Bitcoin Exposed: Today's Complete Guide to Tomorrow's Currency (6 page)

The “How to Trade Bitcoins” section of this book explains techniques for extracting the most profit out of Bitcoin investing. Bitcoins are not yet accepted for buying shares on national stock markets. This situation is unlikely to change anytime soon. Banks and governments controlling commodity, stock, bond and currency trading exchanges will not want to cede credibility to Bitcoin.

No matter, even without access to any conventional investing markets, Bitcoin has the potential for vastly outperforming other investment classes over time.

Protecting Bitcoins

Protecting our Bitcoins is critical. It has the same critical importance as protecting cash, gold, bank account access, or any easily converted item of value. Bitcoins can be stolen the same way a password can be stolen, or an online account for email can be hacked and abused.

There are several ways for protecting our Bitcoins:

1. Keep our Bitcoins in our online web wallet at anyone of a number of sites

So long as we keep our login credentials secure, the main risk is that our wallet site will be hacked. InstaWallet was hacked and closed on 4-3-2013.

2. Keep our Bitcoins on our computer or cell phone

This ups the risk of loss because computers and cell phones can be stolen. While we may have a password-protected device, passwords can be broken, and we lose access to our wallet when our device is stolen. Whether or not the criminal gains access to our Bitcoin wallet on our device, we lose access.

If we do want to keep our wallet on our computer or cell phone, it’s suggested to use TrueCrypt for encrypting Bitcoin files such as wallet.dat.

Keep two wallets for using this protection system. One wallet has a small amount of BTC's for daily use and the other is like a savings account with more BTC's. The daily use BTC wallet will not be encrypted so it is easy to use daily. TrueCrypt will be used for the savings wallet for protecting the greater store of BTC's. This way, if our computer or device is stolen, we only lose the small wallet of BTC's. Our big savings stash of BTC's will be secured with 256-bit encryption.

We can encrypt all our Bitcoin files, wallet addresses, passwords, and our account ledger. We then load these encrypted files onto a secured USB drive, SIM card, or any storage device such as an MP3 player.

Once all our files are encrypted with TrueCrypt (Truecrypt.org) or similar tool, we can safely distribute those Bitcoin files and addresses to anyone for back-up purposes. Only we will have the password for cracking open the TrueCrypt files and using the Bitcoins.

3. A hybrid of #1 and #2.

Use an online version of a Bitcoin wallet for our daily spending with normal password protection and then store the major portion of Bitcoins on our computer or cell phone with the full TrueCrypt protection and distribution explained in #2. This is the ideal method. Having our Bitcoins in an online wallet, especially Blockchain (at http://www.Blockchain.info) brings a more convenient experience. We can send money as long as we have Internet access either on a phone or computer, anywhere, any time. Blockchain's wallet excels in cross-platform performance from on-line, off-line, iPhone, Android, or locally stored computer applications.

This last method of protecting our Bitcoins bridges the convenience vs. security gap with the best of both worlds.

Transferring Bitcoins

Transferring Bitcoins is almost exactly like spending Bitcoins shown in a previous section.

When transferring Bitcoins, we normally do not have a time limit such as in the chocolate purchase example. Also, there is usually no limit to the amount in Bitcoins we can transfer. Different wallets and exchanges have limits on who and how much can be transferred. Some wallets require proof of age for transfers and accounts. Coinbase requires users to be 18 or older.

Bitcoin wallets stored locally will be free of such limits. In-exchanges, where we fund our Bitcoin purchases, often limit the amount of national currency we can convert into Bitcoins. Some limits apply based on the laws followed by particular exchanges. Mtgox.com limits transactions to roughly $1000 per 24 hours. Other exchanges, such as Bitcoin-24, have no limits on transactions or withdrawals.

There is no limit on how many Bitcoins we can send from our Bitcoin wallet to any other Bitcoin wallet. That is a direct transfer. However, if we choose to go through an exchange, limits may apply.

Sending a transfer looks exactly like the Send process shown earlier. We simply ask the receiving party for their Bitcoin address or Bitcoin wallet and put that piece of code in the Send space as shown below.

Note that we can also use an email address. The person receiving this Bitcoin Send will get an email from Coinbase explaining they have Bitcoins waiting for them. They can either provide Coinbase a Bitcoin wallet for receiving the payment, or set-up an account with Coinbase for receiving the payment.

There are many other ways of sending Bitcoins directly to debit cards with OkPay.com, or to other online payment services with Dwolla.com, MyBitcoin.com, and others. Same basic steps apply.

1. Get the receivers Bitcoin wallet address.

2. Open our Bitcoin wallet or account screen on any Bitcoin exchange we have our Bitcoins stored in.

3. Use the Send function and put the receivers Bitcoin address and/or email in the “To:” box. 

4. Carefully confirm amounts and addresses. Once we hit send, there is usually no method of canceling or recalling the transfer.

