Investing in Bitcoin

Bitcoin Tutorial

In this episode, we will discuss some options that people have used to Invest in Bitcoin and crypto-currencies on their local stock markets. Before we begin, let us be clear that at LearnByCartoon.com we do not give or offer any investment or financial advice.   LearnByCartoon.com are an education service, not an investment or financial advice service.  We do not even promote the purchase of Bitcoin or any crypto-currency. Before you invest in any crypto-currency, you must do your own due diligence to see if this is right for you. We also advise that you speak with a reputable financial advisor.

DigitalX is an exchange listed on the Australian Stock Market. In two thousand and seventeen, on the back of the massive price rise in Bitcoin, the DigitalX stock price went up over seven hundred percent.  If you search for crypto-currency businesses listed on stock markets that you can legally invest into, you may find similar companies, showing similar profits, that operate as either exchanges or related businesses. However, there is absolutely no guarantee that investments into crypto-currency related stocks on any stock market will increase in value consistently over time, and losses could occur.

  • Investing in Bitcoin for BeginnersMany World-renowned Economists say that although crypto-currencies are here to stay, this does not necessarily mean Bitcoin itself will be one of them.  Nouriel Roubini, professor of economics at New York University, who is the economist credited with predicting the 2008 global financial crisis, said the sharp fall of the Bitcoin price at the beginning of twenty eighteen, was the start of a crash that would see the value of the digital currency plummet “all the way down to zero”.
  • Renowned economist Andy Xie from Shanghai, considers Bitcoin a massive Ponzi scheme that can potentially cause a crisis that is “worse than 2008.” Xie also went onto say, “This is a Ponzi scheme. The difference from the past ones is that it is global due to the Internet and, hence, all the people in the world can join. This is why it can go way beyond other schemes.”
  • Professor Steve Keen, Head of the School of Economics, at Kingston University in London has said “It is becoming obvious that Bitcoin can’t be independent of regulation given that criminal attacks and “intelligent fraud” can’t be ruled out.”  Professor Keen went on to say, “there is enormous pressure on the buy side of bitcoin and there are almost no sellers.”

As more people are drawn to buy into the limited number of Bitcoin that actually exist, the price naturally rises very quickly.

However there have been several recorded periods of sudden massive selling, which has dropped the Bitcoin price just as quickly as it went up.  Also today there are many alternative crypto-currencies to choose from. And major financial institutions and banks are now creating some of them. One example is ‘Utility settlement coin’ created by six of the world’s largest banks. This aims to come into circulation sometime in twenty eighteen. We don’t give investment advice, and we cannot predict the future for Bitcoin or any other crypto-currency, however crypto-currencies are most certainly here to stay in one form or another. One associated technology that is witnessing a massive rise in investment, and that does not depend on any one specific crypto-currency is the Crypto-Currency Hardware Wallet.  Hardware Wallets are not only used to store Bitcoin, they can also store many other crypto-currencies. Most Hardware Wallet manufacturers, such as Ledger who produce the Nano S Hardware Wallet, are still privately owned, so investment opportunities is still limited, at least for the moment, but this is one sector of investment that may be worth keeping an eye on.

Whatever you decide to do, here are some basic things to keep in mind with all crypto-currency investments.

Take care when Investing in Bitcoin – Digital Currencies are High-Risk

  • Bitcoin and the Blockchain, plus all other crypto-currencies are entirely new technologies.
  • Several Crypto-currencies are actively competing against each other, and no clear winner has yet been established.
  • Many Governments and Financial Institutions are actively opposed to Bitcoin and crypto-currencies. This could impact taxation or market fundamentals in the future.
  • Historically, rapid price increases in Bitcoin have been followed by rapid price declines.
  • If you do invest in Bitcoin or crypto-currencies, never invest more than you are willing or able to lose.
  • Bitcoin and other crypto-currencies are a very risky investment and you should keep this in mind at all times.
  • If you buy Bitcoins make sure to move them into your own personal wallet and never leave them at the exchange.
  • Several exchanges have been hacked and have failed.
  • Exchanges are not Banks, and some online Bitcoin services have proven to be scams.
  • Ideally, use a hardware wallet such as a Ledger Nano S, or Trezor Bitcoin Wallet to store your Bitcoins, as these offer the most robust security.
  • If you can’t afford a hardware wallet, try a paper wallet to take your Bitcoins offline and away from computers and Internet access completely.
  • Make sure to do your own due diligence.
  • Research and buy Bitcoins only from exchanges that have proven their reputation.
  • It’s also a good idea if you do buy Bitcoins, to buy Bitcoins using Dollar cost averaging.  This means that you don’t buy all of your Bitcoins at one time, but instead buy a fixed amount every month, or every week throughout the year.  This will help you average the purchase price of your Bitcoins over the course of a whole year as the price rises or falls. This also helps to spread your risk.
  • Most importantly, remember the price of Bitcoin can go down just as quickly as it went up.

Many people have bought Bitcoin, and many people have also lost them.  There is still a lot to learn about Bitcoin, and we urge you to continue your education through websites such as Bitcoin.org or Bitcoin.it

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Mining Bitcoin For Beginners

Bitcoin Tutorial for Beginners. Bitcoin and Blockchain Tutorial

Mining Bitcoin For BeginnersBitcoin Miners today use complex cryptology software and specialized computers to crack the puzzles that encrypt Bitcoin Transactions.  These are then validated and confirmed with other miners, before being written into the Blockchain Public Ledger.  For this the Miners receive a small reward.  But the rewards are not given in full Bitcoins worth thousands of dollars, but fractions of a Bitcoin.  Over a full day’s Mining, this could work out to just a few dollars for some computers.  When Bitcoin was invented ten years ago, it was easy for anyone with a computer to mine up to perhaps fifteen Bitcoin per day.  But today it’s a very different story.

Even with thousands of dollars of mining hardware, a home user might only mine a fraction of a bitcoin, worth less than the electricity needed to mine it.  About seventeen million bitcoins have already been mined, out of the twenty one million that will eventually exist in total.  From that seventeen million almost a third have been lost through hard drive failures or lost private keys.  Mining bitcoin requires that your computer cracks the very difficult encryption that Bitcoin transactions are wrapped inside.  And this encryption becomes exponentially more difficult to crack as fewer Bitcoins remain to be mined.  So day-after-day Bitcoin Mining becomes more difficult.

You must also compete against other Miners on the Internet, including professional Bitcoin mining businesses. Professional Miners connect hundreds of computers in tandem to be the first to unlock Bitcoin transactions, and then write validated transactions to the Blockchain. They can then claim the small Bitcoin fees that are attached.  You really cannot compete today by buying a three hundred dollar GPU for your computer and expect to make a profit.   The cost of electricity used can be extremely high, as cracking Bitcoin transactions takes a great deal of processing power and a lot of time. For an individual with sufficient money and interest, professional ASIC Bitcoin Mining Computers are a possibility, with prices starting from around two thousand dollars. You may be able to mine some Bitcoin successfully with these specialized Mining computers, but you must seriously take account of your electricity costs, as the high cost of this could mean running at a loss.

