Getting started with Bitcoin
Buying Bitcoin for the first time can seem like a daunting prospect. However, it is not as complicated as it might appear.
Bitcoin was the cryptocurrency that kickstarted the current boom in decentralised, virtual currencies when it launched in 2009. Since then many other currencies have emerged – more than 1,300 according to some estimates – but Bitcoin remains the best known.
Bitcoin’s value has been volatile, and it has proved as attractive to speculators as well as those who wish to use it as currency. At the beginning of 2017 a single Bitcoin was worth $1,000. By the end of the year it had risen to more than $14,000. Since then the value has reached enormous highs followed by precipitous drops – often with little warning.
With that in mind, it is worth watching for a little while before buying Bitcoin so that you understand what you are getting into. Don’t worry about how much a single coin costs – it’s possible to buy as little as 0.00000001 of a Bitcoin.
Why use Bitcoin?
One of the key ideas behind Bitcoin is that it is decentralised. The networked nature of the blockchain – where every transaction is recorded – means that a central bank or a government cannot manipulate the currency. If you are in a country with an unstable currency and rampant inflation, for example, then this would be a significant advantage.
A traditional, or ‘fiat’ currency is also prone to inflation. As more money is printed, the value of existing money falls. In contrast, the number of Bitcoins is capped at 21 million, which means its value will increase rather than fall. This is one of the things making it an attractive investment for some.
Bitcoin was originally very popular for transferring money between countries because of its low transaction fees. Money transfer services have had to cut prices to compete, so this advantage has decreased recently, but Bitcoin remains attractive for any transaction, such as a credit card payment, that comes with large fees.
Finally, Bitcoin transactions are near-instantaneous and, thanks to the blockchain, virtually impossible to alter. This adds a layer of security and convenience that is missing from say, credit card transactions.
What can I do with Bitcoin?
Like any technology, Bitcoin has advantages and disadvantages. If you visit your local supermarket, it’s unlikely that you will be able to pay with Bitcoin. It is not yet ready to be used as cash. However, it can be used as payment in many places online. Microsoft accepts Bitcoin in its app stores, for example, while online retailer Overstock has accepted it since 2014.
As mentioned above, it can be used as an efficient means of transferring money across borders. And, given that its value continues to increase, Bitcoin is increasingly being treated as an investment asset, though the volatility and lack of consumer protection can make this risky.
At its most basic, the value you get from Bitcoin could be its increasing price, see above.
At the moment, there isn’t anything that you can do with Bitcoin that you can’t do with a traditional currency, so the value to you will depend on whether it makes certain tasks, such as transferring money, more efficient.
How to buy Bitcoin
To buy Bitcoin you will need to use an exchange, broker or an online marketplace. Cryptocurrencies, though virtual, must be stored somewhere so you will need a ‘wallet’ too.
Most exchanges and brokers will require you to sign-up and link your traditional bank account so that they can charge you. Some will require you to submit identifying documents as you would to a stockbroker or bank. Some will provide a wallet – others will require you to have a third-party wallet.
Your wallet is where you store the private key that allows you to access your Bitcoins and that you use to sign transactions and transfer funds. It is extremely important to keep this safe because losing it means losing access to your wallet. And if somebody else gets hold of it then they will be able to access your wallet.
The private key will also make it possible to move to a new marketplace; once you have bought your Bitcoin, you are not tied to the broker that sold them to you. You can buy or sell from a different broker later. You can also move to a new wallet, if you wish.
For any serious Bitcoin user, having your own wallet is essential. The main reason to do this is security. The nature of Bitcoin means that it is a ripe target for hackers hoping to steal from exchanges or users. Exchanges can – or should – have more resources to devote to security than the average user, but they are also more attractive targets.
The lack of regulation of cryptocurrencies means that if your coins are stolen from an exchange there is unlikely to be much recourse. In contrast, if money is stolen from your bank then – assuming you didn’t give the thief access – you would get your money back.
In the current situation, it makes sense to take responsibility for looking after your own Bitcoins. And as a further security measure, it is worth having more than one wallet.
Types of Bitcoin wallet
There are four – arguably five – types of Bitcoin wallet. A web wallet stores your keys on the server of a company that provides the wallet service. This is how an exchange provides a wallet, too. The advantage is that you can access your funds from any computer with an internet connection. The disadvantage, as discussed above, is that these services are targets for hackers. There have even been cases of services simply disappearing – taking their customers’ coins with them. Notable services include Coinbase and Blockchain.
A mobile wallet stores the information on your smartphone. This has the benefit of being able to take your wallet with you – just as you can with a real wallet. The disadvantage here is that, if you lose your device then someone might be able to gain access to your information. Also, because the Blockchain ledger is several gigabytes in size, most mobile wallets use a simplified version of the technology, which means you might not be able to use your coins in every situation. Notable apps include Airbitz and Bitcoin Wallet.
A desktop wallet stores your keys on your desktop or laptop computer. This is more secure than a mobile or web wallet but still carry’s some risk of hacking because the device is connected to the internet. Also, if your computer fails and the information on it cannot be recovered, then your wallet is lost. Notable options include Electrum and Bitcoin Core.
Finally, there are hardware wallets, which are like USB sticks and the most secure way to store Bitcoin. Often, they have a screen and physical buttons to add additional layers of security. The downside here is that they are expensive – some models can be around $100 – and, of course, they can be lost. Notable models include KeepKey and TREZOR.
A fifth option is a paper wallet. It’s possible to print out both the public and private keys and store them in your actual wallet. This is safe so long as nobody gets hold of the paper.
Most serious Bitcoin investors will have multiple wallets. They will keep the bulk of their coins in a hardware wallet and have small amounts available in web and/or mobile wallets for when they need them.
How to get a Bitcoin address
A common misconception for newcomers to cryptocurrency is that the Bitcoin wallet ID is the same as a Bitcoin address. This is incorrect. Your Bitcoin wallet has a unique ID, which you use for logging in. This is created when you sign up for a Bitcoin wallet and remains the unique ID for that wallet for as long as you use it. The wallet ID works like a username – you will use it to login to your wallet, followed by your password and then any other security measures you are using, such as two-factor authentication.
A Bitcoin address is not the same as your wallet ID. It is a token used to send someone a Bitcoin payment. In that sense it is like an ‘address’ but unlike, for example, an email address, there is no corresponding ‘from’ address in a transaction like this. An address is used only as a destination to send coins too. Nothing in the address identifies the sender or carries any balance.
Bitcoin addresses are usually 34 characters long and made up of a random selection of uppercase and lowercase letters. An address can still be valid if it is shorter than 34 characters – it’s possible for a valid address to have as few as 26 characters. Unlike your Bitcoin wallet ID or your email address, Bitcoin addresses should be uniquely generated for each transaction.
In the popular Coinbase wallet, for example, all you need to do is to go the Addresses section and click ‘Create New Address’. Some software will automatically generate a new address for you each time you create a payment request. For example, Bread Wallet automatically creates a new address with each transaction.
Although addresses are valid forever and can be used more than once, it is considered bad practice to do so because multiple payments to the same address could eventually be used to identify the recipient, which could be a privacy or security threat.
Once you know how to do it, creating a new Bitcoin address is straightforward and it will help you to get the most out of the cryptocurrency.