The best way to learn about bitcoin, is to jump in and get a few in
your "pocket" to get a feel for how they work.Despite the hype about how
difficult and dangerous it can be, getting bitcoins is a lot easier and
safer than you might think. In a lot of ways, it is probably easier
than opening an account at a traditional bank. And, given what has been
happening in the banking system, it is probably safer too.
There are a few things to learn: getting and using a software wallet,
learning how to send and receive money, learning how to buy bitcoin from
a person or an exchange.
Preparation
Before getting started, you
will need to get yourself a wallet. You can do this easily enough by
registering with one of the exchanges which will host wallet for you.
And, although I think you are going to want to have one or more exchange
wallets eventually, you should start with one on your own computer both
to get a better feel for bitcoin and because the exchanges are still
experimental themselves. When we get to that stage of the discussion, I
will be advising that you get in the habit of moving your money and
coins off the exchanges or diversifying across exchanges to keep your
money safe.
What is a wallet?
It is a way to store your bitcoins.
Specifically, it is software that has been designed to store bitcoin. It
can be run on your desktop computer, laptop, mobile device (except, as
yet, Apple) and can also be made to store bitcoins on things like thumb
drives. If you are concerned about being hacked, then that is a good
option. Even the Winklevoss* twins, who have millions invested in
bitcoin, put their investment on hard drives which they then put into a
safety deposit box.
*The Winklevoss twins are the ones who originally
had the idea for a social networking site that became Facebook. They
hired Mark Zuckerberg who took their idea as his own and became
immensely rich.
What do you need to know about having a bitcoin
wallet on your computer?Below you can download the original bitcoin
wallet, or client, in Windows or Mac format. These are not just wallets,
but are in fact part of the bitcoin network. They will receive, store,
and send your bitcoins. You can create one or more addresses with a
click (an address is a number that looks like this:
1LyFcQatbg4BvT9gGTz6VdqqHKpPn5QBuk). You will see a field where you can
copy and paste a number like this from a person you want to send money
to and off it will go directly into that person's wallet. You can even
create a QR code which will let someone take a picture with an app on
their phone and send you somebitcoin. It is perfectly safe to give these
out - the address and QR code are both for my donations page. Feel free
to donate!
NOTE: This type of wallet acts both as a wallet for you
and as part of the bitcoin system. The reason bitcoin works is that
every transaction is broadcast and recorded as a number across the
entire system (meaning that every transaction is confirmed and made
irreversible by the network itself). Any computer with the right
software can be part of that system, checking and supporting the
network. This wallet serves as your personal wallet and also as a
support for that system. Therefore, be aware that it will take up 8-9
gigabytes of your computer's memory. After you install the wallet, it
will take as much as a day for the wallet to sync with the network. This
is normal, does not harm your computer, and makes the system as a whole
more secure,so it's a good idea.
Bitcoin Qt
The original
wallet.This is a full-featured wallet: create multiple addresses to
receive bitcoins, send bitcoins easily, track transactions, and back up
your wallet.Outside of the time it takes to sync, this is a very easy to
use option.Search for Bitcoin Qt wallet download to find their
site.Armory
Runs on top of Bitcoi Qt, so it has all of the same
syncing requirements.Armory allows you to back up, encrypt, and the
ability to store your bitcoins off line.Search for Bitcoin Armory Wallet
to find their site.If you don't want to have that much memory used or
don't want to wait for your wallet to sync, there are good wallets that
do not make you sync the entire history of bitcocin:
Multibit
A
lightweight wallet that syncs quickly. This is very good for new
users.Search for Bitcoin Multibit Wallet to find their site.Electum
In
addition to being quick and light, this wallet allows you to recover
lost data using a passcode.Search for Bitcoin Electum Wallet to find
their site.After you get the wallet set up, take a few minutes clicking
around. Things to look for:
o There will be a page that shows you how
many bitcoins are currently in your wallet. Keep in mind that bitcoins
can be broken up into smaller pieces, so you may see a decimal with a
lot of zeros after it. (Interesting note, 0.00000001 is one Satoshi,
named after the pseudonymous creator of bitcoin).
o There will be an area showing what your recent transactions are.
o
There will be an area where you can create an address and a QR code
(like the one I have above). You don't need the QR code if you don't
want it, but if you run a business and you want to accept bitcoin, then
all you'll need to do to accept payment is to show someone the QR code,
let them take a picture of it, and they will be able to send you some
money. You will also be able to create as many addresses as you like, so
if you want to track where the money is coming from, you could have a
separately labeled address from each one of your payees.
o There will
be an area with a box for you to paste a code when you want to send
money to someone or to yourself on an exchange or different wallet.
