There is a lot to know about Bitcoin. This post continues where the first post left off, Someone Gave Me Some Bitcoin. Can there be 2 private keys? What if I don’t have a private key? There is nothing behind Bitcoin so why is it worth anything?
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There is nothing behind Bitcoin so why is it worth anything?
I asked my friend Chat over at ChatGPT and got two responses:
- Bitcoin’s value comes from its usefulness and the trust people have in it. Like digital gold, its worth is based on its scarcity—there’s a limited amount, just 21 million. People believe in its security and the technology behind it, which lets them send money directly to others without a bank. Its value, like anything, depends on what people are willing to pay for it.
- Bitcoin’s scarcity is built into its protocol: only 21 million bitcoins will ever be created. This limit is enforced by the network’s underlying code, which halves the rate of new Bitcoin creation approximately every four years in an event known as “halving.” This design mimics precious metals and combats inflation, ensuring Bitcoin remains a scarce digital asset.
The snarky response to someone who says Bitcoin is not worth anything:
OK, if they are not worth anything, please go get a few hundred of them and just give them to me, thanks!
What if I don’t have a private key?
I would ask, when you were given Bitcoin, what were you given? If it is a half dollar sized token with the Bitcoin logo on it, well it is likely just a souvenir and not worth more than a trinket. By chance, if there is a USB adapter that slides out of it, perhaps it is a hardware wallet, yet I have never seen one with that description.
Perhaps you were given an account on Robinhood or some other service that will hold the Bitcoin and private key for you. This is also unlikely, or at least you would know. In the US there are user identification requirements for custodial accounts, for tax purposes they need to know who owns each account.
If this is a friend that give you some Bitcoin, then you have a resource that you can ask questions.
Keeping private keys seems like a hassle, is there another way?
You do not need hold your own keys, in fact most Bitcoin is held in what is called a custodial service. Coinbase.com is the largest custodial service. That said, Not your keys, not your coins!
The phrase “Not your keys, not your coins” is a popular adage in the cryptocurrency community, emphasizing the importance of private key ownership for securing your crypto assets. It means that if you do not have control over the private keys of your cryptocurrency wallet, you do not truly own the coins in that wallet. This phrase is often used to advise against relying on custodial services, like certain exchanges or wallets, where the private keys are managed by a third party. In such cases, you are dependent on that third party’s security and integrity to access and use your cryptocurrency, which can be risky.
How can I keep my Bitcoin safe, yet have the flexibility to use it when I need it?
What many people do is keep most of their Bitcoin in cold storage, and then keep a small portion in a costodial service such as Coinbase. There are just a few steps to set this up.
- Open a Coinbase.com account. You will need to send them a photo of your state issued ID and set up some sort of 2-factor authentication. I use YubiKey for 2FA, and the topic is discussed below.
- Transfer some bitcoin to your new account.
- Download and install the Coinbase app, use the same YubiKey for authentication in the app.
How do I give $10 to a friend for pizza?
To contribute $10 for the pizza, the other person will have a QR code for their public key ready.
- Open your Coinbase app
- Hit the 9-dot menu and Send
- Select Bitcoin
- Hit the scan button and scan your friends public key
- Enter $10 for the currency amount You are done, no need for the green stuff. It might take 30 minutes or so to appear on your friends account.
Alternatively, simply take out $10 from your wallet and you’re set. It’s wiser to spend that money on pizza, as tomorrow that $10 might only be worth $9.99 or a similar amount due to inflation. However, it’s also fair to note that Bitcoin’s value could decrease significantly or, conversely, increase substantially.
The cumulative rate of inflation since the Federal Reserve was created in 1913 is 3034.6%. If your Great Grandma had put the equivalent of $10 under her pillow in 1913, it would be $0.003 today.
Can I have more then one Public Key?
A Bitcoin address has only one public key, however the key is just a string of letters and number, and there can be many copies. The friend that gave you some Bitcoin may have kept a copy of the private key. If you don’t completely trust this person, you should make a new wallet and transfer the Bitcoin to the new wallet. This could be a paper wallet, free, a USB stick, or a hardware wallet such as the Ledger Nano S, as discussed in the previous Bitcoin post.
If you don’t completely trust this person, you should make a new wallet and transfer the Bitcoin to the new wallet.
People are known to put a copy of their private key in an ultra safe place, perhaps your Mother’s safe deposit box or that of an ultra-trusted friend. Every time you make a copy of a private key, you increase the chances of some bad actor finding it. If the key is in three different places, there are three times the chances that the key can found and the funds stolen.
Is crypto subject to capital gains taxes?
The IRS currently considers cryptocurrencies “property” rather than currencies, which means they’re treated a lot like traditional investment (such as stocks). Selling at a profit triggers capital gains tax, while selling at a loss may allow you to take deductions.
Two-Factor Authentication with YubiKey
YubiKey 5C NFC - Two-Factor authentication (2FA) Security Key.
- From your laptop, insert the key into a USB port and press the circular button.
- From your phone, press the key against the back of the phone and the phone will authenticate using NFC.
These devices are nearly indestructible, put it on your keyring and you will always have it. Not only will it help you secure your Coinbase account, but it works with Google Gmail, and many other online services.
Ledger Nano S
Here is a popular hardware wallet, The Leger Nano S Plus, and the one I use. It works when plugged into your laptop or cell phone. It is easy enough to use such that the fly you can send $10 to the person that bought the pizza.