Mining Bitcoin For BeginnersMining Alternatives to Bitcoin

As an option to mining Bitcoin, some entrepreneurial people mine smaller crypto-currencies, such as Litecoin and other alt-coins.  Alt-coins are based on the same technology as Bitcoin, but are currently easier to mine.  The area of Mining Bitcoin continually changes.  Although Bitcoin algorithms become increasingly more difficult for miners to crack, new hardware for mining is always coming to market.  There are several Bitcoin Mining Calculators available on the Internet, such as this one from 99Bitcoins.com that will help you work out if buying Bitcoin Mining hardware makes sense for the electricity cost in your area.  You also need to be aware that the price of Bitcoin continually rises and falls. So what is profitable one day might not be the next.  If the Bitcoin price does reach extremely high levels in the future, then Mining could return a profit if Mined Bitcoins are retained.  However, the future price of Bitcoin is not guaranteed for many reasons, and the Crypto-currency market offers many competing alt-coins today. Mining is an ever-changing area, but to have any chance of Mining success at the beginning of two thousand eighteen, expect to invest at least two thousand dollars, plus pay for a lot of electricity.

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How to Buy Bitcoin

Bitcoin Tutorial for Beginners. Bitcoin and Blockchain Tutorial

Bitcoin For Beginners

How to Buy BitcoinUnfortunately you can find on the Internet, Crypto-currency exchanges that are either fraudulent, or badly operated, which risks your money and personal information.  Different crypto-currency exchanges provide varying degrees of safety, security, privacy, and control over your funds and your personal information.  It is your responsibility to work within the law in your own country, and to perform your own due diligence when selecting and using an Exchange.  You must also select a wallet before you select an exchange.  If you have not yet installed a Bitcoin Wallet, and taken the time to understand how your Wallet operates, then you are not ready to use a Bitcoin Exchange.  Remember, there is no controlling authority for Bitcoin or other Crypto-currencies.  Also local laws could suddenly change that affect Bitcoin Users or Exchanges.  Many people have lost Bitcoin or cash money to Fraudulent Exchanges, which operate for a short period of time, then disappear with their customer’s funds, while others have lost money to Exchanges that were poorly operated and were hacked.

  • These are just some of the reasons why doing your own due diligence is essential.
  • When using Bitcoin, it is your responsibility to ensure your own safety.

Bitcoin.org

To find an exchange, we recommend that you visit Bitcoin.org or another recognized Bitcoin Community in your own country.  Before even using an exchange that is listed here, you must still carry out your own due diligence, especially as circumstances and laws around Bitcoin can change at any time.  Many Exchanges are well operated and trustworthy, but some might not be.  We cannot advise you on what you need to do to fully protect yourself, as due diligence is your own responsibility.  Generally, when you sign up with an exchange you will need to supply identifying personal information before you can open an account.  Your Personal Information will then fall under the laws of the country where the Exchange operates.  This could also mean that the Government or Revenue Service in that country might obtain records of your personal details.

How to Buy Bitcoin

Never Leave Bitcoin in the Online Exchange

Once you have created and funded your Exchange account, the exchange will allow you to buy Bitcoin and usually other crypto-currencies.  When you have Bitcoin in your exchange account, to transfer this to your own Wallet is a simple process of creating and saving a Receiving Transaction record inside your own Bitcoin Wallet. This will create a unique Bitcoin Address for your Wallet and this transaction.  You can then send Bitcoin from your Exchange Account to the Bitcoin address that your Wallet provides.  It is often a good idea to send only a small amount of Bitcoin first, until you are familiar with the Sending and Receiving process, as mistakes often cannot be reversed. Remember also that if you do this, when you create a new Bitcoin Receiving Transaction in your own Wallet to receive Bitcoin, this usually generates a new Bitcoin Address that must be given to the sender.

How to Buy Bitcoin

Your Personal Security is Your Responsibility

Maintaining your financial and personal information security when using Bitcoin is always your responsibility.  Some people see this as the biggest drawback of Crypto-currencies.  Even Steve Wozniak, who co-founded Apple with Steve Jobs has said he fell victim to a bitcoin scam.  Loss of Bitcoin is something that can happen to anyone, even the man who co-founded the world’s most valuable computer company. Also remember that just as there are benefits in selecting more than one Bitcoin Wallet, there could also be benefits in selecting more than one Bitcoin Exchange.

So take your time, do your own due diligence and stay safe.

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Blockchain Public Ledger Explained

Bitcoin Tutorial

Without the Blockchain Public Ledger, Bitcoin and all other crypto-currencies simply could not function. The Blockchain is literally distributed everywhere.

  • The Blockchain Public Ledger is a relatively simple data file, which is central to the entire Bitcoin crypto-currency system.
  • The Blockchain contains a record of every single Bitcoin transaction ever made, but it distributes this information in a unique way.
    • As we record this in March of twenty eighteen, the Blockchain is around one hundred and fifty gigabytes in size, roughly the equivalent of thirty DVD films.
  • What makes the Blockchain special is that it is shared across the Internet, in what is called a distributed network, which means it is not actually in one single place.
  • Unique Bitcoin Receiving Addresses for most transactions help maintain Privacy.
Blockchain Public Ledger

Blockchain Public Ledger Explained

A copy of the BlockChain Public Ledger can be found on all Bitcoin Mining Computers as it is required in the process of Mining Blocks of new Bitcoin Transactions, validating the senders of Bitcoins have the right to spend them, and writing new confirmed Transaction Blocks into the BlockChain.

  • Picture a single spreadsheet that is duplicated thousands of times across a network of thousands of computers.
  • Now imagine that this network is designed to regularly update this spreadsheet across all of these computers all at the same time.

You now have a basic understanding of the Blockchain and a distributed network.

The Mining Process & The BlockChain

Blockchain Public LedgerThe Blockchain is not stored in any one place, it is distributed across hundreds of thousands of Mining Computers and some Bitcoin Wallet Applications across the entire Internet.  As the Blockchain is updated with new Bitcoin Transactions, it is updated across all of these Computers, all at the same time. The Blockchain is the distributed ledger technology at the heart of Bitcoin and many other cryptocurrencies.

  • When a Bitcoin transaction is first sent, in both the Senders and Receiver’s Bitcoin Wallet’s the transaction will actually say ‘unconfirmed’ for some time, and the recipient will not be able to spend these Bitcoins.
  • Every few minutes, all the latest unconfirmed bitcoin transactions are gathered together into a single block, usually containing a few hundred, to a couple of thousand individual bitcoin transactions.
  • This new Block of transactions then poses a mathematical puzzle to Bitcoin Mining Computers who compete with each other to guess the correct answer that will unlock this new block of transactions.
    • The puzzle that needs solving is to find a number that when combined with the data inside the block, produces a result that is within a certain range. This acts like a key, and unlocks the block.
    • No advanced mathematics or computation is involved, it’s basically just guesswork.
    • The first Miner to guess correctly will unlock the new block of transactions. When this happens, the Miner announces this to the other Miners on the Internet.
  • The other miners then check that the solution to the block puzzle is correct, and that the Senders of the Bitcoin transactions included inside the block have the right to spend the included Bitcoins.

For doing this work, the winning Miners receive a reward in Bitcoin. In order for Miners to earn Bitcoin rewards, they must verify at least one megabytes worth of transactions, and also be the first Miner to arrive at the right answer that unlocks a block puzzle.  This is called “proof of work”.

6 Confirmed Blocks & Double-Spending check.

Before the Bitcoin in the Recipients Wallet can actually be spent, the transaction must be at least six blocks deep within the Blockchain Public Ledger.  This is an auditing technique which prevents the possibility of fraud called “double-spending”.  By waiting until a further six blocks of transactions have been confirmed, this ensures that there has been no attempt to fraudulently spend the same Bitcoins in other transactions.  Six confirmed blocks is the usual minimum for Confirming a Bitcoin Transaction, but for some Bitcoin Wallets or Exchanges, more confirmed blocks, sometimes twenty or more, will be required before the Bitcoin transaction is trusted and fully confirmed.

