Thursday, December 26, 2013

So You Got Some Bitcoin… Now What?

My family knows how consumed I am with Bitcoin. I first discovered it in February and have spent countless hours researching it. I'm glad to say they are super supportive and excited about it also.  For Christmas, I shared my passion by giving them bitcoins as gifts. Everyone was so stoked and declined my offer to manage the bitcoins for them. They all want to learn more about owning and using them. Here's my post to them and hopefully to your friends and family as well.

Bitcoins are Digital Cash

Bitcoins exist as amounts recorded in a public ledger (the blockchain) at various Bitcoin addresses. Each address has a public and private key. If you lose access to your private key, bitcoins stored at that address will be lost forever. There is no one to complain to. Keep your private key private. Your public key is fine to share. That's the address others can send bitcoins to. Coinbase makes this easy by managing all your public and private keys for you.

Security is Priority Number One

You are the bank. There is no vault door protecting your investment. That's why your computer has to be secured against hackers and thieves. My first recommendation is to have an up-to-date antivirus software running at all times. You should also use a password management program like LastPass or 1Password. These programs will protect you from phishing attacks, make key logging almost irrelevant, and equip you to create strong individual passwords for every site which needs them. Please, never reuse passwords. If you're using 1Password, you can securely store and sync your password database across multiple devices using Dropbox.

Working With Coinbase

Your bitcoins were gifted to you via Coinbase. Coinbase is an online wallet which means they manage your bitcoin addresses and your private keys. You can send bitcoin to your Coinbase account by going to Account Settings -> Bitcoin Addresses. Coinbase creates a new public address with every transaction and sending bitcoin to any of those addresses will credit your account.

Sending Bitcoin for the First Time

A great exercise for understanding how Bitcoin works is to send some from one account to another. Set up a wallet at blockchain.info. If you're using 1Password, be sure to save the Identifier string as well. Once that account is created, you can copy your Bitcoin address, head back to coinbase.com and click the Send/Request option. Click Send Money, paste the address, and send a small amount, such as 1 millibit (.001 bitcoins). It's fun to have the blockchain.info window open in another tab when you do this so you can see how quickly the system works. Say goodbye to 3-5 business days to transfer money between accounts. :) Also, if you want to keep some bitcoin online for purchasing goods and services via your smart phone, the blockchain.info app works well. Depending on the circumstances, you may have to pay a very small transaction fee, but most of the time it will be free.

Setting Up a Paper Wallet

Throughout the history of Bitcoin, there have been a series of hacks on the online exchanges. The very best way to store your bitcoins and to eliminate this risk is to store them offline. This is done via creating a paper wallet through services like bitaddress.org. There are plenty of tutorials online for booting off a CD, disconnecting your computer from the Internet, and printing out your paper wallets. Depending on the amount of bitcoin you're storing, that may be overkill. Once you create your paper wallets, you can send various amounts from Coinbase to those wallet public addresses. Later they can easily be imported back into a standalone Bitcoin client or any of the major online wallets. It's a good idea to store these in a secure, water-proof place such as a safe or safe deposit box. Some people also email or mail portions of the import keys as a backup to friends and relatives so they can be reconstructed later if needed.

Bitcoin as an Investment?

Some (including me) believe bitcoins will have a much higher value in the future. How high could they go? I've heard everything from $1,300 per coin to over $1M per coin  Sound crazy? Well, when you think about the size of the remittances market, the daily forex market, services like MoneyGram and Western Union, those who store value in gold and silver, the number of ecommerce transactions, donations, etc… even a small percentage of those activities done via bitcoin would create a big disruption (especially since there will only ever be 21 million bitcoins).

Bitcoin as Money?

The number of stores accepting bitcoin is increasing all the time with big announcements almost every month. For example, overstock.com recently said they will accept bitcoin as payment in 2014. You can also buy gyft gift cards with bitcoin which, in essence, lets you buy anything from the many vendors they support. Also, keep in mind there are 100,000,000 divisions in each bitcoin which means you can do micro transactions for fractions of a penny.

Cashing Out Your Bitcoins

Since you now have an account with Coinbase, cashing out your bitcoins to old-fashioned fiat currency is really easy. You just have to set up your Coinbase account to have access to your bank account. I trust them, and if you use the method they offer which logs directly into your bank, you can be up and running in minutes. Selling your bitcoins back to Coinbase will result in a bank deposit within 3 to 5 business days.

Taxes

Though some ultra-libertarians and anarcho-capitialists want to pretend bitcoin usage can fly under the radar of the IRS, the truth is today they are not anonymous and are always taxable. That means you need to keep track of a few things:
  1. The date you obtained them.
  2. The market value at the time you obtained them.
  3. The date you sell them, give them as a gift, or use them to purchase something (any taxable event).
  4. The market value at the time of the taxable event.
The easiest way to do this is to set up a Google Drive spreadsheet which you can access from anywhere. I'm also working on a service to make this easier as well, so stay tuned. With bitcoin, you are your own bank. You won't be getting a tax document in the mail from anyone with all the info you need to do your taxes at the end of the year.

Why Bother?

Well... to fuller understand my perspective on why Bitcoin (the protocol) and bitcoins (the currency used on the Bitcoin network) are so revolutionary, feel free to explore some of my other posts on the subject. In a nutshell, Bitcoin provides a decentralized public ledger which could make many financial institutions today irrelevant. They empower individuals to store and use the value they create without any third party risk with complete control to send that value to anyone anywhere in the world in minutes for free.

I hope this post was helpful to you and your friends and relatives entering the amazing world of Bitcoin. If you'd like to support content like this, feel free to send donations here: 1BxUs1hjWzYLEYdECbrRTJJtcTmwBzNtFN

4 comments:

james wrider said...

Major website you have. Do you already abide Bitcoins? I would praise to contract up at who-accepts-bitcoins.com. They will create the reciprocation you impoverishment as their database is oft searched by bitcoin spenders. It's liberate tho'!

Sean William said...

You might want to try and experience how bitcoin works in online gambling at Betcoin™. I’m a big fan of bitcoin casino because it’s more convenient and safer to wager bitcoin than using your real cash. That’s a very informative article. So have you tried using bitcoin to play in online casino?

reymark perry said...

This post is definitely helpful. Thanks for sharing your insights about bitcoin. Anyway, I also would like to share this bitcoin infographic which I think will help your readers: http://bitcoindaily.com/media/Bitcoin-Daily-Bitcoin-101-Infographic.jpg

Tabatha sima said...

Bitcoin is a form of digital currency created through a special process known as mining. The mining process involves difficult mathematical algorithms that make the currency scarce. Read more

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