Hello!
Someone today feels more than confident in using cryptocurrencies, but there are people, who are just starting to explore the opportunities provided by cryptocurrencies. My occupation suggests using cryptocurrencies every day, so, I want to offer a kind of a FAQ for beginners who have heard about bitcoins but have never come across digital currencies in practice. I am going to suggest a step-by-step guide for people, who want to buy and sell bitcoins, as well as other cryptocurrencies and Bitcoin forks (for example, bitcoin cash bch). I will start with theory and move on to practical examples.
The article covers the following subjects:
Well, let us look at all the ins and outs of bitcoin.
What is Bitcoin?
If you are a newbie in this field, I recommend you to start getting into the crypto world with Bitcoin or BTC.
Bitcoin is the most popular cryptocurrency in the world. It has the same features and functions as ordinary currencies; this is a payment means. However, there are significant differences, except the prefix “crypto”. You can buy, for example, a new computer for bitcoins. You can pay back a debt to your friend. You can trade bitcoins on an exchange. Or, you can wait until the BTC price will be much higher against your local currency and make a profit from selling BTC. Everything is like with an ordinary currency. But...
Cryptocurrency can be operated only on the Internet. The BTC coins that can be seen on the Internet are basically a code that is on the physical medium. The currency appears by means of performing computation operations on computers all over the world and the number of coins that can appear is limited. No one prints this money. No one can control this network, as you will have to own the majority of the computers in the world so that you can somehow influence it.
The currency is stored on bitcoin addresses. A Bitcoin address is a set of Latin letters and numbers 34 characters long (case is important!).
Bitcoin can be operated by means of blockchain technology.
What is blockchain?
Blockchain is a chain of blocks (I am always with you, your Captain Obvious). It is like a data logg or a spreadsheet that contains entries of all the transactions in this currency. It is constantly updated with a new “row” or “column”, which is a block.
Each new block contains an update of the transactions journal. The block is stuffed with your bitcoins transfers, forms and proceeds for confirmation of the network that consists of millions, or, may, billions of computers all over the world. The network approves the block, bitcoins are sent to the destination addresses, and the computers that took part in the approval receive a reward.
This is a very rough description, you can find more exact and detailed information here or wait for the next article :)
To use bitcoins, you do not need to understand how a blockchain works. We all use computers but we may not know what a motherboard is or how a graphic card works. It is enough to have a general understanding, to take part in a talk if there is a case. If there are enough people who are interested in how blockchain works, I’ll describe the process in more detail, with pictures and examples next time. In the meanwhile, let’s go on.
As an example, I’ll use an electronic diary of a student. This is a kind of data log too. A student’s marks can only be seen by teachers, parents, and this student. In the blockchain, everything is in the public domain, each transfer can be found on the network, you only need to know the unique id (hash) of the transaction, the destination address or the address from where the transfer was made. For each BTC-address you can find the history of all its transfers. Everything is as open and transparent as possible.
You can change past marks of a student in an electronic diary, but you can’t do that in the blockchain. No one can change the details of your transaction or your deposit. Everything is as safe as possible and your account is protected from outside interference.
By the way, these electronic school diaries can be kept using blockchain technology!
What’s the point in using bitcoins? Are there any benefits?
- It is completely confidential. You can pay for anything with bitcoins. No BTC address is associated with your name, residence or anything else that is usually required in the bank.
- Low commissions charged for transferring any amount of money to any part of the world. It is especially beneficial if you want to transfer a big amount of money, compared to payment systems or banks. It is only important that the receiver accepts bitcoins.
- It is quite easy to use. You just download a wallet, install it, and there you are! No commissions for connection paid apps or anything else.
- It is decentralized. The chain of data (blockchain) is allocated among all the participants of the chain, there is no organization that controls this network, all participants have equal rights.
- There are no servers, and so, there can be no DDoS attacks, and so, it has a very high level of safety. Also, a high degree of system security is guaranteed by the complexity of cryptographic keys. No one can steal your bitcoins from your wallet if do not make an error yourself. No one can pry into your transfer, no one can block it or ask about the source of income.
- You can trust the blockchain, it is protected in a more complex way than your bank credit or debit card, but it is fully transparent at the same time
- Decentralization provides high speed of transaction processing, as the network capacity is basically the capacity of a huge number of computers. No banking system can compete with it.
- And of course, most readers are interested in a way of making profits from bitcoin rate to the fiat currency. This involves high risks, but it is very exciting. Due to BTC high volatility (changes in the price), you can make good money on BTC. You buy bitcoins → you hold bitcoins on your wallet for some time → BTC price has increased → you sell it = profit.