Blockchain Public Ledger versus Bank Accounts

If you compare Bitcoin and the Blockchain to a regular Bank Account from a regular bank, it’s as if everybody’s accounts were grouped together in one huge single file that recorded all transactions, and that could also be opened and read by anyone.  So, how do we guarantee everyone’s privacy, if all accounts, and all transactions are kept in one single file that can be read by anyone?

Your Wallet will generally never use the same Bitcoin Address (to Receive Bitcoin) more than once.

The vast majority of Bitcoin Transactions are sent to Receiving Bitcoin Addresses that are used only once, for one transaction. Without the Private Keys that created the Receiving Bitcoin Address, it’s impossible to identify the Wallet that actually owns the Address.  Wallets can be setup to use a fixed Bitcoin Address, but the vast majority of Bitcoin Transactions are received into Bitcoin Addresses that are unique and used only once. An Electrum Wallet for example, can make around twenty one billion unique Bitcoin Addresses for receiving Bitcoin, all linked to the unique set of Private Keys that mathematically created them.

  • Think of Bitcoin received into your Wallet, as being cash held inside a sealed envelope. Onto this sealed envelope is written the Bitcoin Address used to receive it.  This is the way that your Wallet actually stores your Bitcoin.
  • Through the magic of mathematics, the number of valid but unique Bitcoin addresses that your Wallet can make is unlimited.
  • To the casual observer looking at the Blockchain, all Bitcoin Addresses appear random, with the exception of permanent addresses used by some businesses or Websites.
  • Only the Private Keys held on your own Wallet, could mathematically identify the transactions recorded on the Blockchain that actually belong to your Wallet.
  • This is why your Private Keys should always remain a secret to you alone, as there is a risk of theft from your Wallet if someone discovered them.

When you first install your Bitcoin Wallet on your Computer or Smartphone, it will generate a set of Private Keys, usually around sixty four characters in length, made from a mixture of both letters and numbers.  You don’t need to do anything with your Private Keys, except keep them safe and confidential.

  • Your Private keys mathematically generate your Wallet’s Public Keys, and a set of unique Bitcoin addresses which are used to receive Bitcoins.
    • Importantly, the mathematical process that creates your Bitcoin Addresses from your Private Keys cannot be reversed. This means it’s impossible for anyone with a list of your Wallet’s Bitcoin Addresses – to work out in reverse what your Private Keys are.  All of the Bitcoin Addresses that your Wallet generates will appear to be completely random.
  • Your Private keys are also used to authorize Bitcoin transactions leaving your wallet.
  • Your Private Keys must always remain confidential to you alone, as losing your Private Keys could mean losing the contents of your Wallet.
  • The number of possible mathematical variations of each Private Key is a number larger than all the grains of sand on the Earth – combined.  This immense number of possible variations for each Private Key prevents anyone or anything from simply guessing what your Private Keys actually are.
Blockchain Public Ledger

Blockchain Public Ledger Explained

BlockExplorer.com

You can open the BlockChain yourself and browse through every Bitcoin Transaction ever made, by visiting blockexplorer.com   On BlockExplorer.com, on the bottom of the page are live, real-time Bitcoin transactions that are flowing in from Bitcoin Wallets all around the world.  These transactions are actually being slowed down so we can see them. The actual speed of transactions is much faster.  In the left column, we have the heading called “Hash”, which contains rows of random letters and numbers.  These random letters and numbers are actually what Bitcoin transactions look like when they leave your wallet.  They are called a “Hash”.

Bitcoin Hash Transactions

A Hash is a mathematical process that encodes Bitcoin Transactions leaving your Wallet.  This returns this long set of apparently random letters and numbers.

  • All transactions are made public, which is why it’s called a Public Ledger. However, to maintain privacy, the receiving Bitcoin Addresses are random in the vast majority of cases, so it’s impossible to tell to which actual wallet a particular transaction was sent.
  • There is no Bitcoin Address for the Wallet of the person sending the Bitcoin, but the actual Bitcoin being sent will have an associated Bitcoin Address. This is the Bitcoin Address that this Bitcoin obtained when it was received into the Wallet of the person who’s now sending it on.  Generally, that address will also be a random, one-time-only bitcoin address.

A unique Bitcoin Address for (most) Received Bitcoin Transactions

Blockchain Public Ledger

Blockchain Public Ledger Explained

With BlockExplorer and websites like it, you can search for any Bitcoin transaction ever made, including your own.   All you need to do is search for a valid Bitcoin Address, and blockexplorer.com will show you the full transaction record.   Excluding addresses used by businesses or donation websites, ninety nine percent of all Bitcoin Addresses that you can search for will have been used only once, and for only one transaction.

  • Mining Bitcoin requires computers to guess the answer to a mathematical puzzle that unlocks blocks of Bitcoin Transactions.
  • There is no complex decryption taking place, it’s all basically guess work.
  • But the answer to the puzzle that unlocks blocks of transactions becomes exponentially more difficult as fewer Bitcoins remain to be mined.
  • The puzzle that computers attempt to unlock is called a Hash, which is why if you look at professional Bitcoin Mining Computers, they will all advertise their Hash rate.
    • Computers with high hash rates can make more guesses per second, which gives a better chance of winning Bitcoin from the Mining process.
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Bitcoin Cold Storage Wallets and Hardware Wallets

Bitcoin Tutorial for Beginners. Bitcoin and Blockchain Tutorial

Why use Cold Storage or Hardware Wallets?

So far, we’ve discussed the history of Bitcoin, and it’s strengths and weaknesses.  We’ve explored the different types of Bitcoin Wallets available.  We’ve warned of the potential for theft, scams, or computer hacking of Wallets, and the advisability of using Internet protection tools, such as Bitdefender or Bullguard. We’ve installed a typical wallet and discussed the need to safeguard your Seed, your Private Keys, passwords, and any other secret keys used to create the wallet, plus your Wallet’s data files. We’ve highlighted the importance of keeping all of this crucial information and any backup data files in a secure location, separated completely from the devices holding your wallet.  We’ve sent and received Bitcoin from a Wallet, and talked about random bitcoin addresses.  We’ve discussed the due diligence required, before you select a Bitcoin Exchange, or any other online Bitcoin service.  We’ve highlighted the wisdom of starting small, by sending and receiving only a few dollars worth of Bitcoin between any Bitcoin Exchange and your Wallet, and from one Wallet to another.  We’ve also looked at Bitcoin Fees, and how to calculate these using estimatefee.com. Fees are calculated and charged to the sender as your Bitcoin leaves your Wallet, so it’s best to know what these are, as they can vary wildly.

If you plan on holding Bitcoin for investment, then holding them on a Computer or Smartphone is not your only option.  In mot cases, dues to the security issues involved with holding Digital Currency on Devices, that include hacking, cybercrime and theft or loss, moving your Bitcoin onto non-digital devices is a very good idea.

