Creating a bitcoin wallet
To take part in the Bitcoin economy, you need a Bitcoin wallet. This contains your private keys which give you access to your Bitcoin, along with public addresses you can give out when you want someone to send you Bitcoin. So where can I get a Bitcoin wallet you ask? That’s a very good question because scammers have created Bitcoin wallets that look trustworthy but end up stealing your money. Since it is decentralized, there is no one official place for Bitcoin information. But I’ve long trusted bitcoin.org’s listing of wallets, especially since most of the ones they feature are open-source.
On bitcoin.org you scroll down and click Get started with Bitcoin. Instead we’ll go to Choose your wallet, and here we are. We’ll start by looking at software wallets. They’re available for a variety of platforms. We’re going to use an Android wallet, but first I want to point out something that might trip you up by going to Bitcoin Core on the Mac side.
To do that, we go up to Desktop, and Mac, and there it is. This is the oldest and most basic wallet. Bitcoin.org provides additional information on each wallet when you click. Here we see that Bitcoin Core on the Mac has something called full validation. That means that it downloads the full blockchain, which includes a record of every Bitcoin transaction that has ever occurred. Now that’s great for security, but also means downloading over 140 gigabytes of data the first time you use the wallet.
That’s like downloading dozens of full-length movies. It’ll take a long time and it could cause problems with your internet service provider. So instead, we’re going to go to my Android device and install a different wallet called Electrum. It only downloads an abbreviated version of the blockchain, relying on outside sources for additional security. To download, we go to the Play Store and search for Electrum. And there it is, Electrum Bitcoin Wallet, and install it in the usual way.
I won’t go into the specific features of the Electrum Wallet as you might choose a different one. The important thing is that it includes ways to send and request money among other features. There are several steps in installing any wallet, just follow whatever instructions it gives you. On the plus side, software wallets are always in your control and read to be used, but you must maintain them with security updates, and such plus wait for the blockchain to sync for many of them. Also, if you lose the device or your password, and you haven’t made a backup, that’s it, you simply lose access to all your money.
The next kind of wallet stores your Bitcoin online. These use an external service that usually has control of your money. Besides those online wallets listed on bitcoin.org, most places where you can exchange Bitcoins for dollars and euros, also let you store your money on their servers. Coinbase.com and blockchain.info are two examples. The good thing about online wallets is that they don’t require any maintenance, and they’re accessible even if you’re using someone else’s computer or phone.
The bad thing is that you’re trusting someone else with your money, and that’s been a big problem in the past. Next, we come to paper wallets, where you start with either a software wallet or a web wallet, and then you essentially print out the private part of your Bitcoin wallet and store the physical piece of paper in a safe place. They’re the safest kind of wallet, because they’re completely physical. They simply can’t be hacked, except through physical access. And they can be carried around and transferred just like paper money.
But on the other hand, using money from a paper wallet is difficult. You first must convert it back into digital form. In Electrum, you can export your private keys in RAW form by going first to Receive, and then clicking the public address here. That shows a list of addresses in your wallet, as each wallet can have multiple addresses, click on the one you want, and then click Details, and Export Private Key. You’ll have to enter your password here.
Other wallets, including online wallets, have similar features. As part of your Bitcoin security strategy, be sure to test them out by exporting your keys and then importing them into another computer. Finally, there are also dedicated hardware wallets. These vary quite a bit in features, security, and interface. They’re not widely used, although possibly worth investigating if you become a serious Bitcoin enthusiast. There’s a lot of activity happening in Bitcoin wallet development, with new features appearing all the time.
Any wallet will work, and you can always change which wallet you use. Simply install the new wallet and send all your Bitcoin to yourself at the new address. But whichever you choose, treat it like a real-world wallet, because it contains real world money.
Buying and selling bitcoin
Bitcoin is interesting, but a lot of its value comes from the fact that people are willing to exchange it for dollars, yen, euros, and other national currencies. The most direct way to buy and sell bitcoins is person-to-person, but although it’s technically easy, in practice, this is the most complicated method. The first hard part is finding someone who wants to make the exchange. If you happen to know someone, that job is done, but there are also online directories that serve as match makers, such as localbitcoins.com where you can find a list of people near you who are willing to make the exchange in person or online.
