This is part 4 of my series on Bitcoin. Part 1 featured an introduction and can be found here, part 2 discussed the mysterious operation of creating Bitcoins, called mining, and part 3 explained the public ledger, the block chain. For those of you for whom this was all a bit too theoretical and/or esoterical, what with all the Byzantine generals floating around, here’s a practical guide.
Disclaimer: The legal situation regarding cryptocurrencies is constantly changing in many countries, and in others, even the possession of Bitcoin and other cryptocurrencies is outright illegal. Therefore, nothing you read here can be construed as legal or financial advice. It is your own responsibility to know and follow all applicable laws.
Bitcoin Wallets
Let’s begin with the first thing you need to obtain Bitcoins, a wallet. A Bitcoin wallet has the same function as its physical counterpart, namely to store money, which can then be transferred. Actually, as explained in part 3, a Bitcoin wallet doesn’t store Bitcoins, but in fact transaction receipts. However, for all practical purposes it can be viewed as the equivalent of a physical cash wallet. And like a cash wallet, your money is gone when the wallet is stolen or lost, therefore, it is highly recommended that you secure your wallet by encrypting it with a password and backing it up.
You can get wallets from the source, Bitcoin.org. If you download the Bitcoin Core, you’ll get a full Bitcoin client, which transforms your computer into an active node on the Bitcoin network, and which you can also use for mining. Here, the drawback is that you need to download and store the entire block chain on your computer. The block chain is currently 40 GB in size and growing. The download can take a while and updates can take a while as well.
There are all sorts of alternative, lightweight wallets, mobile wallets, online wallets, and even paper wallets. Online wallets should be used with caution, because these are always the targets of hackers, like every other financial institution. Unlike traditional financial institutions, however, in most cases, the money that is stolen is irretrievable, since Bitcoin transactions are not reversible and cannot be traced easily (as is evident from part 3 of this blog post series). You can find a good list of wallet options here.
If you decide to go with the full client, you should periodically check Bitcoin.org for updates. While this does not happen frequently, it does happen occasionally that the block chain forks, that is, that there is no common consensus among the nodes about which block is valid when two blocks are discovered simultaneously (see part 2 of the post series). If you continue to use an outdated client/wallet, you may be on the wrong fork after the block chain is reconciled, and any transactions you made in the meantime will be invalid. In fact, such a (rare) fork happened just two days ago.
Below, I am showing my Bitcoin Core wallet running on a Mac. The versions for other operating systems look fairly similar. I blacked out the balances and transactions for obvious reasons. In the lower right corner you see the status of the client. My client is locked and encrypted, and the block chain synchronization is up to date.
Bitcoin Core wallet
As mentioned above, the first thing you should do is encrypt your wallet. This is accomplished in the Mac version by clicking on Settings > Encrypt wallet. You will be asked to enter the passphrase every time you make an outgoing transaction.
Transactions
In order to make transactions, in particular, to receive Bitcoins, you need to create a receiving address. This can be done via the menu, for Mac the option is File > Receiving addresses, as shown below. After clicking on “New”, you are asked to create a label for the address, which is just for you to distinguish the transactions and not broadcast. The client creates an address automatically when you click OK.
Receiving addresses
Likewise, you can create an address book of addresses you want to send Bitcoins to, as shown below. Note that it is your responsibility to check that these addresses are valid and belong to the correct recipients. The Bitcoin network does not check this for you!
Send to addresses
Sending and receiving is now pretty straightforward via the two send and receive tabs, as shown below. When sending Bitcoins, you can increase or decrease the transaction fee. Unless you are an expert, I would leave the default, since the transaction fee determines the confirmation priority in the mining process. You do not need to be online to receive Bitcoins, since everything is handled automatically by the Bitcoin network. You also do not need to stay online to wait for confirmation after pressing the send button in your client.
Bitcoin core “Send” tab
Bitcoin core “Receive” tab
The remaining functions of the Bitcoin Core client are pretty self-explanatory. The Help menu contains a debug window and advanced command line options, which go beyond this introductory post.
Now you have set up a wallet and some addresses. How do you actually obtain Bitcoins?
Bitcoin Exchanges
One option is to exchange regular currency into Bitcoin at an online exchange. However, proceed with caution, since not all exchanges are operated legally, and assets can be frozen at any time by the authorities. Depending on your location, even using an exchange may not be legal. Furthermore, exchanges are frequently the target of hackers, and many people’s assets have disappeared irretrievably in the past.
Moreover, thanks to speculation, the Bitcoin exchange rate is fluctuating wildly, even as we speak. The exchange rate to US Dollars as a function of time is shown below. Some of the exchange rate “crashes” are in fact due to large quantities of BTC being stolen from exchanges. The BTC exchange rate and the entire economical microcosm would probably make for a few interesting economics studies and publications, but I digress.
BTC USD exchange rate
Your safest bet to obtain some BTC to play around with is therefore to obtain them from so-called faucets (see next section). Alternatively, a safe exchange option is Coinbase, which, however, has some fairly large fees. OTOH, Coinbase has the Coinbase Earn program, where you can actually make anywhere from $50-150. An alternative for US-residents is Robinhood, where you can trade stocks and cryptocurrencies commission-free. However, Robinhood does not currently allow you to transfer or send your cryptocurrencies outside of Robinhood. (Yes, I get a referral commission here, too.)
Faucets
Faucets are websites, where generous (or not so generous) people give out BTC, most of the time in exchange for advertisements. Usually, you also have to solve Captchas in order to prove that you are not an automated bot. More often than not, these sites load pop-up windows with occasionally questionable content, but that’s how these sites make money. (I recommend a good anti-virus program!) Usually, you can never get more than a few Satoshis. A Satoshi is 0.00000001 BTC, or one hundred millionth of a BTC, the smallest BTC fraction the algorithm can currently deal with. Since the minimal amount of BTC in a transaction is currently 5430 Satoshis (0.00005430 BTC), these sites usually pay to another site, where the micropayments accumulate until your faucet earnings are over the minimum transaction limit. When you have exceeded the limit, these micropayment sites will pay out to your Bitcoin address.
I list a few (OK, one…) of the more trustworthy faucets below:
Yes, there are referral commissions involved; these faucets are a bit like pyramid schemes… Still, I have obtained a few fractions of BTC this way, and if you want to just play around with BTC or other cryptocurrencies, this is a good way to get started without having to invest in mining equipment or get burnt in exchanges.
Get free crypto, guaranteed
You’ll notice that there aren’t many active faucets around anymore. Plus you really need to click a lot to make any reasonable amount of money. However, there is the Coinbase Earn program, where you can actually make anywhere from $50-150 a year. (Yes, I get a referral commission here, too.) In June 2021, you can earn $28 right now, simply by watching introductory videos on various crypto tokens.
This concludes part 4 of the Bitcoin blog post series. Next, we’ll look at altcoins, cryptocurrencies that differ more or less from the Bitcoin protocol, and other alternative uses of the block chain.