Bitcoin Cold Storage Wallets and Bitcoin Hardware Wallets

When Bitcoin is kept on a device connected to the internet, there is the potential for loss of Bitcoin through computer viruses, malware or hacking.  Traditional Cold Storage Wallets, and the newer and more robust Hardware Wallets, such as the Trezor or ledger Nano S, get around this problem completely by removing your Wallet from Internet Connected Devices altogether, except when you need to use them.  Before we explore these options, a word of warning…

Any mistakes that you might make when sending or receiving Bitcoin, or working with your own Cold Storage or Hardware Wallets, can be permanent and these mistakes are also your own responsibility.  We advised you to start small, with a few dollars worth of bitcoin, when first sending or receiving Bitcoin from a Wallet.  It’s also wise to do this when familiarizing yourself with Cold Storage and Hardware Wallets.  If you practice by sending the equivalent of a couple of dollars to a cold storage or hardware wallet, this will familiarize you with the process, but it doesn’t risk a lot of Bitcoin, in case of mistakes.  Working with Bitcoin can be complicated for the beginner or experienced computer user alike.

The most common point of failure that leads to lost Bitcoin is the Bitcoin User themselves.

Bitcoin Cold Storage Wallets and Bitcoin Hardware Wallets
Bitcoin Cold Storage Wallets and Bitcoin Hardware Wallets

The first type of Cold Storage Wallet is the Paper Wallet. This is a Wallet that must be printed on Paper.  Be careful creating these, as even experienced computer users have lost Bitcoin because they made simple human errors when creating or even simply printing Cold Storage Wallets.  The Paper Wallet is literally a sheet of paper onto which is printed a valid Bitcoin Address, a Public Key, a Private Key and a QR code.  The reason Paper Wallets are made possible is the fact that all Bitcoin Transactions are recorded in a single large public file called the BlockChain Public Ledger. On the Blockchain, all Bitcoin transactions ever made can be traced back to specific Bitcoin Addresses; both from the sender’s wallet and to the receiver’s wallet.  This is why your Bitcoin Wallet will automatically create a new and unique Bitcoin Address each time you send or receive Bitcoin, as this protects the confidentiality of your own Wallet.

Bitcoin Cold Storage Wallets and Bitcoin Hardware WalletsThese random Bitcoin Addresses and transactions on the BlockChain can be mathematically associated back to the private keys that uniquely identify every Bitcoin Wallet.  It doesn’t matter if these Private Keys belong to wallets that are Digital, or exist only on a sheet of paper.  Many Digital Wallets, such as Electrum, have their own built-in options that allow you to create an offline Paper Wallet.  A paper wallet contains a set of Private Keys, Public Keys and a valid Bitcoin Address that you can send Bitcoin funds to, just like any other wallet.  Look for the instructions for creating a paper wallet in your own Wallet’s online Help files, or on the Wallet Developer’s Website.

There are also several online sites that can create a Paper wallet, such as Bitaddress.org    Bitaddress.org will generate a random Bitcoin address; complete with a valid Public and Private Key. This is essentially everything that a digital bitcoin wallet contains. Once you have a valid Paper Wallet, containing a valid Bitcoin Address, plus a set of valid Public and Private Keys, you can send Bitcoin directly to the Paper Wallet’s address, in exactly the same way as you would with a digital wallet address.

Every Bitcoin transaction is registered on the BlockChain Public Ledger, along with the sending and receiving Bitcoin Wallet addresses.  When you want to access and spend the Bitcoin you have sent to your Paper Wallet, simply scan or import the paper wallet’s private and public keys into an Online Digital Wallet, such as Electrum. This will then give you access to the Bitcoin associated with the original Paper Wallet.  Paper Wallets should always be stored in a secure location, such as a Fireproof and waterproof Safe, or Safety Deposit Box, completely separated from your other devices.  There are many ways to create a Paper Wallet, however always do your own due diligence before selecting the best method for your circumstances, and ensure you are following trusted and up-to-date instructions.  For your own security, if you print out a paper wallet, it is always best to do this using a printer directly connected to your computer by a cable.

Wi-Fi printers are not secure, and many printers include a buffer, which means that previously printed images could be reprinted.  If your printer does have a buffer of stored data, make sure this is cleared after you print your wallet.

Another option for creating a Cold Storage Wallet is using a number of high-quality USB Thumb-drives or recordable DVDs, onto which you can copy your Wallet’s Data Files, Seed and Private and Public Keys.  This is not always as robust as the Paper Wallet, as Digital Devices can fail or lose data for mechanical or electo-magnetic reasons.  You should make a number of copies of the Thumb-drive or DVD, as this protects you from a hardware failure, but be aware that any hardware device can break, even if you have multiple copies.  A more robust choice is a purpose designed Hardware Wallet, such as the Trazor or Ledger Nano S.  These are the best-known hardware Wallets, but there are many other good choices available from other manufacturers on the market today, and Hardware Wallet technology advances all the time.  Hardware Wallets are by far the most secure way of storing Bitcoin on any digital device.  Hardware Wallets also provide built-in options for recreating your Wallet, using a secure seed phrase and password, should the original device get lost, stolen or destroyed.  These devices don’t contain any operating system that might be infected with malware, but only software designed to store Bitcoin.

The Hardware Wallet is protected during daily use by passwords and pins.   To use Hardware Wallets, connect them to an Online Computer that contains an App from the device manufacturer, or a chrome browser extension.  This connects the hardware wallet to the Internet, and allows you to send or receive Bitcoin like a regular Wallet.  They can function as a standard Digital Wallet, but only when they are physically plugged into an online computer via the USB socket.  When you’re not using your Hardware Wallet, simply unplug it from the computer, and keep it somewhere safe, like a safety deposit box or safe.  If the device fails, your Wallet can be recovered onto a new device using a Seed phrase, like an Electrum Bitcoin Wallet.

If you can afford Hardware Wallets, they offer far more features and security than the thumb-drive or DVD method. 

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Sending and Receiving Bitcoin from an Electrum Wallet

Bitcoin Tutorial

Start Small to Prevent Expensive Bitcoin Mistakes

To prevent expensive mistakes, in your own Wallet, start by sending and receiving no more than a Dollar’s worth of Bitcoin from your Wallet to another Wallet, and select low fees.  Both Wallets can be on your own computer.  Mistakes made using Bitcoin are usually permanent, so start small and practice until you are comfortable with the process.  Now, let’s open our Electrum Wallet.  To open our Wallet, we must enter the password we created when we first installed it.  If you downloaded Electrum, you may need to enable some options from Electrum’s Preferences, available from the tools menu, to see all of the options shown in this demonstration.  Press “Help” from the Electrum toolbar for instructions.

Main Tabs on Electrum Wallet

On the top of our Electrum Wallet are four tabs:

  • History
  • Send
  • Receive
  • Addresses.

The History tab shows my Bitcoin transaction history.  The Send tab allows me to Send Bitcoin from my Wallet to another Bitcoin Address.   The Receive tab allows me to enter details of Bitcoin funds that I am expecting to receive into my Wallet.  Take note of the first four characters of this displayed “Receiving Address” for our Wallet.  When I click on the Addresses tab, we can see the same Bitcoin Address is shown in the list of our Wallet’s available Addresses.  Usually, every transaction we make from our Wallet will use a new and unique Bitcoin address, as this helps to maintain confidentiality.  Our wallet will make more unique Addresses whenever they are needed.

Download from Electrum.org

Electrum.org

Sending and Receiving Bitcoin from an Electrum Wallet
Sending and Receiving Bitcoin from an Electrum Wallet

Let’s now explore Sending funds and Fees by clicking on the “Send” tab.  In the “Pay To” field, we enter the Bitcoin address for the Wallet that we are sending Bitcoin to.  We can Copy and Paste the recipient’s Bitcoin address, or if we are using a Bitcoin Wallet on a Mobile device we can scan the QR code, which is a random square of digital blocks containing the recipient’s Bitcoin Address. In the “Description” field, enter a good description that will remind you to whom and for what these Bitcoin were sent.  My Wallet allows me to enter an amount in Bitcoin or US Dollars.  Local currency entry is an option that can be enabled from Electrum’s Preferences.  If I enter a dollar amount, my wallet will calculate the Bitcoin price, or I can simply enter the Bitcoin price directly.  You need to be careful when sending or receiving Bitcoin, as there are several different types of Bitcoin units.