- The transaction can’t be cancelled. It is an arguable advantage. If the transfer entered bitcoin blockchain, it will either gain the needed amount of confirmation and the recipient will receive it; or it will got stuck in the network if you have grudge money for commission (it can be increased even after the transaction was made). In the second case, you can’t get back your bitcoins.
Why does bitcoin cost so much? What affects bitcoin price?
If common fiat money is backed with a country’s GDP and its policy, then bitcoin is not backed with silver, or gold, or the GDP. Bitcoin is pure mathematics. It is backed only with investors’ interest in this technology.
The rates of BTC/USD, BTC/EUR and so on, just like with normal currencies, depend on the market. For example, there is published the news that a country accepted BTC as a legal payment means, the BTC price rises. Or, a large Internet shop announced that now accepts payments in bitcoins, the bitcoin rate is rising. Otherwise, if some country officially bans bitcoins in its territory, the bitcoins are falling in price
There can be positive and negative news for cryptocurrencies. This basically affects the bitcoin rate to the fiat currencies, as there are fiat currencies in these pairs… It can’t be avoided for now.
I can’t but mention that the amount of bitcoins is limited. Here, bitcoin is similar to gold. Just like gold, the amount of bitcoins that can be mined/acquired (I will explain this a but later), is limited. There can be just 21 million bitcoins. A part of them has already been mined, a part of them is being mined, and the rest will be mined. The difficulty of bitcoin mining is adjusted every 2016 blocks based on the time it took to find the previous 2016 blocks. One block is mined 10 minutes. It becomes more and more difficult to mine every year since there are more and more computers involved in mining, and the calculation time to confirm the block should always remain the same - 10 minutes. By the way, the growing difficulty of bitcoin mining just proves that people are interested in this cryptocurrency. According to forecasts, the last coin will be mined in 2140.
How to start using Bitcoin wallet?
A Bitcoin wallet is used to store a private digital key that provides access to bitcoin addresses and the transfer signature, i.e. access to your funds in the bitcoin network
So, first, you need to decide what wallet you will use. There are several types of software:
1. Desktop Bitcoin wallets
- Bitcoin Core - official desktop Bitcoin wallet developed by Bitcoin core developers. (https://bitcoin.org/en/download over 50 GB)
- Thin desktop wallet Electrum (https://electrum.org/#download 35 MB)
- Armory (https://www.bitcoinarmory.com/download/ 24 MB, works only with Bitcoin-Qt)
- Thin desktop wallet Multibit (https://multibit.org/download.html 32 MB)
Desktop wallet applications are divided into two types, thin and thick. “Thick” Bitcoin wallet is a type of storage that involves downloading all the blocks and checking their reliability. It requires high capacity and much free hard disk space. A thin wallet (Electrum, Multibit) is distinguished by the fact that it has a simplified system of interconnection with blocks — through the TCP server of the wallet developers. It doesn’t take much space on your computer and works faster.
However, security suffers a bit, since such wallets do not download the whole chain of blocks, but take information from the developer’s servers, which creates a dependence of the last.
Besides, if you use Bitcoin Core and Armory, you can increase the level of confidentiality to a degree of darknet by accessing the network using Tor.
I use Electrum, and I explain how to start using Electrum wallet a bit later.
Advantages of thick Bitcoin wallets: high level of security, full control of all transactions.
Disadvantages: it is not convenient to use
2. Mobile Bitcoin wallets
- Mobile bitcoin wallet for iOS: Blockchain, BitWallet, Coinbase, Circle, Xapo
- Mobile bitcoin wallet for Android: Blockchain, BitcoinWallet, Mycelium, CoinBase, Xapo
You download the mobile app and install it on your mobile phone, according to the operational system. The functions are the same as of the desktop wallet – to store the private key and make transfers. Since few of us leave the phone unattended even for 5 minutes, your bitcoins will always be at hand. It is convenient to read QR codes from the phone’s camera and immediately transfer bitcoins to the needed BTC addresses. I even heard about the possibility of some paying with a contactless transfer, like on a telephone (NFC), but in practice, I have never witnessed such a transfer.
I use Blockchain wallet on my mobile. So, I recommend using it.
Advantages: it is mobile, convenient and easy to use.
Disadvantages: it is less safe and confidential.
3. Web Bitcoin wallet
The most popular web wallets are Blockchain, BitGo, Xapo.
Web wallets usually used together with mobiles. I have a web wallet, you can install its mobile version on your mobile phone. Addresses are the same, and the amount of bitcoins is the same.
