Chapter 6 How to Get Started on Bitcoin – Understanding Cryptocurrencies

CHAPTER 6

How to Get Started on Bitcoin

Get Started on Bitcoin

The exponential growth of bitcoin in 2017 and emerging of numerous altcoins caught attention of people worldwide. If you have set your mind on bitcoin, then the upcoming chapters will provide more information about it from various perspectives such as end user, miner, investor, trader, or may be creator of another altcoin.

What Are the Various Methods to Own Bitcoins?

Various methods to own bitcoins is via buying, exchanging, or mining.

The most straightforward method to own bitcoins is via bitcoin exchange. Users can buy or sell bitcoins from the bitcoin exchanges using their local currency. Coinbase is one of the well-known digital currency exchanges to do so. One requires a coinbase wallet to perform these actions. Not only bitcoin, one can exchange other cryptocurrencies, including bitcoin cash, Ethereum, litecoin, and many more via this exchange using local currencies. A user can use their banks or credit cards to buy bitcoins. The exchanges have their stringent criteria for the verification of the users. The exchange services are not available in all countries, or may have partial services available where it is.

Another way is to look for people or agencies selling bitcoins. One must be extra careful in a way similar to conventional shopping. Localbitcoins.com allows filtering based on criteria, such as city, where one may decide to buy from. Local sellers willing to sell their bitcoins for cash or other cryptocurrencies are there. Various payment methods allowed are bank transfers, PayPal, MoneyGram, and so on.

Amazon accepts bitcoins as a payment method. If one owns an online store, then the goods or services can be sold in the same way. Many online retailers, including Amazon, eBay, allow a user to open their own store there, where they charge a fees for listing or selling items. The seller can start owning bitcoins by accepting bitcoins as the payment method for the goods or services offered. The seller needs to spread the word about accepting bitcoins as the payment method. Also, the seller needs a bitcoin payment processing service with which they will be able to convert bitcoins into dollars.

Technical people may choose to become miners. Miners participate in the verification process of transactions for a block, along with solving a computational problem, before a consensus method leads to the addition of that block on top of the previous block in the blockchain. Mining is not an easy job. Bitcoin has gone way ahead in the game, where a single person or desktop is not enough to perform mining due to gigantic computing power required. Mining for bitcoin at this stage does not appear to be a good idea. It certainly used to be a great thing to do in its early days of mining. Bitcoin incentive of mining continues to decrease. Even if the bitcoin value is way too high or may increase even higher, still the hardware and software required to performing bitcoin mining today does seem to be way too expensive to do so. One may look for another cryptocurrencies that are still in their starting phase, hoping that they will become as lucrative as bitcoin has.

Where to Store These?

Digital wallet is used to store bitcoins. Remember, bitcoin is a digital asset. There is no physical coin. Bitcoin address is a public key that can be shared with others. Wallet stores the private key, and not the actual bitcoin. A wallet is able to store several private keys. Generally, a wallet refers to an online location, though cold storage may also exists in the form of a physical USB drive, or paper, and so on.

Different types of wallets can be classified as electronic or cloud based, software based, hardware based, paper based, and mobile based. Another type of classification is hot or cold. An online wallet is called hot, and the offline wallet is called cold.

Online or cloud-based wallets are provided on the Internet. One should be on the Internet to access these. Coinbase is one such provider that is most well-known with a huge consumer base.

Hardware-based wallets are USB-like devices with a screen. The side buttons help navigation through the contents on screen. These wallets allow the user to allow more than one cryptocurrency in terms of private keys and public addresses. These can also be plugged to a laptop to view the contents. Trezor and Ledger are two leading companies that manufacture hardware wallets.

Paper-based wallets are what the name suggests. User prints the private keys and public addresses on a paper for storage. This is possible for bitcoin and some altcoins as not every cryptocurrency offers this. One can use these paper wallets for bitcoin transfers.

The process to obtain a paper-based wallet is a little bit technical, but worth it due to its safety, if the user takes extra precaution for its safety. For this, while being connected to the Internet, a user visits bitaddress.org and saves the webpage on a local drive. After locating the webpage, the user should disconnect from the Internet. A user can now open the webpage in a browser. The opened webpage shows a degree of randomness. When the mouse is hovered over the contents randomly, the degree of randomness changes. The user must get this number to 100 percent that produces the bitcoin address and a private key for printing on a piece of paper. It is always good to keep a backup copy of the private key and save in a safe location. The paper wallet needs same attention for the storage as other valuables in a safety deposit box. If a user leaves or refreshes the site, or generates a new address there, then the recent contents get lost, and a new pair gets generated, making the previous key not retrievable. The private key is like a password to a user account, hence should not be shared. Sharing of the private key may lead to access to all the bitcoins associated with that address. The user needs to provide this bitcoin address to other users to receive bitcoins from them. At blockchain.info, a user can check the balance or spend bitcoins there.