There will be other options and features, but to start out with, these
are the items that you should know about.
Getting Your First Bitcoins
Now
that you have a wallet, you will, of course, want to test them out.The
very first place to go is http://faucet.bitcoin.st/.This is a website
that gives out small amounts of bitcoin for the purpose of getting
people used to using them. The original version of this was run by the
lead developer of bitcoin, Gavin Andreson. That site has since closed
and this site operates by sending out one or two advertisements a month.
You agree to receive those messages by requesting the bitcoins. Copy
and paste your new bitcoin address and enter a phone number to which you
can receive an SMS. They send out an SMS to be sure that people are not
continuously coming back for more since it costs nothing to create a
bitcoin address. They will also send out once or twice a month
advertisement to support their operation. The amount they send it
trivial: 0.0015 BTC (or 1.5 mBTC). However, they process almost
immediately and you can check to see that your address and wallet are
working. It is also quite a feeling to get that portion of a bitcoin.
(Non-disclaimer: I have no connection with this site and receive nothing
if you use them. I simply think they are a good way to get your feet
wet).
Congratulations! You have just entered the bitcoin economy.
To
get your feet a little wetter, you can go panning for gold. There are a
number of services and websites out there that will pay you in bitcoin
to do things like go to certain websites, fill out online surveys, or
watch sponsored videos. These are harmless, and you can earn a few extra
bitcoins this way, but it is important to remember that these are
businesses that get paid when people click on the links on their sites.
They are essentially kicking back a portion of what they get paid to
you. There is nothing illegal, or even immoral about this (you might
like what you see and make a purchase!), but they are frequently flashy
and may not be completely straightforward. All the ones that I have
tried (particularly bitvisitor.com) have paid out as advertised. It is
interesting to experiment with these, but even with the likely rise in
the value of bitcoin, you won't become a millionaire doing this. So,
unless you are an advertisement junkie, I would recommend you move on.
If you would like to try, simply Google "free bitcoins" or something
along those lines and you will find numerous sites.
Buying Bitcoin Hand-to-Hand
Finally,
this is going to be the real test of bitcoin. Can people easily trade
them back and forth? If this can't happen, then there can't really be a
bitcoin economy because retailers won't be able to use it. If retailers
can't use it, what earthly good is it? Fortunately, this is not really a
problem. iPhone is a bit of a hold out, but many smartphones have apps
(mobile wallets) that will read QR codes and allow you to send bitcoin
to whomever you want. You can also display a QR code of your address, or
even carry a card in your wallet with your QR code to let people send
bitcoin to you. Depending on what kind of wallet you have, you can then
check to see if the bitcoins have been received.
A couple of things to note:
When
you set up your wallet, if you click around a bit, you will see an
option to pay a fee to speed transactions. This money becomes available
to a bitcoin miner as he/she/they process bitcoin information. The
miners doing the work of creating blocks of information keeps the system
up to date and secure. The fee is an incentive to the miner to be sure
to include your information in the next information block and therefore
"verify" it. In the short term, miners are making most of their money by
mining new coins (check the section on What Are Bitcoins for more
information about this). In the long term, as it gets harder to find new
coins, and as the economy increases, the fees will be an incentive for
miners to keep creating more blocks and keep the economy going. Your
wallet should be set to pay 0 fees as a default, but if you want, you
can add a fee to prioritize your transactions. You are under no
obligation to pay a fee, and many organizations that process many small
transactions (like the ones that pan for gold described above) produce
enough fees to keep the miners happy. In clicking around your wallet, on
the transactions page or linked to specific transactions, you will see a
note about confirmations. When you make a transaction, that information
is sent out into the network and the network will send back a
confirmation that there is no double entry for that bitcoin. It is smart
to wait until you get several confirmations before walking away from
someone who has paid you. It is actually not very easy to scam someone
hand-to-hand like this, and it is not very cost-effective for the
criminal, but it can be done.
Where can you buy bitcoin like this?