If I open the preferences window for my Electrum wallet, and click on the Appearance tab, you will see my chosen “base unit” is in Bitcoin, or BTC.  There are two other common Bitcoin units, which are MilliBitcoin or “mBTC”.  One thousand “mBTC” are equal to one Bitcoin.  Bitcoin could also be quoted in units called “Bits”, which are one millionth of one Bitcoin.  These alternative unit sizes make managing Wallet funds easier for some people.  They are essentially the same; it’s like the difference between one hundred cents, or one dollar.  To prevent expensive mistakes, just make sure when sending or receiving Bitcoin, that you are using the same Bitcoin unit as the other party.

Sending and Receiving Bitcoin from an Electrum Wallet
Sending and Receiving Bitcoin from an Electrum Wallet

Bitcoin Fees can be complicated.

Fees are taken by the Miners, for the task of processing and confirming each transaction and writing confirmed transactions into the BlockChain Public Ledger. Electrum offers a slider to set my fee, with the lowest fee on the left, and higher fees on the right. Bitcoin fees are based on the size of the transaction, in bytes, leaving your Wallet. Usually this is a very small number.

estimatefee.com

Estimatefee.com

The Fee is calculated in Satoshi’s per byte, which is the smallest possible fraction of a single Bitcoin. Average Fees can change almost daily, depending on how busy the Bitcoin Network currently is.  The larger the fee you select, the faster the Bitcoin Miners will confirm your transaction. By sliding all the way to the right, the description box tells me this transaction will be confirmed by Bitcoin Miners in the next block of transactions written to the BlockChain.  This usually means about an hour.  It also shows the cost in Satoshis per byte. If I move the slider all the way left, this transaction will be confirmed within twenty-five confirmed blocks on the Blockchain.  This means a delay of hours, a day, or sometimes longer.  However, the fee charged is a lot less.  During times of high or low traffic, the fee slider could cause you to overpay or underpay fees.  You can also change Electrum’s Preferences to enable you to enter a manual Fee amount, but this should be avoided by the beginner, as it is possible to enter a fee that is far too high.  A good estimate of the current Bitcoin market fees are available from estimatefee.com

The numbers to look at are the number of blocks to confirm within sixty minutes, and the number of satoshis per byte to enable this for a transaction.  This also gives me a cost in cents or sometimes dollars for how much this actually is in local currency.  When I return to Electrum, to confirm this transaction within the hour, I simply move the slider to a place where it falls close to the number of blocks and satoshis that estimatefee.com showed me.

I now know approximately how much this fee is, in dollars or cents, and that this transaction should confirm within one hour.

Electrum Wallet Send BitcoinNext, it’s a good idea to click on the Preview button.  The top of the window shows us the details of the transaction, and the fees we have selected.  On the bottom, in the output section, you might see two outputs.  Think of each of these outputs as separate digital coins.  Like cash transactions, Bitcoin sometimes generates small amounts of change from a transaction, that must be returned to the person sending the Bitcoin, which is me.  The first output address will match the Bitcoin Address we entered into the “Pay to” field. This is where our Payment is actually going.  The second output is a small amount of Bitcoin change returning to my own wallet through one of my own Wallet’s unique Addresses.  We could sign this transaction here, which uses our Private key to authorise the transaction, then press the “Broadcast” button to send this transaction out into the Bitcoin Network for confirmation, or we can close this window.

From the Send screen, I can now press the Send Button to send this transaction, which uses our Private Keys to sign and authorise the transaction. If you have setup a password for your Wallet, you will be asked to enter that before the transaction actually leaves the Wallet. As we setup Two-Factor Authentication for our Wallet, we must enter a random six-digit code using Google Authenticator on our Cell Phone, before the transaction can be sent.  Once we send our transaction, we can check how it’s going in the History window. The transaction will appear as “unconfirmed’ until the Miners pick up the transaction, agree that it is valid, and then write our transaction  into a new Block of transactions, which are  added to the BlockChain Public Ledger. Only when this is done, and more Blocks of transactions are confirmed after it, will the transaction change to “Confirmed” in the sender’s and receiver’s wallets. The recipient will not be able to spend the Bitcoin until the transaction changes to Confirmed.

Unconfirmed Bitcoin Transaction in Electrum Wallet

Receiving Bitcoin into an Electrum Wallet

Unless you are using a permanent Bitcoin address, which is generally only done by businesses or Websites with a donation button, every time you receive Bitcoin, your Wallet will provide a new receiving address to protect your confidentiality. Before you can receive Bitcoin, you must create a Receiving transaction in your Wallet and Save this, so that the Receiving Bitcoin address is saved against this particular transaction. The QR code on the screen can be scanned by the other person sending you Bitcoin, or you can copy and paste the Receiving Address. Enter a description for the receipt, and the amount of Bitcoin that you are expecting.  “Request Expires” can be left as “never expires”.  Then press the Save button.

Our Bitcoin Receipt transaction and our receiving Address have now been saved to our Wallet.  It’s now safe to give the person or Website sending us Bitcoin a copy of our Receiving Bitcoin address.  The History tab will show us the status of the transaction.  As I explained earlier, the length of time it takes for the transaction to move from “unconfirmed” to “confirmed” depends on the size of the fee that the Sender has chosen.  So we can expect our Bitcoin in an hour, a few hours, a day, or even longer.

Receiving Bitcoin into an Electrum Wallet

 

We can only spend the Bitcoin we receive when the state changes from “unconfirmed” to “confirmed”.  

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Bitcoin Wallet Seeds, Recovery Keys, Private Keys, Public Keys and Bitcoin Addresses

Bitcoin Tutorial for Beginners. Bitcoin and Blockchain Tutorial
Bitcoin Tutorial Blockchain Guide EP09 - Cryptology 500 x 280

Bitcoin & Cryptology

Let’s explore some more about the Seed and the pairing of Private Keys, Public Keys and Bitcoin Addresses.  Our Electrum Wallet was generated using some random words called the Seed. But what exactly is this Seed, and what does it do? At the heart of Bitcoin is advanced Cryptology software that is used to encrypt and decrypt Bitcoin Wallets and Bitcoin Transactions. When you first create your Wallet, the Seed is picked up by the Wallet’s advanced Cryptology software to generate a number of unique items.  The random words and letter placement in the seed is used by the encryption algorithms, to create encryption patterns and Keys that are unique to your Wallet.

First, your Wallet’s main datafile, which stores details of your Bitcoin transactions is created and encrypted.  As the Blockchain Public Ledger holds details of every single Bitcoin Transaction ever made, all transactions from your Wallet will also exist in the Blockchain Public Ledger.  Next, matching pairs of Private Keys and Public Keys will be created, along with some unique Bitcoin Addresses that are matched to these keys.  You need a supply of Bitcoin Addresses in order to send or receive Bitcoin into your Wallet. And every Wallet can create an unlimited number of unique Addresses.