Cryptocurrencies have their own desktop wallet that can be installed on the desktop or laptop. Generally, users prefer to have a desktop wallet, instead of storing their bitcoins or other cryptocurrencies on the exchanges.

Mobile wallets are the applications downloaded on the Android and iOS. A user installs these on their smartphones to access bitcoin or other cryptocurrencies. Because of their ease of use and easy accessibility, mobile wallets are the most used ones. It is important to note that, although mobile wallets are very common, these may not be that safe as the mobile devices are always connected to the Internet.

Bitcoin had its original bitcoin wallet BitcoinQT. The very first users used it to store their bitcoins, along with access to the blockchain.

What Considerations Should I Put While Deciding on a Wallet?

Following various factors must be considered before deciding on a wallet for bitcoin or any other cryptocurrency:

1. Go for cold or offline storage, if one possesses big amount of coins.
The examples are paper wallets or hardware-based wallets. This way, a hacker does not have access compared to storage to devices connected on the Internet always.

2. Go for software wallets when doing small transactions.
The examples are mobile based, cloud based, website based, or from a device connected on the Internet. When a user is transacting a small amount of bitcoins, the risk of losing that amount reduces.

3. Backup the keys; create a physical copy.
In case of loss of software wallets, the bitcoins become irretrievable unless a backup copy in cold storage is available.

Currently, there are many bitcoin wallets, with their own set of features and functionalities. Various factors to consider are listed as follows:

Accessibility

Amount of coins

Anonymity

Ease of use

Security

Storage media of private keys and public addresses

Remember, a bitcoin wallet does not store actual bitcoins. In fact, bitcoins are not stored anywhere. A bitcoin wallet stores the private keys to one’s digital currencies, including bitcoin. A user can see the bitcoin balance using the public and private key. The private key resides in the wallet, which can be used to perform a transaction.

What Is a Good Time to Own Bitcoin?

I personally got interested in bitcoins and other cryptocurrencies as recent as 2017. While understanding the risk, I went ahead and invested in bitcoin and other digital currencies via an exchange using my credit card. I certainly missed the earliest wave, but invested in it with optimism that these digital currencies will soar higher. Again, I stuck to the philosophy of not investing more than affordability to lose it.

There is a drastic difference in the risk appetite of every single individual. One must use their own diligence, understand the risks and possible usages before deciding to own digital currencies.

How to Own Your Very First Bitcoin

The various methods to own your bitcoins are via buying, earning, or mining. Regardless, the first step is to have a bitcoin wallet. Previous topics have covered the considerations to select a wallet. Let us assume you have decided to own a physical wallet—hardware based or paper based due to safety reasons.

In case of an online wallet, a credit card can be set up for buying bitcoins or other digital currencies. In coinbase, one can set the digital currency, its amount, and frequency of transactions.

In this paragraph, I am going to share what I did to own my first digital currencies. On coinbase, I had set purchase of bitcoin, Ethereum, and litecoin for 100 U.S. dollars every Monday and the cycle repeated after three weeks. Hundred U.S. dollars’ worth of bitcoin on first Monday, 100 U.S. dollars’ worth of Ethereum on second Monday, and 100 U.S. dollars’ worth of litecoin on third Monday, with cycle repeating after that to purchase 100 U.S. dollars’ worth of bitcoin on an upcoming Monday. A confirmation e-mail confirms the transaction has taken place. I took this approach as an enthusiast to learn cryptocurrencies first hand. I do have interest in mining of other altcoins, but not bitcoin at this stage. Personally, I do not want to invest huge amount toward the hardware and software for bitcoin mining. However, I am totally open to perform mining of comparatively newer digital currencies, where I can utilize my home laptop. Also, for my online stores, I have decided to accept bitcoin as a media of exchange.

More I am getting into this world of digital currencies, more it is making me interested and create more confidence that these currencies are going to stay here, and evolve more. The blockchain has use cases wherever imaginable. This is certainly a revolution in the digital world and has the potential to change how we are going to do business in the future times. I feel glad to be part of these digital revolutions, that is, World Wide Web, dot com, and upcoming blockchain. It gives me more motivation to learn more about blockchain and cryptocurrencies from online courses so that there is enough wisdom as an end user and as a subject-matter expert on this topic.