Many areas also have events where bitcoin enthusiasts meet. Meetup.com is one good place to find them. When you sell or buy directly, only accept cash or a valuable, physical object as payment. Checks do bounce and then you’re left with nothing. Security is crucial. The person you’re meeting knows that you’re carrying something of value and may simply rob you. Some police departments will let you execute transactions in the station. Just go in and ask.
Always use a familiar system. If they suggest escrow or another unusual setup, it may be a trick. Finally, wait until the transaction is confirmed by the bitcoin network before considering it done. A second way to buy bitcoin is through exchanges. Like the stock market, exchanges are places that not only match sellers with buyers, but also manage the transfer. You deposit your money or bitcoin, then set an offer to buy or sell at a certain price.
Exchanges typically have a dashboard like this one on Bitstamp.net. It shows bitcoin’s price over time right here, information about bids that individual buyers have offered, and the asking prices that sellers want, and then down a little bit further, we have a chart of them meeting in the middle. Exchanges are a great place to set future orders, like buy when the price reaches this level and then sell it when it reaches this level, but that means you must leave either money or bitcoin in the exchange and such exchanges have a bad record of just taking people’s money and disappearing.
A list of exchanges is at cryptocoincharts.info. Just go over and click exchanges and there’s your list. The last way to buy and sell bitcoin is through institutions that simply sell their own holdings. One of the biggest is coinbase.com which I’m logged into here. It’s very straight-forward. You load your bitcoin or money from a bank account, or you use a credit card. Then, you say how much you want to buy or sell, and then you check the fees and terms, and then simply click to make it happen.
It looks something like this. Go up to buy or sell, scroll down, then say I want to buy $50 of bitcoin. Type in 50 here and it shows me how much I’m buying and then, of course, you just continue the process right here. Institutional sellers are great for buy it or sell it now orders, because the prices and fees are clear. But the same caveats apply as for exchanges. You’ll have to setup a payment system. If it’s a bank account, expect it to take a few days to get confirmed by the institution.
Some exchanges also accept credit cards. The fees can be high on the order of a few percent, so familiarize yourself with all the terms ahead of time and, as with exchanges, don’t leave too much money or bitcoin in the accounts when you’re not actively trading. Your bank account or paper wallet is safer. Finally, whenever you deal in bitcoin, remember that you’re effectively dealing in money. Use the same precautions, trust others selectively, and consider your recourse in every situation.
Sending and receiving bitcoin
Bitcoin is worthless without a way to send and receive it. If you bought Bitcoin from an exchange or institution, that place will provide a way for you to send Bitcoin to your wallet. The process is similar regardless of whether the wallets are online or in hardware or in software. The steps are as follows. First get the recipient address. This is usually represented either by a string of alphanumeric characters, which you’ll copy and paste, or as a QR code, which you capture with your device’s camera.
Then enter all the details. Most important are the amount and the recipient address. You might also add notes to accompany the transaction. These will be written into the public block chain, so don’t include any secret data. If you’re using a wallet that doesn’t automatically calculate the transaction fee, you can figure out how much to include by doing a search for Bitcoin transaction fee calculator. Then you confirm all the information and hit send. The Bitcoin should show up in the recipient’s account within about 10 minutes, although it could be much longer if your transaction fee wasn’t high enough.
You can track your transaction’s process through the system. See the video, Tracking Bitcoin, in this course for details. Now let’s go ahead and send some money. We start by getting the recipient’s address. I switch to Electrum and tap the receive button. Then I tap copy to get the address copied to the clipboard. Then I go back to Coinbase.com. I select accounts and click on my Bitcoin wallet. From here I see the button to send.
Now at the top of the screen you’ll see a warning that a minor fee will be added. This is true for all times when you send Bitcoin from one wallet to another. It’s not specific to Coinbase or any other online wallet. I’ll enter my Bitcoin address by pasting it in, decide on the amount, in this case $20. And you see that it automatically gets converted into the appropriate amount of Bitcoin. And then I’m about to click continue, but I see that it won’t accept my input.