Bitcoin Tutorial Blockchain Guide EP09 - Private Keys Public Keys 1020 x 400

Private Keys and Public Keys

Each Bitcoin Address is directly linked to a pair of  matching keys, the Private Key, and the Public Key.  The “Private Key”, must remain securely on your own Wallet, as it is used to encrypt and authorize transactions leaving your Wallet.  Never, for any reason show anyone what your Private Keys are, as this makes your Wallet vulnerable to cyber-crime and potential theft. If anyone found out what your Private Keys were, they could potentially steal Bitcoins from your Wallet, in much the same way that they could if they stole your Seed. The other Key is the Public Key.  This matches up with your Private Key, to form a matching pair, a bit like non-identical twins.

Bitcoin Tutorial Blockchain Guide EP09 - Seed Recovery Phrase 500 x 280

Next we have the Bitcoin Address itself. Every Bitcoin Transaction you make from your Wallet generally uses a completely new and unique Bitcoin Address, which helps retain your anonymity and protects your wallet. The Bitcoin address is a mathematically related shortened version of your Public Key, created using a technique called hashing. So in summary, a bitcoin address is a mathematically related and shortened version of your public key, which itself is mathematically related to your much larger and more complex Private key. Your Private Key creates your Public Keys, authorizes transactions leaving your Wallet, and proves ownership of your transactions.  I did mention Bitcoin was complicated, didn’t I?

When Bitcoin transactions are decrypted by the Miners, for inclusion into the Blockchain Public Ledger, the included Public Key and Bitcoin Addresses identifies the transaction as either coming from your Wallet, or being sent to your Wallet.  You can view your Private Keys inside your Wallet, but you don’t need to worry about them too much for day-to-day use.  The pairing of public and private keys, when transacting in Bitcoin, is handled automatically by your Wallet.  If you want to learn more about the Seed, Bitcoin Addresses, and Public or Private Keys, check the Webpage for this episode and follow the links to more reading.

Always keep your Seed (Recovery Phrase) and Private Keys Secure, Secret and Confidential!

Bitcoin Tutorial Blockchain Guide EP09 - Private Keys 500 x 280
Bitcoin Tutorial Blockchain Guide EP09 - Seed Recovery Phrase 500 x 280
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Backing Up & Restoring a Bitcoin Wallet

Bitcoin Tutorial

Restoring a Lost, Stolen or Destroyed Bitcoin Wallet

As soon as you install any Bitcoin Wallet, you must ensure you have everything needed to actually restore your Wallet and your Bitcoins, in case of loss of the original device or Wallet. Your first task is securing the random words that form the seed phrase for your wallet, plus any passwords, Pins, Private Keys or other secret keys that secure your Wallet. The information, showing how to backup everything needed to successfully restore your Wallet, in case the original was lost or destroyed, will be available on the Wallet Developers Website.  Please don’t skip this step.  Make sure you know how to recover you Wallet and Bitcoin if disaster struck and your original wallet or devices were lost or destroyed.

Restore a Bitcoin Wallet
Restore an Electrum Wallet

Ideally, this crucial information should be kept on paper, as digital devices can fail.  Some people even engrave their seed phrase on a piece of metal.  Keep this information confidential to you alone, and in a secure location, completely separated from the device that holds your wallet, and protected against fire, damage or theft. Bitcoin does make you your own Bank, and security of your own Bitcoin is your responsibility. Running a google search for “How to keep your Bitcoin Wallet Seed Safe” may give you some ideas, based on your own circumstances, for storing this information securely. Some Wallets, although not all of them, will require that you backup certain files onto an external device, such as a USB thumb drive.

Be careful however, as occasionally some Wallets require more than just the Wallet’s main Data-file to be included in a backup. You may also have to backup your Wallet’s Private Keys, and these could be in a separate file from the main Wallet data-file. If you don’t backup everything required to restore a lost wallet, you could lose your Wallet completely if the original Wallet was lost or destroyed. If you use a thumb drive as a backup device, you should only use a high quality device, and also use more than one. We recommend at least three separate USB thumb Drives, used in rotation, to backup your Wallet’s data files.  Other Wallets function slightly differently and do not need any backed up files to restore a lost wallet, but can be recovered using the Seed phrase alone.  It depends on the Wallet you have chosen, whether a physical backup of files is required or not.

Bitcoin Wallet Seed

If you use a thumb drive as a backup device, you should only use a high quality device, and also use more than one. We recommend at least three separate USB thumb Drives, used in rotation, to backup your Wallet’s data files. Other Wallets function slightly differently and do not need any backed up files to restore a lost wallet, but can be recovered using the Seed phrase alone. It depends on the Wallet you have chosen, whether a physical backup of files is required or not. In our previous episode we installed an Electrum Wallet, and before receiving Bitcoins into our Wallet, our first task is to figure out how to recover our Bitcoins if this Wallet was lost or destroyed. To restore a lost or destroyed Electrum Wallet only requires a copy of the original Wallet’s Seed phrase.

However, don’t take our word for this. Bitcoin Wallet Applications continually evolve, so what may be the correct advice one day, could be wrong the next. After installing your Electrum Wallet, always visit the Website for the Wallet’s manufacturer or developer.  Consult their online documentation, frequently asked questions or Community forum, so that you know exactly what you need to do to recreate your Wallet and recover your Bitcoins, in case the original wallet was lost or destroyed.  Follow the Developers instructions closely, and secure everything required to recreate your Wallet. Many people have lost their Bitcoin Wallets because they did not follow these simple steps.

Restore a Bitcoin Wallet Multiple Copies of USB Thumb Drive

If you need to Backup Your Wallet Data File, and Export your Private Keys – Always use Multiple Backup Copies!

Last Will and Testament Bitcoin

Let’s do this with Electrum, by visiting the Electrum.org homepage. From the homepage, we can see two helpful links, which you will find on most Wallet websites: Documentation and Community Forum. If you need to ask questions about how to ensure you have everything needed to restore a lost Wallet, either of these sections will help. Most Websites will have a Community Forum, which allows you to get advice from real people. Key phrases to search for are “Backup”, “restore” or “recover your wallet”.  By looking through the Electrum Documentation, or community forum pages, we can quickly find the correct procedure to restore our Wallet, should this ever be needed. If I quote directly from the Electrum FAQ section:  “It is not possible to recover your password.  This is why we ask you to save your seed on paper.” “To restore your wallet from the seed phrase, create a new wallet, select the type, then select “I already have a seed”, and proceed to input your seed.” Following these steps will allow you to recreate your Electrum Wallet on a new computer or smartphone.

It’s that easy to restore an Electrum Wallet, even if the computer or smartphone that held your original Wallet was lost, stolen or destroyed.  This is made possible because of reverse encryption, and the BlockChain Public Ledger, which holds details of all Bitcoin Transactions, including those from the original wallet.  This highlights why storing your seed very securely, ideally on paper, and completely separated from your device is essential.  It should also highlight one of the major drawbacks with Bitcoin Wallets, which is the very real possibility of theft, either cyber or physical.  If you lost the computer or smartphone holding your Wallet, and you also lost the seed phrase, or Private Keys, then your Wallet could be gone — forever. Also, if a thief stole your seed phrase, or your Private Keys, they could potentially use them to recreate and thus steal your wallet.  One final thing to consider is that none of us live forever.  If you have relatives and loved ones that you would wish to leave your Bitcoin to, should you pass away, then you may need to account for this in your Will.  Also ensure that you leave your loved ones the means to actually access your Bitcoin Wallet.  We can’t advise you how best to do this, as every person’s circumstances are different.  Running a google search for methods other people have used to account for Bitcoin Wallets in their Wills may help you.  And that’s us.

