Saturday, July 26, 2014

How to get started with Bitcoin

Many people are enthusiastic about Bitoin, but don't know how to get started.  I've found that the best way is to jump in and learn as you go.  If you're worried about losing money, just start small.

A lot of people are put off by the high price of Bitcoins (currently about $460 US per coin).  When Bitcoin first launched a few short years ago, they sold for $0.001 per coin and have traded around $1,200 at their peak in 2013.  Fortunately, Bitcoins are divisible into parts just like any other type of money.  Bitcoins can be broken down into 100,000,000 parts.  The smallest part (1 hundred millionth) of a Bitcoin is often referred to as a "Satoshi".  So, there is no need to worry about investing a lot of money.  Go ahead and buy $100 worth or if that's too risky try $5 worth.  There really isn't a minimum amount that you must purchase, though once you get down to the hundred thousanths or millionths place, you'll start to incur some errors due to volatility and rounding on the fiat side of the equation (sometimes referred to as Satoshi Spam).

Here is how you can get started in a two simple steps:

1.  Get a free Bitcoin Wallet
A wallet is a piece of software where you can receive Bitcoins and from which you can send them.  It contains a private encryption key, that is contained within the software.  Your wallet addresses are public encryption keys which you can safely give out to anyone in order to receive money from them.  When someone sends money, they basically send an encrypted message which state the amount of Bitcoins being sent.  That message is encrypted using the public key of the recipient.  Since the public key matches the private key contained in the recipients wallet, only the recipient can interpret the message and receive the coins.

There are several wallet options.  You can download a local wallet which will be stored on your device (desktop, laptop, phone, tablet, etc.)  You must be careful to back up these wallets (by simply printing out your wallet addresses) in case you lose your device or your hard drive crashes.

To download a good offline wallet, go to:  https://blockchain.info/wallet

A hosted wallet is online and can be accessed from any computer through the web.  A good password is needed in order to keep it secure so others can't log into your account.  I also recommend signing up for 2-step authentication which is offered by most online wallets.  Instructions for doing this are provided on those sites.

I like Coinbase for their online wallet because they are also a Bitcoin exchange, so you can load your wallet from a connected bank account if you wish.

To get started with Coinbase, click the link below and follow the on-screen instructions.

You can also download wallet software to your mobile devices on Android and now on iPhone as well. Keep in mind that Bitcoins kept in those wallets will be lost if you lose your device (or it breaks) if you do not back them up (print or screencap wallet addresses.  

2.  Buy your first Bitcoin
If you're set up with Coinbase and have a connected bank account you can purchase coins directly from their exchange into your wallet.  You first purchase will take up to ten days to process.  Coinbase may collect a very small fee for the service.

You can also buy them directly from regular people online or in person.  To find people in your area to trade coins with, open up a free account at www.LocalBitcoins.com.  This allows you to buy Bitcoins and meet new people at the same time.  It also allows you to pay cash for Bitcoins.  Transactions are listed on the website, and users can rate each other.  The website also allows you to buy/sell online rather than in person and includes an escrow service so you can avoid getting ripped off.

Benefits of Bitcoin  

  • No banks
  • No bank fees
  • Transactions happen very quickly (usually 10 minutes or less)
  • Transactions are encrypted and secure
  • You can be as anonymous as you wish
  • All transactions are public record and can be viewed by anyone
  • It is a deflationary currency, rather than an inflationary one (it appreciates in value over time).
  • Currency cannot be controlled by any central bank or government.  Minting of coins is done in a steady and predictable manner with a finite maximum number of coins (21 million Bitcoins total which will all be in circulation in the year 2140). 
Drawbacks of Bitcoin
  • Takes a little time to learn and get the hang of, but once you do it turns out to be fun. 
  • Once money is sent, there is no getting it back.  No ability to cancel a payment already made or do a "chargeback" as with credit cards.
  • Online/hosted wallets are only as secure as your username and password (as with online banking)... USE 2-STEP VERIFICATION!
  • Price volatility - This is due to a relatively tiny market capitalization in relation to central bank currencies, but it's getting more stable over time. 

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