You
may have a bitcoin Meetup in your area.You can check out
localbitcoins.com to find people near you who are interested in buying
or selling.Some are trying to start up local street exchanges across the
world. These are called Buttonwoods after the first street exchange
established on Wall Street in 1792 under a buttonwood tree. See if there
is one, or start one, in your area. See if you have any friends who
would like to try bitcoins out. Actually, the more people who start
using bitcoin, the larger and more successful it will be come. So please
tell two friends!Some people ask if it is possible to buy physical
bitcoins. The answer to this is both a yes and a no. Bitcoin, by its
very nature, is a digital currency and has no physical form. However,
there are a couple of ways that you can practically hold a bitcoin in
your hands:
Cascascius Coins: These are the brainchild of Mike
Caldwell. He mints physical coins and then embeds the private keys for
the bitcoins inside them. You can get the private key by peeling a
hologram from the coin which will then clearly show that the coin has
been tampered with. Mike has gone out of his way to ensure that he can
be trusted. These are a good investment strategy as in the years to come
it may be that these coins are huge collector's items. Paper Wallets: A
paper wallet just means that rather than keeping the information for
your bitcoin stored in a digital wallet, you print the key information
off along with a private key and keep it safe in a safe, in a drawer, or
in your mattress (if you like). This is highly recommended and cost
effective system for keeping your bitcoin safe. Keep in mind, though,
that someone could steal them or if your house burns, they will go with
the house and there will be no way to get them back. Really, no
different thancash. Also, as with Casascius Coins, they will not really
be good for spending until you put them back into the computer.* There
is software to make printing your paper wallets easier.
bitcoinpaperwallet.com is one of the best and includes a good tutorial
about how to use them.* The bitcoins are not actually in the wallet,
they are still on the web. In fact, the outside of the wallet will have a
QR code that will allow you ship coins to the wallet any time you
like.* The sealed part of the wallet will have the private key without
which you cannot access the coins. Therefore, only put as many coins on
the wallet as you want to be inaccessible. You will not be able to whip
this thing out and take out a few coins to buy a cup of coffee. Rather,
think of it as a piggy bank. To get the money, you have to smash it. It
is possible to take out smaller amounts, but at this point the security
of the wallet is compromised and it would be easier for someone to steal
the coins. Better to have them all in or out. * People who use paper
wallets are usually security conscious, and there are a number of ways
for the nefarious in the world to hack your computer.
Bitcoinpaperwallet.com gives a lot of good advice about how to print
your wallets securely. Some people have also asked about buying bitcoins
on eBay. Yes, it is possible, but they will be far overpriced. So,
selling on eBay might seem to be a better option given the extreme
markup over market value you might see. But, as with anything that is
too good to be true, this is too good to be true. As I will explain in
the next section, selling bitcoin this way is just way too risky.
How Not to Buy Bitcoin
In
the next section, I am going to explain a couple of key points about
buying from Bitcoin Exchanges. Before I do, let me give you a warning. A
short history lesson: When people first started setting up actual
business based on bitcoin, they used all of the tools available to any
merchant. They sold by credit card and PayPal. The problem with this
business model was quickly spotted: bitcoin transactions are not
reversible by anyone except the recipient of the money. Credit cards and
PayPal have strong buyer protection policies that make it relatively
easy for people to request a chargeback. So, nefarious individuals
realized this and began making purchases of bitcoin and then sooner or
later requesting a chargeback. And, since bitcoin is a
non-physicalproduct, sent by new and poorly understood technological
means, the sellers were not able to contest this. Because of this,
sellers stopped accepting credit cards and PayPal.
This was a big
problem for the currency: How to move money between buyers and seller?
Some business emerged that would credit you with bitcoin if you wired
them money. Very often these businesses would give addresses in Albania,
Poland, or Russia. The fact is that many of these did work and there
are a lot of stories on the forums of people who bought bitcoins this
way. But it took a lot of time and in the meantime the buyer just had to
bite his or her fingernails wondering if they would get their bitcoins
or kiss their investment goodbye. I expect that as bitcoin becomes more
acceptable and valuable, we are going to see a version of the Nigerian
Prince scam. So the warning is this: we now have exchanges and other
businesses that allow for moving money easily onto and off of exchanges.
Never wire money for bitcoin. It was a short-lived, and well-forgotten,
moment in the history of bitcoin. Next
, I will be talking about how to buy from a bitcoin exchange and give a review of the some of the best known exchanges.
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