Restoring an Electrum WalletIn summary, and before you begin to actively use your Bitcoin Wallet, it pays to ask yourself this simple question:  “If I lost all of the computers or smartphones that hold my Bitcoin Wallet, do I have the means to recreate my Wallet, and is this information and data stored safely, securely and completely separated from the original devices?” If you intend to use Bitcoin, the answer should always be “Yes”.

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Installing a typical Bitcoin Wallet – Electrum

Bitcoin Tutorial

Malware Free Computer is Essential

Before you install your own Bitcoin Wallet, please make sure the Operating system on your Device is fully up to date. If you are using Windows, this is done using Windows update. You should also have an Internet Security tool, such as Bullguard Internet Security, or Bitdefender Total Security. Malware, such as key loggers can compromise a Computer or Smartphone, so an Internet Security Tool is essential.

The Bitcoin Blockchain

Bitcoin.org

Electrum.org

First, we need to select and download our Wallet from a trustworthy location.  Bitcoin.org is a great site for this. It holds reviews of all the most popular wallets, and the links to download Wallets can be trusted.  On Bitcoin.org, simply click on “Getting Started with Bitcoin” then “Choose Your Wallet”.  Take your time to browse this area, and compare Wallets to find the ones that are right for you.  Installing more than one Wallet from different manufacturers offers added security, by spreading your Bitcoins across multiple Wallets.  If a security flaw appears in one Wallet, the others should not be affected.  You could use one Wallet for day to day transactions, and one or more Wallets for savings.  Some Wallets, such as Bitcoin Core, will actually download a copy of the entire BlockChain Public Ledger onto your Computer as part of the Installation process.  Other Wallets don’t need to do this, instead using Servers on the Internet to access the Blockchain.  As I record this in February two thousand eighteen, the BlockChain is currently one hundred and fifty gigabytes in size, and it gets larger every day.

Electrum Bitcoin Wallet

Depending on your Internet connection, a full download could take several days.  If you select a Wallet for your Desktop or Laptop Computer that downloads the entire Blockchain file, you will need an Internet connection and sufficient disk space for this.  If you don’t like the idea of downloading the entire one hundred and fifty gigabyte BlockChain Public Ledger to your own Computer, just select a Wallet that uses Servers on the Internet to access the Blockchain.  A popular Wallet that doesn’t download the entire BlockChain Public Ledger, but instead connects to the BlockChain through trusted public servers on the Internet, is called “Electrum”.  The Electrum Wallet has been around for several years and is very popular.  To download Electrum simply click on the “Visit Website” button to visit the official Electrum website.  Click on Download, and then select the correct version for your Computer.  If you are using a Windows PC, then either the Standalone, or the Windows Installer downloads will work just fine.

Electrum Multi Signature Wallet

Installing an Electrum Wallet

When the installation file is downloaded, simply open it to begin. On the Electrum Wallet screen, give your Wallet a name that you will recognize. You can run the installer more than once, to create multiple Electrum Wallets on the same device, such as Bob’s Daily Wallet, and Bob’s Savings Wallet. Next, we have several Wallet Types to choose from.

Standard Elecrum Wallet

With a Standard Wallet, a single security key protects your bitcoins. However, if your computer is compromised with malware such as a keystroke logger, it is possible for your key to be stolen. This is why we recommend that you always have a good Internet Security Tool to protect against Malware.

Two Factor Authentication Wallet

A more secure option is the two-factor authentication Wallet. With two-factor authentication, your computer cannot spend your bitcoins without you first entering a random Google Authenticator code sent directly to your cell phone, which is linked to your Wallet. This gives significantly increased security, so we are going to select this option. There are two other options available, which I’ll briefly explain.

Multi-Signature Wallet

A multi-signature wallet creates two separate Wallets, usually on separate computers.  These Wallets can be controlled by two separate people, who must act together, in order to access Bitcoins in the shared Wallet. Both wallets also use the same set of Bitcoin Addresses. A Multi-Signature Wallet functions like a co-signature joint Bank Account, meaning no one person can spend Bitcoins on their own.

Import Bitcoin Addresses or Private Keys

“Import Bitcoin Addresses or Private Keys” is used to import either a Cold Storage, or another Digital Wallet. This can also be accomplished by scanning the imported Wallet’s QR code. You can also use Electrum, to make a Cold Storage Wallet, which you can store on a USB Thumb Drive, or a hardware device such as the Trezor or Nano S Bitcoin Wallet.

Electrum Seed

Keep your Electrum Seed Safe

Back to our installation, with two-factor authentication selected, we simply click on next.  We now come to the beginning of life for all Bitcoin Wallets, called the “seed”.  The Seed is a long set of random words. These are used to encrypt your Wallet, and generate your Private Key that authorizes transactions leaving your Wallet.  The Seed is also required to restore a Wallet that has been lost, stolen, or destroyed. The Seed can rebuild your Wallet from backup files, or for some types of Wallets, called “Blockchain Wallets”, from information held on the Blockchain itself. Keep the “Seed” secret and secure, and separated from your device.  If anyone found out what your Seed was, they could steal your Wallet. When we click through to the Seed page, we can accept the random words given, or we can select our own random words.

Electrum Seed

Wallet Recovery Information – Keep hard copies and secure!

Whichever words you choose for your Seed, write them down, print them, or store them in a text file.  Keep this in a secure location, totally isolated from your Computer or Smartphone.  Please don’t be tempted to simply copy your Seed into a text file, and keep this on the same Computer that stores your Wallet. Many people have lost their Bitcoin Wallets doing exactly this.  If you print out the seed words, do this only from a printer that is directly connected to your computer.  If you use a USB thumb drive, use more than one high quality drive to store the seed, in case of hardware failure.  We do recommend that the seed is written on paper somewhere, and stored securely, as all hardware can fail.  Next, to make sure that you really do know what your Seed key is, Electrum will ask you to retype it.

Wallet Password – Lose it – lose your Wallet.

Next, we have a password to keep secure. This password will be required whenever you want to open your Wallet.  Make this memorable, but not easy for anyone else to guess.  If you forget your seed, password or PIN, it’s usually impossible to recover them.

Security in Bitcoin is Everything!

You must store these very securely! Many people have lost all of their Bitcoins by simply forgetting this crucial security information. So, safeguard and store all of this information securely!

Testing your Electrum Bitcoin Wallet

In this next step, as we selected two-factor authentication for our Wallet, we need to scan the QR code using Google Authenticator on our cellphone.  Google Authenticator will then return a six-digit code, which must be entered into this screen.  Once that is done, your cellphone will be linked to your Bitcoin Wallet. And every time Bitcoins are sent from your Wallet, a random Google Authenticator code, sent to your linked Cellphone must be entered to authorize it.  To test our Wallet, simply open the Electrum Application, and select our Wallet, then enter the Password we created during the installation.  And we’re done!

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Securing Your Bitcoin Wallet

Bitcoin Wallet

Cryptocurrency removes the user from the traditional banking system. Essentially you become your own bank.

As your own Bank, you are the one in charge of security. It is crucial that you understand this. There are basic security requirements that you must meet. If you do not, you could lose your Bitcoin. Adopting proper security precautions will put you ahead of many Bitcoin users, who continually make basic mistakes, which results in lost Bitcoins. Bitcoin users have lost Millions of dollars in Bitcoin, and continue to do so, often for reasons that were entirely avoidable.

