Bitcoin Guide – Getting Started
If you’re relatively new to bitcoin then you may be concerned about the complexities of the currency. It is true that completing a bitcoin transaction is more difficult to understand than handing over cash to a retailer, but the learning curve is steep, and within 30 minutes of reading this guide you’ll be using bitcoin with ease.
Once you have finished this quick start guide to bitcoin, you will have a good understanding of bitcoin wallets, transactions and importantly, wallet security.
Bitcoin: An Introduction
Bitcoin is a digital currency that is transferred ‘peer-to-peer’ (p2p) or ‘person to person’. The p2p nature of bitcoin is what makes it a ‘distributed’ network – there is no governing body that controls the supply of bitcoin, and neither is there one that controls ownership of the currency. Transactions do not feed through a 3rd party (traditionally a bank) and instead go directly from one individual to another. In some ways, you can think of it being similar to paying a friend ‘cash in hand’ with dollar bills, except you’re making the transaction digitally.
When bitcoin is transferred from one person (peer) to another, the transaction is made public on the bitcoin blockchain. Every transaction since the very first transaction has been and will be stored on the blockchain – this blockchain (or ledger) is publicly available on websites like blockchain.info where users can see the transacting parties and the amounts transacted in BTC. While all transactions are public, they are also private, in that no personally identifiable details are given for any transaction; all the information is hidden behind an encrypted hash, so a transaction would like just like this:
Don’t worry too much about the hash, the important thing to understand is that bitcoin transactions are anonymous.
For someone to make a transaction, they must first have some bitcoin to transact and another person to transfer the money to. To do this both parties need to have a bitcoin wallet. You can think of a bitcoin wallet like any wallet, but in a digital sense – a bitcoin wallet is software that (typically) resides on your computer or smartphone and allows for the storage of bitcoin.
There are a range of wallets that you can choose from, each providing a very similar function, but for an up-to-date list of the most trusted and secure wallets, choose from bitcoin.org’s list of wallets.
NOTE: some wallets run as a ‘full node’, if you are not looking to store the entire blockchain on your computer, download a lightweight version like Electrum.
Once you have chosen your wallet, you can receive bitcoin using any of the addresses generated by your wallet. An address might look like this:
1E68XtiA1eF9pssh4BcTdfuqETBhoDPDga (this is not a valid address)
Sending bitcoin to the address above would be received by the wallet that generated that address. Your wallet will have an unlimited number of addresses, this provides some benefits discussed later in this guide.
IMPORTANT: wallet addresses are unique. If you send or receive bitcoin to the wrong address those bitcoins will be lost permanently. We recommend you read our Bitcoin security guide before moving forward.
Most wallet software will store your addresses on your wallet permanently so that future transactions are guaranteed to go to the right place. However if it is possible to delete addresses, it is highly recommended that you avoid doing this under any circumstances for the reason above.
It is essential that you have an understanding of how to secure your bitcoin before you begin using the digital currency. While we have gone into some detail below, it is important that you continue your research until you are comfortable with an appropriate level of security. The below is still helpful, but for a comprehensive resource we have created this “best guide to Bitcoin security“.
Unlike a bank account, you need to take personal responsibility for the security of your funds. However, with the right process in place you will be able to secure your wallet beyond what is possible with a bank. Whether you have one wallet or multiple wallets, it is important that you have followed this checklist – the levels at which you adopt these practices are largely based on individual risk tolerance, it is up to you to decide how secure you want to be.
It is widely accepted that storing large sums of bitcoin in an online exchange (e.g. bitstamp.net) or wallet (e.g. coinbase.com) is unadvisable. As was seen with MtGox, there is a very real risk of losing all of your funds without any suspicion of a problem until it’s too late. While online platforms may be regulated and trusted by the majority of bitcoin users, there are no current guarantees that your bitcoins are safe, neither are the funds backed by the government in the case of theft or bankruptcy. On the other hand, online platforms can be extremely accessible and convenient, therefore storing small sums of bitcoin over short periods of time is an understandable requirement for some users.
By downloading and using a trusted wallet listed on the bitcoin.org website you can ensure that your funds are in your posession. Software wallets, whether they are desktop or mobile, provide a level of comfort that online storage cannot offer. By storing your bitcoin locally, the private key (proof of ownership) is under your control. However, if your software resides on a device that is connected to the internet, then your bitcoins will be at risk to hacking. A number of wallets provide the option to add 2-factor authentication for added security which will go a long way to preventing any theft – at this point ‘social engineering’ is your primary risk to consider. It is also recommended that you regularly backup your private keys in the eventual loss or damage of your hard drive.
A step beyond local storage with 2-factor authentication is to use offline storage with 2-factor authentication. This mitigates the risk of a hack entirely, and an offline device or paper wallet can be stored in an extremely secure place such as a safe deposit box or with your family solicitor. Offline storage devices like Trezor provide open source software that allows you to hold bitcoin under 2-factor authentication alongside some additional security features including pin access. For a truly offline storage solution, you could use a ‘paper wallet’ which stores your private keys on printed paper, you can learn more about setting up a paper wallet here.
Whether you’re transacting very small sums of bitcoin or looking to store large amounts of the digital currency, it is highly recommended that you choose the right wallet and secure it appropriately. The level of security that you choose is entirely up to you, and will depend on your tolerance for risk, but it is important to remember that security is entirely your responsibility.
Now that you’re up and running with bitcoin, you’ll be ready to send and receive bitcoin for all manner of goods and services. However it is important to know that bitcoin is not necessarily an entirely anonymous form of payment.
AML and KYC
AML (anti-money laundering) and KYC (know your customer) is a requirement for businesses operating in the financial sector of a regulated economy (there are exceptions). This applies to all major bitcoin exchanges as well as online wallets or other businesses in this space. While AML and KYC can be an extremely useful practice for stamping out some illegal activity, it is also a hurdle for users who are looking for anonymity. These checks require (among other things) that the business has personally identifiable on all of their customers, including name, proof of ID and proof of address. This means that your data could potentially be used by the government at their discretion, or the business itself could, in some cases, sell your data to others.
As mentioned, a wallet address is unique and anonymous to the person who holds it. However a user that chooses to use the exact same address for sending and receiving bitcoin over a number of transactions exposes themselves to having their identity revealed.
For example, consider your received 1,000 separate transactions to a single address. Someone looking at them more closely may be able to identify patterns within the transactions or the transactions leading to the transaction that was eventually sent or received by you; they may also see a large number of bitcoin stacking up in one address, and the incentive for theft (physical or virtual) could become stronger. If you are looking to be truly anonymous, it is important to generate a new bitcoin address for every single transaction that you receive.