Practical guidelines for bitcoin

Khorix
InsiderFinance Wire
8 min readJun 12, 2022

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In this blog post, we provide some practical advice on how to get started using bitcoin. We will consider several possibilities for procuring and safeguarding bitcoin units and indicate some of the risks and errors that users should avoid. After this, we will discuss how to make and receive payments using bitcoin units.

Exclusion from liability: crypto assets are highly speculative and can result in total loss of the user's invested capital. All activities undertaken such as the procurement, handling, and safeguarding of crypto assets are performed at the reader’s own risk. The authors are not legally liable for any losses including losses that are a direct consequence of following the descriptions in this book. This is not financial/investment advice.

  • Procurement

To gain experience with bitcoin units, it is necessary to procure them first. There are numerous methods for doing this, and they can roughly be divided into three categories: you can either (1) find someone who is willing to gift you bitcoin units, (2) try to obtain them through mining, or (3) purchase them.

  • Gifts

Some bitcoin owners are willing to give you some fractions of a bitcoin unit for trial purposes. Good locations for coming into contact with bitcoin users are meetups, conferences, and presentations given on the topic of bitcoin. However, be careful there are many people who will try to scam you. In particular, do not trust anyone who promises to gift you a significant amount.

  • Mining

Newcomers to bitcoin often consider mining to be the neutral activity to obtain bitcoin units however, in many cases, this is an extremely unprofitable method of procurement. The mining market has changed enormously over the last few years and has become professional. Processors (cpu) and graphic cards (gpu) have been replaced by chips that have application-specific integrated circuits (ASIC). These chips have been developed specifically for bitcoin mining and are mainly used by large mining operations. These companies have established a competitive advantage based on returns to scale, low electricity prices, and low cool costs.

  • Purchase

Over-the-counter purchases (OTC): bitcoin units can be purchased from other people or companies by means of a bilateral transaction. These purchases are called over-the-counter (OTC) transactions and can be settled in a face-to-face meeting or via any type of communication channel. Naturally, the appropriate precautionary measures have to be taken in both cases.

  • Centralized exchange platforms

The most common way to obtain bitcoin units is to buy them at one of the many centralized bitcoin exchanges. A user can simply open an account and then transfer fiat currency to it. The account holder can then use these funds to buy bitcoin units or one of the many other crypto assets. The pricing on large exchanges is competitive with relatively small bid-ask spreads. Most exchanges provide cryptocurrency order books and relatively sophisticated financial tools that make the trading process transparent. However, it is still recommended to compare the various fee structures and to do your research on the business practices and reputation of a particular exchange. In particular, when selecting a centralized exchange, one should also consider the trading volumes, the offered services, and security.

  • Bitcoin ATM

Bitcoin ATMs are appearing to be similar to standard banking ATMs. with regard to the spectrum of functions that they provide, however, these machines have little in common with traditional cash dispensers. They allow users to buy bitcoin units in exchange for fiat currency and some models function as two-way currency converters. The counterparty is normally the ATMs operating company.

In order to buy bitcoin units, the customer feeds the desired banknote into the bitcoin ATM. the bitcoin units are then credited to a bitcoin address that the customer has previously generated. To execute the bitcoin payment, the customer must present a QR code containing the beneficiary bitcoin address in front of the machine’s integrated camera.

  • Physical Bitcoin units

Some companies embed bitcoin units within physical objects so that they can be circulated in the form of coin certificates, bars, or other objects. The private key for managing the respective assets is physically hidden within the object itself. The public address is externally visible.

  • Storage

Private keys can be stored in many ways. Irrespective of the method of safekeeping. There are two important principles to follow. First, private keys must be stored in such a way that they will not get lost. The loss of a private key means the irrecoverable loss of the associated bitcoin units. Second, no other person should ever be given access to your private key because if a person has possession of a private key, he or she also obtains unrestricted control over the assets on the corresponding address.

All storage options have specific advantages and disadvantages. In particular, there is an unavoidable trade-off between convenience and security. Wallets of the category of hot storage are directly linked to the internet and have the capacity to initiate transactions. Wallets of the category of cold storage consist of wallets that do not have a network connection.

  • Securing a private key

If you wish to store your bitcoin units independently, you will need at least one bitcoin address and a corresponding private key. Basic functionality of practically all software wallets is the generation of new addresses. The wallet generates the private key in the background and, in most cases, displays a mnemonic seed that you can use to restore your bitcoin units. This convenient way of generating a key is adequate for most applications.

