So, your friend has just gifted you some Bitcoin, and you’re excited to dive into the world of cryptocurrency. But hold on – before you start spending or trading, it’s essential to understand the basics. Here’s a beginner-friendly guide to help you navigate your newfound digital treasure.
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Bitcoin runs on more than 1 million computers around the world, and it is encrypted. This means is that a government can’t stop or change Bitcoin, a large company can’t stop or change Bitcoin, it is the most secure money the world has ever known.
At the heart of this system are public keys and private keys. Think of them as your digital signature. The public key is akin to your bank account number – it’s safe to share with others for receiving payments. On the other hand, the private key is like your PIN – it should be kept secret as it grants access to your funds.
Paper Wallets vs. Electronic Wallets
A paper wallet is a single sheet of paper containing your Bitcoin public and private keys. It’s paper so it is offline, making it immune to online hacking. Creating a paper wallet involves generating keys securely and printing them out. The process is free, easy, and anonymous, and you can have more than one. The paper wallet provides a high level of security, but it’s crucial to store the paper safely to avoid loss or damage. If you lose your paper wallet, specifically if you lose the private key, you have lost your bitcoin.
Electronic Wallets
Electronic wallets, or digital wallets, come in various forms – software, mobile apps, or hardware devices. They offer convenience and accessibility, allowing you to manage your Bitcoin from anywhere with an internet connection. However, electronic wallets are vulnerable to online threats like hacking and malware, so it’s essential to choose reputable providers and implement robust security measures. One nice feature of some electronic wallets, is that it can keep an encrypted backup. If you lose your wallet, you can recover it and your private key, this is a nice feature. I discuss a popular electronic wallet below.
QR Codes and Number Codes
Here is an example of a Public Key shown as a QR-CODE. Point your smart phone camera at this and it reads “bitcoin:3LG5bbP4yGSJjVVLb1Y5fAHW4zBp9FcKjs”. If you had pizza with a friend and want to contribute $10 in Bitcoin, your friend can give you their public key and using your private key you can send the equivalent of $10 to your friend using an exchange.
Checking your balance. What is your Bitcoin worth?
Using the same Public Key example, go to any browser, key in “blockchain.com/explorer/addresses/btc/” followed by public key “3LG5bbP4yGSJjVVLb1Y5fAHW4zBp9FcKjs” and you can see the balance and the last few transactions. Click on the complete URL to see what it looks like: http://blockchain.com/explorer/addresses/btc/3LG5bbP4yGSJjVVLb1Y5fAHW4zBp9FcKjs.
When the media says that Bitcoin is only for drug dealers and smugglers, it is either a lie or only the not-so-smart would do this, given every single transaction is in plain sight. It does not show who is making the payments but that is not so difficult to figure out. The point is, your use of Bitcoin is not private.
Fun party trick: Find a popular Youtuber that accepts Bitcoin and use their
Public Keyto see how much they are making.
Exchanges for Holding Bitcoin
Cryptocurrency exchanges are platforms where you can buy, sell, and trade Bitcoin. They often provide wallet services, but remember: when you store your Bitcoin on an exchange, you’re entrusting them with your private keys. While exchanges offer certain conveniences, they are susceptible to hacks and regulatory risks. If the exchange company were to go out of business, you can lose your Bitcoin. If the company gets hacked, you can lose your Bitcoin.
Wallet Terminology, Custodial Wallets, and Non-Custodial Wallets
Custodial Wallets, Managed by third-party services like Coinbase or Robinhood. They handle the security and storage of your Bitcoin on your behalf. While convenient, custodial wallets mean you don’t have full control over your private keys, which may go against the ethos of decentralization. Example: Coinbase & RobinhoodNon-Custodial Wallets, Non-custodial wallets give you full control over your private keys. Examples include software wallets like Electrum or hardware wallets like Ledger Nano S. While they offer maximum security, you’re responsible for safeguarding your keys and ensuring proper backup. Example: Ledger Nano S & Paper Wallet
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.
Should I Keep or Sell My Bitcoin?
Great question! You can do either, or both. Voltility is a word to describe Bitcoin. If you keep your Bitcoin, for your sanity, you would be advised to not watch too much. If you will be buying a car or a house in the near future, you might look for a high point and sell some. The nice thing about the US Dollar is it is stable, negative but stable. If you put that inheritance under your bed, in 20 years you will be disappointed with what it is worth. If you were given $25 in Bitcoin for graduation in 2018, it is now worth $250, a 10X increase in 6 years. Sell $25, you have removed the principal, and everything else is gravy. Also note, that the 10X gain is a capital gain as far as the IRS is concerned. Most of my Bitcoin is in a Roth IRA, and gains are tax-free.
Conclusion
Receiving Bitcoin from a friend is an exciting opportunity to explore the world of cryptocurrency. Whether you opt for a paper wallet, electronic wallet, or rely on a service provider, understanding the importance of public and private keys is paramount. Choose a storage method that aligns with your security preferences and risk tolerance. Remember, with great digital wealth comes great responsibility!
References: Antonopoulos, A. M. (2014). Mastering Bitcoin: Unlocking Digital Cryptocurrencies. O’Reilly Media. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf