Beginners Guide to Buying and Using Bitcoin

By Jason Hulott | Bitcoin

Bitcoin was the first cryptocurrency, created in 2008 as a by-product of an attempt to create a viable digital cash system. It’s the best known, highest value and where most people’s brains go when thinking of crypto. Getting started with Bitcoin is simple but comes with caveats. This isn’t like managing your bank account online; there’s no central authority to appeal to if something untoward happens. If you send Bitcoin to a fraudulent account or make a mistake the transaction is irreversible.

Wallets

Bitcoin is a purely digital currency; there’s no paper version, and you get no certificate to say you own it. Your Bitcoins live in one or more “wallets”. These are essentially a database of Bitcoin addresses and keys identifying you as the owner.

The blockchain (the mathematical puzzle that put the “crypto” in cryptocurrency) makes transactions secure. Like any Cloud-based data storage, it’s only as secure as the host. Exchanges make juicy targets for hackers – once they have your Bitcoin addresses and private key, the security of the transaction system works against you, making theft almost impossible to trace.  The simplest way to avoid this threat is to use multiple wallets and avoid putting all your eggs in one basket.

Software Wallets

  • Web-based and mobile apps

These are the cloud-based solutions; you trust a company such as Coinbase to house your details. In return, you can complete transactions directly from the wallet app, making this convenient and easy to use. That convenience makes them vulnerable to attack despite all security precautions the host can take. Such hacks are uncommon, but with no comeback or central controlling body, web-based apps may be best used as a temporary home for your trades rather than long-term storage.

  • Desktop

Applications you download to your computer that let you manage your Bitcoin holdings. These can be more secure than web-based solutions because they’re not always online. The downside is you absolutely have to take control of your PC security, which means a robust firewall and anti-virus solution. Controlling the access permissions for the app can enhance security; a novice might have trouble, but they are more secure than leaving your coins in an exchange as your PC will not file for bankruptcy.

Paper

Yes, you can take your Bitcoin keys offline entirely. Paper wallets generate public and private keys in the form of QR codes. You load your coins by scanning the deposit QR code on your smartphone and sending them from your software wallet or exchange. Since these are critical pieces of paper, the keys are never online and can’t be hacked. The downside is these are literal pieces of paper and can be stolen, lost, damaged or fade with time. Great for giving Bitcoin as you can load it up like a gift card, but a thief can scan or copy the visible codes, making them secure but not perfect. In addition, withdrawing coins requires the use of a standard Bitcoin wallet, with the potential security issues that entails.

Hardware Wallets

These usually are USB powered devices that hold your Bitcoin addresses and your keys to access them. You connect them to your computer or mobile device and access the contents through a secure web interface. A screen on the wallet gives you access to its security functions. How secure are they? To date, there have been no reports of loss from a working hardware wallet produced according to spec and used correctly.

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This level of security means the user must take precautions to avoid compromising their device. Losing access to the device, through theft, accident or simple loss means losing access to the coins stored on it. To prevent this loss, wallets make use of BIP39, a process that generates a unique sequence of words that can regain access to your Bitcoin. This phrase represents a potential security threat itself;  you should handle it with the utmost care and discretion. Lose it, and you really could lose everything.

Hardware Wallet Manufacturers

There are several models of hardware wallets, but the market leaders are Trezor and Ledger. Both offer “cold” (offline) storage for your Bitcoins but differ in their methods.

  • Trezor Trezor devices enforce strict data security. The first thing you do when setting up your new wallet is to install its firmware. If there’s any installed, it means the device may be insecure. The two models of wallet connect over a physical cable to desktop computers or Android devices and accessed through specific software. Once you have set up your details, it prompts you to back up your data by creating a Recovery Seed. This random sequence of words is shown twice in a row, on backing up the wallet and never again. Even if your wallet is stolen, a thief can’t access the contents without that phrase.

This makes your Recovery Seed unique and valuable; Trezor points out that you shouldn’t make any digital copies, read it out loud, or reveal it anywhere near a camera. Mics, smartphones and webcams are far more vulnerable to hackers than the wallet itself. They even supply a special booklet to record the phrase (at least 12 words, depending upon the level of security) and stress your responsibility to keep it safe and in multiple places. It’s the definition of “data in one place is data you don’t care about”.

  • Ledger Ledger takes a slightly different, though equally rigorous approach. Their wallets use a proprietary operating system which runs everything through the Ledger Live app. Because of this, the Nano-X can make a secure Bluetooth to mobile devices and is the only one from either company that talks to IOS.

It’s recommended you write your Recovery Seed down as soon as possible and keep it safe, but Ledger pushes the belt and braces approach of keeping two hardware wallets. They suggest that you use the Bluetooth enabled model when out and about and secure the wired-only model somewhere safe, just in case. This means buying two wallets, but handily Ledger offers a twin pack.

Buying Bitcoin

Bitcoin buyers tend to fall into two camps; investors and traders. Bitcoin is a volatile currency, so it’s perfectly possible to trade it as with any other currency. This requires considerable investment and experience, but the Bitcoin model has some advantages. Traditional markets operate in business hours; Bitcoin trades can happen anytime so you can respond to market fluctuations.

Investors are in for the long haul and rely on a long-term upward trend in market prices to realise a profit. Hanging onto your Bitcoin is called “Hodling” – derived from a typo for “holding” that stuck. Two beginner-friendly purchasing sites are Coinbase and Coinmama.

  • Coinbase
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Setting up a wallet on Coinbase is as simple as starting any online account with 2-Factor Authentication. In addition, to do anything more than admire your empty wallet, you must verify your identity with your passport or driver’s licence. Once you’re set-up, you’re good to store and trade Bitcoin (or any of the other cryptocurrencies handled by Coinbase). If you wish, you can transfer funds to whichever wallet (hardware or software) you prefer.

Coinbase is an exchange; they act as a middleman between buyers and sellers and allow users to buy and sell cryptocurrency for fiat currencies. You select how much you wish to purchase of a currency and deposit the price into your fiat wallet using bank transfer, credit or debit card. You can hold a mix of currencies in your Coinbase wallet, which is convenient for instant trades but leaves you open in case they suffer an attack.

The broader business model means Coinbase can offer trading and purchase. Additionally, Coinbase has a Merchant program to allow online sellers to accept crypto in payment.

  • Coinmama

You set up your Coinmama account in precisely the same way as on Coinbase, with the same requirements for 2FA and ID verification. The difference between Coinbase and Coinmama is that Coinmama is not an exchange.  Any purchased Bitcoin goes into a wallet you have designated, and you buy directly from Coinmama instead of a third party. You can only buy crypto with fiat currency; you can’t pay for one type of coin with another.

This model is fast and puts the control of your wallet in your hands but limits the services Coinmama can provide.

The decentralised nature of Bitcoin means the market prices you see apply to trades made on that platform. There’s no universal agreed value as with traditional currency trading.

Using Bitcoin

Once you have your Bitcoin, you can take advantage of the secure, near-anonymous trading network it encompasses. You can spend your coins in a variety of ways as the benefits of crypto become more mainstream. There’s an enormous benefit to the borderless nature of Bitcoin transfer as customers can avoid concerns about exchange rates when spending abroad, either directly or on foreign sites.

  • Merchant services

Several companies are supplying ecommerce plugins that allow merchants to accept Bitcoin alongside traditional payment cards. As when Paypal first appeared on the scene, these frequently involve placing specific “pay with crypto” buttons on the shop site.

Coinbase and BitPay offer merchant solutions online, while Flexa has launched partnerships that will allow Bitcoin payment to expand into high street stores across Canada in the coming year.

  • Cards

The most familiar way for consumers to make payments is via plastic. Visa is accepted worldwide and requires no new technology for merchants. Customers link their cards to a software wallet, and the conversion from crypto to fiat currency happens at the point of payment. This means that customers can take advantage of low exchange charges by always paying in the local currency. There is a rider though; since Bitcoin is a volatile currency, the value of the wallet’s contents can vary wildly. Fortunately, card providers also supply Android and IOS apps to allow customers to track their funds.

  • USA

Bitpay and Shift (linked to Coinbase accounts).

  • UK and EU

Wirex,  Revolut and Fusex.

Wirex and Revolut respectively offer 0.5 and 1% cashback in Bitcoin with each transaction, which can somewhat offset the maintenance fees these cards incur.

So there you have a basic guide to buying, selling, using and storing Bitcoins. The Fintech is expanding all the time as more platforms bring crypto use into the mainstream, and both startups and established platforms diversify for consumers and B2B services.

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About the Author

Jason Hulott is Business Development Director at Digital Marketing Specialists, Speedie Consultants. He is Google Partner certified. His role is to identify and implement traffic generating and revenue increasing ideas for our client base.