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Bitcoin for idiots: An introductory guide

How do you keep your Bitcoins safe?

Once you have bought Bitcoins, the next step is to keep them safe.

As mentioned above, Bitcoins are represented by long strings of numbers that make up the public and private keys. If someone gets hold of those digits, they can steal the Bitcoins they represent. If you lose the keys, that Bitcoin is lost to you forever. It’s not like credit cards, where you can report a theft and have a transaction voided or get a replacement in the mail if you lose the card.

As a result, safe storage is extremely important.

A common way to store Bitcoins is in digital wallets like Coinbase. This is the easiest solution if you are actively transacting with Bitcoin.

However there have been dozens of stories of wallets getting hacked. In a recent theft, hackers made off with 4,100 Bitcoins totaling $1.18 million from Bitcoin wallet Inputs.io.

Inputs.io shut down, and its founder, using the alias TradeFortress, later said, “I don’t recommend storing any Bitcoins accessible on computers connected to the Internet.”

What’s the alternative? Keeping Bitcoins offline, or in “cold storage.” There are a couple of ways to do this.

You can save the Bitcoins on a USB or external hard drive.

You can even save them in a paper wallet by printing out a public address and the private key. Bitaddress.org is a popular service for doing this, but remember to generate the paper wallet offline so you don’t expose the private key to hackers and so you can keep the physical copy safe.

When you want to spend Bitcoins that you have printed out, you have to load the private key back into a digital wallet.

What can you buy with Bitcoin?

Now that you have a Bitcoin stash, where can you spend them? The list of merchants accepting Bitcoin is growing every day.

An Orange County, Calif., Lamborghini dealership recently sold a Lamborghini Gallardo in exchange for Bitcoin, and we’ve heard various tales of mansions being sold for Bitcoin. Making large purchases like these in Bitcoin means quicker approval time (as long as you have the correct amount on your wallet, you are good to go), and significantly lower transaction fees than going through a bank or credit card company.

You can now use Bitcoin to make in-app purchases in Zynga games. You can use Bitcoin to pay for gift cards, airline tickets, an account on OKCupid, plastic surgery, food and drink at bars and restaurants, and wares from independent merchants on Etsy and Shopify. You can even buy the news: The Chicago Sun Times partnered with Bitwall to experiment with a Bitcoin paywall for its content.

Overstock.com recently became the largest retailer to accept Bitcoin to date, and the company made $124,000 through 780 Bitcoin orders within less than 24 hours of accepting it as a form of payment.

Want to use Bitcoin in the real world? Coinmap is a useful tool for finding physical establishments that accept Bitcoin.

Should you prefer to redeem your Bitcoin for cash, there’s always the aforementioned Robocoin ATMs. More units are shipping around the world this year.

Bitcoin enthusiasts such as Adam Draper, who runs a Bitcoin startup accelerator called Boost.vc, say merchant adoption is critical to creating a vibrant ecosystem around the Bitcoin. Right now, it is treated more as an asset than a currency — something you hold on to rather than spending on a piece of pizza or new bed sheets. Given the recent volatility of Bitcoin’s price, it doesn’t make sense to use it as a daily currency. But more opportunities to spend Bitcoin will create more liquidity in the market, which in turn will encourage more growth.

There are benefits to merchants as well: The transaction fees are significantly lower than credit cards or PayPal, and you can cash out the value of the Bitcoin right away so as not to lose money if the price drops.

Bitcoin: Good or evil?

Understanding Bitcoin is very different from believing in its viability or future. Despite how far the ecosystem has come, a flourishing crypto-currency is still uncharted territory.

New York Times columnist Paul Krugman, who won the Nobel Prize in Economics, wrote that “Bitcoin is evil” and he remains “deeply unconvinced” that Bitcoin can ever be a stable store of value.

Reuters’ economics editor Edward Hadas called Bitcoin a “fool’s gold standard.” He said it is not backed by anything substantive enough to make it viable, and that it is particularly susceptible to crashing — its popularity represents “widespread economic amnesia.”

These are voices worth paying attention to. Bitcoin raises security concerns and has few protections in place for its investors. If hackers get into your wallet or your hard drive crashes, that’s it — your money’s gone. And Bitcoin hacking is not merely a theoretical worry; many incidents of hacking and theft directed at exchanges have already happened.

However, there are other experts who see tremendous promise in Bitcoin.

Marc Andreessen is a well-known venture capitalist who helped create the SSL cryptographic protocol for Web browsers. He has helped invest $50 million into Bitcoin startups and recently wrote that Bitcoin matters because it transforms one of the most fundamental things people do — make payments.

Andreessen said one of the most exciting applications is in international remittances. Immigrants send $400 billion a year back to their families in their home countries. Banks and payments companies extract up to 10 percent or more of these transactions, whereas Bitcoin fees would represent a tiny fraction of that amount.

Lower fees also have broad implications for merchants, particularly those with a narrow profit margin or those that sell inexpensive items. If you sell coffee for $3 per cup and payment fees gobble up $0.25 of each transactions, the cumulative loss is significant.

In both of these examples, by cutting out the large financial institutions, people get to keep more of their money.

Bitcoin also creates new opportunities for micropayments, meaning payments below $1. Right now, those are too expensive to process efficiently through the existing credit card and banking systems. With Bitcoin, it is possible to send pennies at a reasonably low cost. This means it is possible to charge someone a tiny amount for a small act, like reading one newspaper article.

Bitcoin makes it easier to send cash to a complete stranger as well. In December, a college student held up a sign with the QR code to send money to his Bitcoin wallet. His sign made it into ESPN’s game footage and the story took off on Reddit. As a result, he received $23,000 worth of Bitcoin, sent by total strangers who had nothing more than his QR code for an address. This could have huge implications for disaster relief, fundraisers, or protests.

It is these kinds of possibilities that have Bitcoin evangelists so excited.

However, possibility and excitement do not translate into economic reality — not necessarily.

Ultimately, only time will tell whether Bitcoin is a viable long-term currency.

In the mean time, you can still buy a cup of coffee — in the right cafes — with a fistful of satoshis.

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More information:

RoboCoin makes it easy to buy and sell Bitcoin wherever there’s a machine.... read more »

Coinbase makes it easy for the average person and business to use the digital currency Bitcoin. Coinbase lets any consumer to create a Bitcoin wallet and start buying/selling Bitcoin instantly by connecting their bank account. In add... read more »

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