No Bitcoin Cold Storage

First, let’s look at the potential for loss or failure of computer hardware holding your Bitcoin. Bitcoin is a digital currency, and most bitcoins will exist solely on computers or smartphones. However, any Computer or Smartphone can break, even if the quality is good. There are several infamous examples, such as this man in the UK, who discarded a broken laptop. Unfortunately his laptop hard drive contained the equivalent of eighty million dollars in Bitcoin.  He had no backup.

Poor Backup Technique – Only One Copy?

  • This man in Australia did make a backup of his bitcoin Wallet, using the Thumb Drive method of Cold Storage.
  • Unfortunately he used a cheap five dollar USB Thumb Drive. When he tried to recover his Bitcoin, the thumb drive was dead.
  • He lost millions.

Bitcoin Cold Storage

Bitcoin Tutorial for Beginners. Bitcoin and Blockchain Tutorial

How many people lose their own Bitcoin.

One of the most common forms of lost Bitcoin is simply forgetting a security phrase or PIN to access a Wallet. This locks the owners out of their own Bitcoin Wallet, forever. Next, we come to a serious form of lost Bitcoin, which is cyber-crime. This can affect your own devices, or websites such as Bitcoin exchanges, or Online Wallets.

Fraudulent Bitcoin Exchanges and Bitcoin Wallets continually pop up on the Internet. These are scams designed to steal Money and Bitcoin. You should only ever use a trusted and recommended Online Bitcoin Service or Wallet through Websites such as Bitcoin.org

There is also the possibility of software failures and real computer hacking. In January of twenty-eighteen, a Japanese Bitcoin Exchange called ‘CoinCheck” was hacked. It lost five hundred Million dollars of its customers Bitcoin.  Similar losses have occurred on other exchanges.

In November twenty seventeen, a Bitcoin Wallet Developer called Parity accidentally locked all of their user’s Cryptocurrency Wallets, on their own client’s devices. In a panic to unlock their Client’s Wallets, the Developers accidentally destroyed them, plus the three hundred million dollars in crypto-currency they contained.

Online Wallets are an alternative to holding your own Digital Wallet on your own device, but there have been several cases of hacking of Online Wallets that have also led to huge losses.

bitcoin seed, password and pin

There is a lesson here, which Information Technology security professionals have always known: if something is connected to the internet, there is a chance it can be hacked, or it can break. Most software is updated continually, including operating systems, Bitcoin Wallets, and websites. Every new update brings the potential for a new type of cyber-attack, exploiting a new weakness. Loss of Bitcoin continues to be one of the biggest drawbacks to using it, and why you must protect yourself.

With a cyber-attack through the internet or Wi-Fi, it is possible to lose the contents of your Bitcoin Wallet. You could lose the device holding your Bitcoin Wallet to hacking, hardware damage, destruction, or theft.

Update your Device Operating System

But don’t panic, you can recover from a total loss of your device, if you plan ahead. So, just how do you recover from a catastrophic loss of the entire device holding your Bitcoin? The first step is to secure your devices, whether a computer or smartphone, against cyber-attack through the internet, or through a Wi-Fi connection, which is a common method of attack. To do this, update the Operating system, such as Microsoft Windows on your Computer or the Android Operating system on your Smartphone, and keep them updated.

Internet Security Tools & Bitcoin

Next, make sure all of your Digital Devices have a class-leading Internet Security and anti-Malware tool installed. There are many to choose from today, that will protect all of your devices with a Firewall, which blocks malicious internet or Wi-Fi attacks, plus anti-malware and anti-virus tools. We have links on this webpage at learnbycartoon.com to two class-leading Internet Security products, BullGuard Internet Security, and Bitdefender Total Security.

No matter which Internet Security Application you select, please make sure that you do actually use one, and keep it updated.  Once you have an Internet Security Tool on your Device, and before you install a Bitcoin Wallet, run a full antivirus scan to make sure your device is clean from any viruses or malware.

How Many Wallets?

Once you know you have a clean device, it’s a good idea to use more than one Digital Wallet Application.  These can be on the same or separate devices. There is no limit to the number of different Wallets you can install from different Wallet providers on the same device. Always encrypt your Wallet with a passcode. This will help protect your wallet from thieves, but it will not protect you from malware, such as key loggers. You need an Internet Security Tool for that.

For day-to-day transactions keep small amounts of Bitcoin in one wallet. The rest of your Bitcoin you can spread over several Wallets. If a security vulnerability occurs affecting one wallet, there is less chance that it will affect the others.

Hardware Wallets & Cold Storage Wallets

You can also use Cold Storage Wallets, including Paper Wallets, USB Thumb Drives, or specialist hardware Devices, such as the “Trezor” or the “Nano S” Bitcoin Wallet. Cold Storage Wallets separate your Wallet from the Internet and Wi-Fi, although you must make sure to follow the instructions and keep these in a safe location.

You must also backup all of your wallets data with Backup Software that allows for encryption.  This means you can secure the backup file with a passcode. If you use your Wallet on a regular basis, then you must also backup regularly. Consult the user instructions for each wallet, which will tell you what you need to do. You may need to backup several files, as some wallets include a private key that is separate from the main data file. You can even include a backup of a Paper Wallet digitally, using a screenshot of the original Paper Wallet, before it was printed, storing this as a high quality image in a backup file.

— It’s getting complicated, isn’t it?

— And this is just the beginner’s course.

The trouble with Bitcoin is that it is complicated – even for someone who understands computers. But don’t worry, there are links on this page to Bitcoin.Org and other pages that will walk you through these steps in more detail.

Wallet Backup Data, Seed (Secret Keys), Private Keys and Passcodes.

Lastly, you must safeguard the Secret Keys, Private Keys or Passcodes used to create and access your Wallets. These secret keys should be long and complex, but you must be able to remember them. Unlike email passwords, Bitcoin Wallet password recovery options are limited, or non-existent. If you think you might forget these passcodes, then they must be kept in a file in a safe place, well apart from your devices, such as a vault.

One of the most common ways people lose Bitcoins is simply forgetting or losing the secret key or passcode to their Wallet. If this happens to you, then your Bitcoins could be locked forever.

Summary for your Bitcoin Protection

  • Before you install any wallets, make sure your Device Operating system is fully up-to-date.
  • Use a quality Internet protection tool such as Bullguard or Bitdefender.
  • Use several Wallets to spread your Risk.
  • Consider using a Cold Storage Wallet to completely separate some of your Bitcoin from the possibility of internet attacks.
  • Use Backup Software that offers Encryption to backup all of the files needed to recreate your Wallets, including any hidden private keys.
  • Consult the User Instructions of each Wallet, and make sure that you are backing up all required files.
  • Keep your backups encrypted and in a secure location. This could be an online backup service, or a USB Key that you keep in a Security Deposit Box or a Vault.
  • Never forget your passwords, or any secret keys that you need to access or recreate your Wallets.
  • If you might forget, keep a printed record in a secure location, such as a vault or Security Deposit Box.
  • Always keep the information you need to recreate your Bitcoin Wallet completely separate from the Device that actually holds your Wallets, and keep this secure.
  • You must plan for disaster, such as the loss of the Computer or Smartphone holding your Bitcoin Wallet.
  • You must always be fully prepared to recreate your Wallets, and the Bitcoins they contain.

Bitcoin is complicated, there is no getting away from that fact. But with our Bitcoin for Beginners course, we will keep you on the right path.

Check out our Bitcoin for Beginners Course for more information.  Until next time, so long and have fun!

Lost Bitcoin
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