You probably have heard of “Bitcoin” and “crypto currency.” But how to get started? That’s why this article based on some real first-hand experience, from a consumer’s perspective.
These are the steps to becoming an informed and true Bitcoin user:
[ ] Understand how Bitcoin works in practice [ ] Create a Coinable account using personal info and verified email address [ ] Setup a payment method (credit card or bank account) and buy some Becton [ ] Get a Bitpay wallet App for your phone, and send your Bitcoin there
Need to Know
- Bitcoins (BTC) are “property” in they eyes of the IRS, just like stocks and bonds. So you need to keep track of the basis (value at the time of purchase) and gain or loss at the time you make a payment in return for cash or stuff. See IRS Notice 2014-21.
- Transactions take time as they need to be incorporated into the public ledger, the block chain. You have to “encourage” this computationally expensive effort by offering a small payment, as part of the transaction. Pay more to get your transaction confirmed faster or less if not in a hurry. These transaction costs are currently under a dollar per transaction.
- The confidence level of the validity of a transaction is expressed by the number of confirmations. One or two confirmations is somewhat confident, 3 mostly, and 6 is regarded a minimum confidence needed for high-value transactions.
- Bitcoin value is volatile and certainly not guaranteed or insured in any way. It is still an experiment going quite well so far, but its future is far from certain. It’s not a safe investment at all, but one with a potentially amazing return.
- Wallets make things easier by keeping track of secret keys, generating addresses, automatically setting transaction fees, and so on.
- Keep your coins on your phone in a wallet App, or better on paper in a safe to keep it safe from hackers and truly take ownership.
- Use Bitcoin addresses only once, for security and better anonymity. But transactions are difficult to make completely anonymous.
- If you send Bitcoin to a valid but not owned address, say by making a typo without making the address an invalid one which is very unlikely, your coin will be lost forever unless someone finds it and the corresponding secret key, which is also extremely unlikely.
- Finally, transactions are irreversible, which is why Internet businesses should love taking Bitcoin, not having to worry about the risks of frivolous credit card charge-backs and other attacks.
Buying Bitcoin on Coinbase
Anonymous transactions, freedom, global movement! But trying to actually use Bitcoin related services will bring you back to earth quickly, starting with the experience of signing up for accounts to hold and to purchase Bitcoin. Laws and Regulations in the US guarantee that businesses involved in these transactions will cover their risks and make sure they collect a lot of information about their customers.
Signing up for an account at Coinbase.com, on of the largest players in this field, will take your full name, email address, which needs to be verified, state, and a phone number for receiving an SMS text for 2-factor authentication. They got my avatar picture via Gravatar but you can upload your own.
Next up is Payment Methods. You need to give your credit card number to fund your purchases immediately, which means address and the usual billing information given out for a transaction. That gives you a weekly limit of $100. Credit card transactions cost an extra 3.99% convenience fee. Or you can give your bank account information, that is routing number and account number to fund your account, which takes 4-5 days to complete, with a $2,500 weekly limit.
You can raise your limits by uploading your photo ID. For selling Bitcoins for US$, your limit starts at $10,000 which also can be increased by verifying your identity.
Don’t be surprised to get a call from your issuer’s fraud department to confirm some charges, after you add a credit card and verify two hold charges made by Coinbase. You have simply become one of those elevated risk customers for a moment.
BTCs are property just like stocks or bonds, subject to wash sale rules and subject to capital gain and loss treatment for tax purposes so keep records of your transactions for the IRS. And start getting used to at times wild swings in value.
If you want anonymity, try to find a Bitcoin ATM, someone who wants to sell some, or just try mining them yourself. Bitcoin does not provide strong anonymity.
Steps for Buying Bitcoin on Coinbase
[ ] Sign up for coinbase.com, using your personal information [ ] Setup a funding method, such as credit card or bank account [ ] Make Bitcoin purchases within the set limits
Moving BTC From Coinbase to Bitpay App
Your Coinbase BTC Wallet now contains a proven transaction proving your ownership of Bitcoin. Your wallet has the capability to create unique addresses, on your command. This is like moving your wallet and funds to a new home at a new address, which you can use for future BTC transactions.
However, let’s move your coins to another wallet altogether, to safeguard your Bitcoins from Coinbase getting hacked, or having your funds frozen for some reason; it’s better to store your money on your phone, or even better, off-line.
BTCs can be moved around by moving around the secret private cryptographic keys associated, or by performing another transaction between two wallets. For security, new addresses are generated every time you receive a payment. These addresses are rather long and prone to error when copying or entering so you must use QR codes and your phone camera instead, or cut-and-paste, to accidentally sending funds to someone else.
Next we will move our coins to a Bitpay wallet App on our phone. Note that this IS a payment transaction, even if made to yourself. That means, a fee will be deducted for recording the transaction in the block chain. With Bitpay there is no need for creating a Bitpay account. A newly installed Bitpay wallet app will just ask you to write down a long backup phrase, which is the ONLY way to recover your bitcoins in case you loose your phone or delete your data.
To move funds from Coinbase to your Bitpay wallet, login to Coinbase from your phone, go to Send, then go to Bitpay app, tap Receive, then on the wallet address you want to use, and then copy the address to clipboard. You should use a new, previously unused address. Paste it into the “send to” field on the Coinbase page, and Send, and Confirm.
Bitpay wallet will notify you that it received the funds, and the Coinbase wallet will show the deduction of funds as “pending” until the transaction can be reliably proven.
The original value was 0.07884837 BTC, or $94.21 at the time of this writing. The transaction cost was 0.0004068 BTC for transaction length of 225 bytes at 0.001808 BTC per kB. This leaves 0.07844157 BTC. Two confirmations have rolled-in, and you can inspect the block (#460749) in the bitcoin blockchain that enshrines for perpetuity the proof for this transaction. It takes about 10 minutes or so until a next block of transactions is created.
The transaction has a long transaction number (the hash), with a time stamp, and wallet addresses before and after transaction. Each address has transactions associated with it and possibly a balance (unspent coins.) After receiving a transaction, the receiving wallet will generate a new address and use that for a future transaction.
Steps for Moving Bitcoin from Coinbase to Bitpay App
[ ] Install and setup a Bitcoin wallet App such as Bitpay [ ] In the App tap "Receive" [ ] Tap on the QR code to copy the address to clipboard [ ] Login into your Coinbase account holding some Bitcoin [ ] Tap on Send/Request and paste the address from clipboard into "Recipient" [ ] Select the amount (or all) BTC to send and "Send Funds" [ ] Wait patiently for the first confirmation; BTC should appear in the App
Making payments is self-evident, and we will leave it at this.
Where to Go Next
If you truly want to achieve anonymity, you will need to dive much deeper. There is a great depth to explore. It is likely to get more technical as you will be doing more on your own. In most cases you do not need Bitcoin. But it’s good to be aware of it and ready to use it in times of crisis for instance.
If you are ready to mine your own coins, you may want to mine other kinds of crypto coins instead, and use it to buy Bitcoin if you wish. That other coin could be Ethereum for instance. Here is a guide.
updated: 20170407; 20170504; 20170514; 20170606; 20170701
photo: CC0 pixabay.com/MichaelWuensch