Web BTC wallets have closed keys that are stored in another safe place, which can be accessed only by you. On the one hand, this is an advantage as this type of wallet interface is accessed directly within your web browser. On the other hand, it is a drawback as you don’t really control your bitcoins. The access to the secret key, and so the total control of the BTC, is available for the company that provides this service.
Not only you are responsible for the safety of storage,(with your access to the account), but also the service. After all, organizations store your crypto on “hot” wallets. This is done so that you can have access to all your bitcoins at any given time. But this is fraught with the loss of all cryptocurrencies in the event of a hacker attack.
As for web wallets, I prefer Blockchain. It the most popular web wallet, besides, I have Blockchain app on my mobile, so I have access to my bitcoins via both my desktop and my mobile.
Advantages: it is easy to use, it is convenient, commissions are low.
Disadvantages: it is less safe and confidential.
4. Hardware Bitcoin wallets
There are also hardware Bitcoin wallets. But it is too early to consider them at this stage. This is a completely different story.
When you choose a Bitcoin wallet, you need to consider what purpose you will use for. And, of course, you can use a few wallets of different types. I will deal with this later
I would recommend starting with the desktop wallet Electrum (https://electrum.org/#download). Download it only on the official website. Do not use other links, torrents and so on. It is for the sake of the security of your first digital coins.
Electrum is considered to the best among thin wallets. It provides safe storage of the data and allows to restore the wallet if it is destroyed or the password is lost. When you create a wallet, you are given a unique 12-word seed phrase. If your computer is broken, your password is lost or you ever decide to change wallet providers, you can use this seed phrase to export your wallet. Electrum can be installed with any operating system and is supported by mobile devices.
After you have downloaded the wallet, you should install it and adjust for receiving BTC.
1. Install Electrum on your desktop or a USB flash drive.
You don’t have to invent anything, you just choose the Auto connection to a server.
2. If you didn’t have a BTC wallet before, you just click on Next.
3. Let us see in more detail how you choose the type of new wallet you are going to create.
a) I recommend newbies to use Standard wallet and go to step 4. And if you, just like me, do not want to pay the extra money and want to have fewer troubles with signing transactions.
b) The two-factor authentication is explained by Electrum itself, I will cite an extract from the app.
Two-factor authentication is a service provided by TrustedCoin. It uses a multi-signature wallet, where you own 2 of 3 keys. The third key is stored on a remote server that signs transactions on your behalf. To use this service, you will need a smartphone with Google Authenticator installed.
A small fee will be charged on each transaction that uses the remote server. You may check and modify your billing preferences once the installation is complete.
Note that your coins are not locked in this service. You may withdraw your funds at any time and at no cost, without the remote server, by using the 'restore wallet' option with your wallet seed.
The next step will generate the seed of your wallet. This seed will NOT be saved in your computer, and it must be stored on paper. To be safe from malware, you may want to do this on an offline computer, and move your wallet later to an online computer.
c) Multi-signature wallets upgrade your bitcoin funds security. A multi-signature wallet requires several private keys to authorize bitcoin transactions. The multi-signature bitcoin address structure lets you split those private keys across multiple devices or among multiple people. If one of your wallets is hacked, you can save your coins by means of the other wallet.
You can, for example, install two different wallets on two separate desktops, and you will control both secret keys, and so, both signatures, due to which, the level of your bitcoins security will be as high as possible.
Multi-signature wallets are most often used in different business projects, where there are several partners who control shred funds. They hold one of several keys to access the funds.
If you want to use your wallet in business to store quite a big amount of bitcoins on your wallet. In everyday life and with a small number of coins, it makes no sense to complicate things. So, I recommend beginners to start with Standard wallet.
d) the fourth way is for those who used to have a BTC wallet.
4. Again, if you didn’t have a wallet, a seed and so on, you choose “Create a new seed”.
5. In this case, I recommend choosing Legacy.
6. Here, you need to enter a seed that consists of 12 words. It will allow you to recover access to the wallet if, for example, your computer breaks down. You should enter the words and write them down on paper in the same order. Do not copy it to the clipboard as it is automatically cleared after clicking Next.
Advice. Save the seed on paper, the word order is also very important. I also store it electronically, but not on the device where the wallet is installed.
7. At this step, you need to retype the seed, which you should properly save. Remember that the clipboard is cleared when you pass on to the next step.
And mind the warning. “Your seed is important! If you lose your seed your money will be permanently lost. To make sure that you have properly saved your seed, please retype it here.
8. Choose a strong password to encrypt your wallet for extra protection.
Take personal data storage as seriously as possible. If you do not know why, read here An epic tale from cryptocurrency world
How to use Electrum
Originally, there are three tabs open:
1. History shows the list of all your BTC transactions (it is blank at first).
2. In the Send tab, you will send your bitcoins
In “Pay to” you enter the address of the payment destination. ”Description” - a note for the transfer only in your wallet (it will be visible in History). “Amount” - the number of BTC for transfer (i-it is now mBTC), “Fee” - transfer fee. The more to the right is the slider, i.e. the more fee you pay, the faster the transfer will be complete. The average commission suits me quite well in terms of price/speed ratio.
3. Receive tab shows you your BTC address so that you can receive money. The “Description” line has the same function as in the Send tab. “Amount” - request for the BTC amount (in this case, so far, it is millibitcoins), “Request expires” is selected depending on your preferences.
I recommend you to open “Addresses” and “Console” in the “View” tab. There are two types of addresses in the “Addresses” tab: receiving and change. Receiving - addresses that will be issued in the receive tab, change - addresses to which change from the transfer is received. In general, you can use these BTC addresses for common everyday transactions.
Basic settings for Electrum:
If a green circle is on in the lower right corner, then everything is OK, there is a connection to the server and we can make transfers. If the circle is red, then try restarting the wallet, updating it, or setting up a connection to the server manually.
You choose the suitable language, display in BTC (recommended), Millibitcoins (mBTC), Satoshi (sat - the smallest bitcoin unit recorded on the blockchain) in General-Tools-Preferences.
To generate more addresses (receiving) and correctly calculate the balance for them in the “Console” tab, you write:
For one new wallet type in electrum console:
wallet.create_new_address(False)
For 100 new wallets type in electrum-console:
for i in range(0, 100): wallet.create_new_address(False)
or just (effect after restart application) for relevant calculation of your balance after new addressees are generated:
wallet.storage.put('gap_limit',100)
In the “Wallet” section, you can check your seed.
A Bitcoin address is like a bank account, you only hold bitcoins on them. Your BTC balance on the wallet is the amount of all your bitcoins stored on all your addresses. You send/receive bitcoins by transferring BTC from one address (account) to another. The signature allows you to get access to the operations on these addresses.
Well, I have now a BTC wallet. How can I get bitcoins?
You can mine! :) Bitcoin mining is the process of adding transaction records to Bitcoin's public ledger of past transactions or blockchain. The blockchain serves to confirm transactions to the rest of the network as having taken place. So, you confirm transactions by means of mathematical calculations performed by your computer and receive bitcoins as a reward.
Basically, mining on the scale of a single computer is not now relevant or profitable. So, I do not think this will suit you.
How do you get bitcoins?
The easiest way to get bitcoins is to use exchangers. There are many variants to exchange some other currency and cryptocurrency for bitcoin or vice versa. You should only use reliable exchangers! I can recommend Bestchange, for example. On Bestchange, I find the best exchange rate for my system and see the number of reviews (safety is the most important parameter for me). And, if there are enough reserves to exchange the needed amount of money, I exchange.
In addition to this site, there are many others, where you can exchange your normal currency for digital currency. But you should always use a safe, reliable platform with a good score!
You change bitcoins for the normal currency back, that is, you get your money back to your bank card, in the same way.
There are also many cryptocurrency exchanges (EXMO (has a mirror), Binance, Kraken, Bitfinex, Coinbase), where you can exchange cryptocurrency for fiat money and vice versa, but it is a little bit more complicated there. But it is safe and at a good exchange rate. On some exchanges, there is even a price pool or a price table(Bisq), which is a list of ask prices for a particular cryptocurrency and a list of bid prices offered by the exchange participants. Here, the organization serves as an intermediary between two users. In addition to complexity, exchanges have another drawback, they often require verification of your profile, and not everybody wants to deal with this, as bitcoin’s benefit is its confidentiality. But the choice is up to you.
When you use the services of an exchanger or an exchange, the most important criterion is the exchange rate.
And here is the question:
What is the Bitcoin official price today?
You won’t find Bitcoin official exchange rate anywhere :) Remember what has been written above: nobody regulates bitcoin.
For example, you can see the ECB euro reference exchange rate to a basket of currencies on the ECB official website. The bitcoin price is changing during the day, and it is not stated by a central bank or any other official establishment. Bitcoin price is formed based on the supply/demand ration. That is why it is impossible to learn the exact official current bitcoin price today. You can learn only the average value. It is updated every second, like, for example, the value of any other normal currency in Forex.