  • Hot storage

When private keys are stored on devices that are directly or indirectly connected to the internet, the term hot storage is used. This type of storage offers the convenience of access, but wallets of this kind are more vulnerable to attacks than cold storage alternatives.

  • Software wallets

Software wallets are usually very user-friendly and, when connected to the internet, can be used not only for storage purposes but also to transfer bitcoin units. We distinguish between desktop wallets for computers and mobile wallets for mobile devices such as smartphones or tablets.

Owning to the network connection, software wallets are vulnerable to a variety of attacks. Most smartphones and tablets isolate individual apps and thereby provide better protection against malware. In contrast, desktop computers are vulnerable in this respect because applications are usually deeply anchored within the system and interact with each other without any significant restrictions; as well, there are substantial differences between the various operating systems.

A software wallet can be operated either as a full node client, as a simplified payment verification client, or on the basis of a centralized subnetwork. Full nodes are able to autonomously validate transactions but require a continuous internet connection.

  • Storage on centralized exchanges

Bitcoin units can be stored on centralized exchanges. This is usually very convenient. Nevertheless, we must strongly urge you not to use this type of service for storing your bitcoin units. The major problem with centralized exchanges is the fact that the user is not in possession of the private keys and therefore has no control over his or her bitcoin units. If the centralized exchange is unable to or does not wish to sign a transaction, the user cannot regain control over his or her funds. Further centralized exchanges present a lucrative target for hacker attacks.

  • Cold storage

Cold storage wallets that do not have a network connection. The storage of your private keys in strict isolation from the internet prevents hacker attacks and is the best option for long-term safekeeping.

The objective of cold storage is to ensure the safety of your bitcoin units. This comes at the cost of convenience. To initiate a transaction, either a pre-signed transaction or the private keys need to be imported into a hot storage wallet.

  • Hardware wallet

Hardware wallets are devices that are exclusively intended for storing private keys. For simple hardware wallets without additional functionalities, a secure digital (SD) card, an external hard drive, or a USB stick is sufficient. Private keys can be stored on these media and kept somewhere away from the computer. If you want to store your bitcoin units in this way for a longer period, it is worthwhile finding out how long the respective medium's lifespan is. It is in any case advisable to keep copies on another medium.

So-called offline wallets are computers without internet access, which are set up exclusively as software wallets. The great advantage of these offline wallets, compared with simple storage media, is that you can independently generate new private keys and addresses. In addition, transactions can be generated and signed offline. The signed transaction contains no information that would allow inferences to be drawn about the private key. It corresponds exactly to the transaction message that will be propagated in the network anyway.

  • Paper wallet

Paper wallets are paper-based notes that contain private keys. Alternatively, paper notes can also contain the mnemonic seed that can be used to derive several private keys. Paper wallets offer such advantages that they are easy to store.

  • Brain wallet

Private keys do not need to be written down anywhere. It may be sufficient to memorize the private key to ensure that you will remember it in the future. This type of safekeeping is called a brain wallet, a wallet that exists in your brain. Not many people will have the capacity to remember their private keys.

  • Payments

Bitcoin units were developed as a “peer-to-peer electronic cash system” in this respect, it is important to learn how to pay with bitcoin units and how to take them in payment.

  • Paying with bitcoin units

Technically, it is easy to pay with bitcoin. However, because the number of shops that accept bitcoin units is still limited, you have to do some research and adapt your shopping to the limited options available. There are curated lists that record the available points of acceptance.

  • Acceptance of bitcoin payments

Accepting bitcoin payments gives retailers numerous advantages. First, the transaction fees are low in comparison with credit card payments, especially when using second-layer solutions like lightning network. Second, customers cannot reverse their payments once they have received the goods or services. Third, acceptance of bitcoin payments provides an opportunity to attract a new segment of customers. There are various methods for accepting bitcoin payments, and these can be split roughly into two categories: acceptance via a self-managed system or via the intermediation of a payment service provider.

  • Self-managed systems

In analogy to cash, bitcoin units can be accepted without the need for an intermediary. You can simply generate a bitcoin address and forward it with a request for payment to your customer.

  • Payment service providers

Payment service providers offer a large number of tools that substantially simplify the implementation of bitcoin payments at point-of-sale terminals and in online shops. These tools usually include all features needed throughout the payment life cycle from the issue of the payment request to its receipt and temporary custody of the bitcoin units.

Hope you had a fantastic reading.

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I'm Shondy Sainthea and I welcome anyone to come learn with me about Blockchain, Cybersecurity and technology.(educational purposes only)