That’s because of something sort of unusual. If we scroll back up, we see please enter a valid BTC address. This is a common problem. You see the word Bitcoin at the beginning with the colon. That’s because when I copied the address, it didn’t just copy the address, but also a request for money to be sent there. All I must do is delete the word Bitcoin and colon, and then everything should be okay. And indeed, it is. We get a confirmation screen. This all looks good and click confirm.
And there we go. Now remember, the recipient won’t be able to spend this Bitcoin until it’s been confirmed by the Bitcoin network, but the process has begun. And we can see that by going back to our Electrum wallet and tapping on balance. And there’s our transaction underway, along with one we did a little earlier today. Whatever wallet you use, here are a few things to keep in mind when sending or receiving Bitcoin. First, payments are completely irreversible.
Be sure you want to send the money before you hit send. It’s easy to fool yourself into thinking that small numbers like a thousandth of a Bitcoin mean small financial value, so confirm the amount in a familiar currency like dollars or Euros before sending, especially if you’re new to Bitcoin. Finally, allow enough time for the transaction to get confirmed. The Bitcoin network confirms a block about every 10 minutes. For extra security, wait for several blocks to be confirmed before considering it a done deal.
How to Safe Guard your Bitcoin
A lot of Bitcoin value has been lost or stolen over the years. In many cases, the loss was preventable. We’ll look at different ways you can lose Bitcoin, and how to protect against those losses. First, here’s the best way to protect Bitcoin for long term storage using a paper wallet, also known as a cold wallet. The steps are, export your private keys, print them, store them, and restore when needed. The method varies from wallet to wallet.
Here’s how it works on the Electrum wallet on Android. We first click Receive. And then tap an address. This brings us to our list of addresses. We’re only interested in the addresses that have Bitcoin in them, so we tap this All until we come to Funded. Those are two Bitcoin addresses where we’ve received money. Then we tap an address and click Details. And Export private key.
And then the code you entered when you installed Electrum. You now see your private key. There are many ways you could save it. For example, by taking a screenshot here, or if your wallet allows it, just export the text. But once you do that, remember to print it and store it, because remember, anyone with access to this information can take your Bitcoin. So that’s the best way to stay safe, but paper wallets are not very practical if you want to use your Bitcoin. So, let’s look at some ways that people have commonly lost Bitcoin from digital wallets, and your best defenses for each.
First, there are losses that have nothing to do with Bitcoin itself. Scams. Some work like pyramid schemes, while others try to convince you to transfer your Bitcoin to another address, or put your password in a website, or something like that. The usual tips apply. Remember that if it can be easily sold, Bitcoin is money. So, question every interaction you have with it. And although Bitcoin is new and cool, bad deals are still bad deals.
Now, onto the kinds of losses that are specific to Bitcoin. The first is one that I think is tragically under acknowledged by the Bitcoin community. Sometimes Bitcoin just sort of disappears. That can be through technical problems like a hard drive crash, or user error such as forgetting a password or accidentally deleting a file. Or physical damage, like dropping your phone in a lake. One researcher estimated in 2014 that 30% of all Bitcoin at that point had been lost forever.
He calls this lost value zombie Bitcoins. So again, a paper wallet is your best defense. A different kind of loss occurs when people leave their Bitcoin in a remote wallet, which then fails. The biggest example of this was when the Bitcoin exchange Mt. Gox went belly up in 2014, taking hundreds of thousands of Bitcoins with it. But Mt. Gox is far from the only example. The solution is to control your coins by storing only a small amount on remote servers.
Realize that Bitcoin companies don’t have to pass the same tests as a regular bank. So, plan of time. Some of those remote sites let you export your private keys to reimport them in a different wallet. Test out those systems before putting a lot of money in them. Finally, we come to the kind of loss that occurs a lot less than people think. Direct theft from your personal computer. Basic computer security is your best defense. First, password-protect your computer and your Bitcoin wallet.Second, never walk away from an unlocked computer. And finally, be careful about downloads, especially as there’s now malware that specifically targets Bitcoin wallets. The fact is, Bitcoin represents a whole new form of value, one that we as a population aren’t used to protecting. But despite all these scary stories, people around the world hold and use Bitcoin safely, and so can you.