You can find out Bitcoin average price when you study its exchange rate in several reliable sources. They do not usually differ much. I use a free service, XE that provides live exchange rates.
Exchangers often provide a better exchange rate than on the service, so I get a kind of psychological satisfaction. In general, I would recommend studying the Bitcoin price on multiple sources, on exchanges, exchangers, or crypto web sites, so that you will get a more exact price. You had better look for BTC to USD exchange rate.
Remember that bitcoin is an extremely volatile cryptocurrency, its price can’t be stable in the long term. During a sharp rise or fall, not all exchangers manage to update bitcoin prices on time. Exchangers can protect themselves by executing your transaction at the rate that is worse for you than it actually is at the moment. So in this case, the main thing is to apply for an exchange: fix the exchange rate and make an exchange at the time limits of the exchanger (do not splurge on the commission fees in this case!) You can even record the exchange rate somewhere or make a snapshot so that in a future dispute with an exchanger you can always refer to some evidence. Trusted crypto exchangers usually cooperate with upstanding clients and make concessions if it is not a matter of hundreds of thousands of dollars.
What is Bitcoin major flaw?
I see two Bitcoin’s big flaws: high volatility and quite a long (rather, not instant) payment processing.
In the first case, roughly speaking, when you come to shop, then the price of milk, for example, in BTC will differ from what it was yesterday, for example, although the price of milk itself is the same. This is the BTC to fiat money rate that has changed. So, the bitcoin won’t become an integral part of common life until its price is more or less stable.
In economic terms, I can add that the central bank, in the case with normal currency, regulates the money supply, so that it corresponds to the supply of goods and services. Bitcoin, however, is constantly changing in price, it is more beneficial to use bitcoins to make money on speculation, rather than to use it as a payment means.
I think everything is clear about the time of payment processing. You can’t afford to spend ten minutes in a shop just waiting for the first confirmation of the payment. And there may be required the third confirmation sometimes :) It may be convenient to pay for Internet purchases in bitcoins, as you do not have to transfer money instantly; but in everyday life, it is not convenient at all.
To sum up, bitcoin will perfectly suite for international money transfers, for Internet shopping, for making money on changes in its exchange rate, and, of course, for a LiteFinance deposit :)
Security:
If a hacker gets access to your wallet, this is the end. In 99% of cases, it is impossible to track the hacker and return your bitcoins.
But, if you observe the rules of cybersecurity and take every measure to protect your crypto wallet, you may not worry about the security of your bitcoin wallet.
First, in the case with Electrum, save your seed. You must save the seed on a different resource, not on the one where your wallet is installed. You can even print it on paper and store in a strong box :)
Second, set a complicated password for your digital wallet. It should contain the upper and the lower case letters, numbers and other characters, you only must remember it yourself. If there is such an opportunity, use two-factor authentication. When you (or someone else) tries to log in to your account, you will be asked to confirm this action in a different way, for example, you may be asked to enter a one-time code sent you via SMS.
Third, you should have a portable version of your BTC wallet, installed on an empty, formatted USB flash drive that you will use only for Bitcoin. Check and protect your computer that you will use for BTC transfers against viruses or other malware with anti-virus software (a free version is dr WEB) and do not visit websites that your browser warns you not to visit. And, in general, you should always observe the major rules of your computer security.
And finally, make a back-up copy. There can be a system failure or your computer malfunction, so make a reserve copy to recover it if needed. To keep your bitcoins, even the least units of BTC, you should regularly make copies and, of course, always encrypt them.
If you have quite a sum of BTC, do not store all your bitcoins on a web wallet! Keep your cryptocurrency on different wallets. Send a small sum to a wallet that you use for frequent BTC transactions, and keep the rest of the sum on a safe, protected desktop wallet.
I keep most of my BTC on a USB flash drive with a portable version of Electrum that has a tough password. The seed is saved both on paper and on digital media that is safely hidden. A small amount of my bitcoins for transactions is kept on the Blockchain wallet, which can be accessed via both my mobile and my desktop.
You can also get and off-line BTC wallet, thus increasing the security of your funds and the confidentiality level, but this is for more advanced BTC users.
What is your opinion about bitcoins and other digital currencies? Is cryptocurrency a simple or a complex financial instrument for a newbie?
Please, do write your ideas, questions and any feedback in the comments, I will be really glad!
P.S. Did you like my article? Share it in social networks: it will be the best "thank you" :)
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Price chart of BTCUSD in real time mode
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