point to the teddy bear (that is now worth more than $19,000!) Voilà! You are now a master crypto currency trader!

And then everybody lived happily ever after!