Accepting Bitcoins In Business

Bitpay.com appears to be the leading merchant services provider for online stores. There are several other methods that work almost like Paypal for accepting payments via Bitcoin. The other Bitcoin merchant tools do require some custom coding.

All we need to do is give users our Bitcoin wallet address for sending payments to us. We can also choose to create an individual wallet address for each sale. This is how the automatic checkouts work and requires software for generating an unlimited number of unique Bitcoin wallet addresses.

Bitpay.com simply requires setting up our products with BTC prices, the normal account tie-ins such as business name, tax code number (EIN# for a business or Social Security# for individuals in the U.S.) and accounts tied to the BTC wallets. Then Bitpay provides all the clearing and collection function.

Showing that we accept Bitcoins on the first page of our store or site shows we are ready for conducting business in the newest digital way.

With our proud sign displayed, we can use one of many different merchant solutions. Bitpay is generally the leader, but others offer similar functionality.

Merchant solutions for Bitcoin:

- Okpay.com

- Mtgox.com

- BIPS

- BitUtils

- Paysius

- Walletbit

- Bitpay

This is only a small portion of the ever-expanding options for merchants.

All that we need to do to sell with Bitcoins, is sign-up for one of the above accounts, (again, bitpay.com is recommended) and place the correct Bitcoin code they provide onto your website. The site will automatically coordinate the Bitcoin transfers and loading up the correct wallet from the purchases.

Using Bitcoins Anonymously

There are several forms of anonymity for online purchases.

Store/service purchasing transaction anonymity - We are able to generate separate wallet addresses so that the store does not see repeat orders from one wallet. This form of privacy breaks the database many stores, such as Amazon, Target, Costco, etc. keep on customer purchases. There will be almost an infinite number of purchases from different Bitcoin wallet addresses.  Different Bitcoin addresses with different purchases makes it almost impossible to track buyers.

We can maintain this low level of anonymity by creating a new Bitcoin address or wallet for each purchase. Many Bitcoin wallet services or clients have a “New Address” option for each purchase. This option creates a shadow wallet address that ties in with your main wallet and masks where the purchase came from.

Our original Bitcoin wallet address, account, and email address can be tracked back to our Internet service provider (ISP), computer, and finally, our identity.

Preventing any attempt at linking a person to a Bitcoin wallet address, service, or email requires a more thorough approach.

These steps are available from Anonymity.com:

1. Use Tor browser from http://www.torproject.corg.

2. After Tor confirms that you are being routed through the Tor proxy network, go to TorMail for hidden service and create an email account. This is the first, and major roadblock for anyone tracking Bitcoin addresses - anonymous email addresses.

3. Create a new, anonymous email address through Tor for each new Bitcoin  purchase.

4. Use the bitinstant.com service or others that allow cash deposits for Bitcoin to email purchases. Another option is to use localBitcoins.com for buying them in cash anonymously.

5. Use the created TorMail email address, the amount of money you are converting to Bitcoins, create a name with a DOB. Will be a good idea to keep these handy, but not necessary.

6. Take the cash deposit slip to the service counter that completes the deposit process. There may be cameras to avoid at some locations.

7. The transfer will be completed after you get confirmation, normally within an hour.  Create another Bitcoin address using the same steps above, and send the Bitcoins to the newest address created with TorMail.

Following these steps creates a nearly impenetrable wall of anonymity.

Our anonymity is not fool proof with Bitcoin. Most of the services commonly used, such as Dwolla, MtGox, Bitcoin-24, Flexcoin, and many others do require tying our account to bank accounts, and often cell phones. This account linkage requires much more effort for clearing our trail. Getting a prepaid phone from a small retailer in the $20 range, we can receive our confirmation text with this phone and not use it for anything else.

Getting funds into and out of the Bitcoin wallet for everyday use will have to occur without having a bank account tied to the Bitcoin service. Once we tie our bank accounts in, we have lost anonymity.

Paypal is not a popular method of buying Bitcoins, partly because it breaks anonymity. The other reason for avoiding Paypal, is that there is up to a 7 day delay for obtaining Bitcoins through Paypal. This delay stems from the reversibility of Paypal transactions. Avoid using Paypal because other Bitcoin users will suspect the transaction to be spam or from a dishonest person.

Our options for fully maintaining Bitcoin anonymity throughout - and not on a per transaction or per store basis - necessitates buying Bitcoins with cash, barter, silver, gold, or anything but bank wires, debit cards, Paypal, or standard financial instruments.

How To Create Bitcoins Or Become A Bitcoin Miner

“No one has a right to consume happiness without producing it.”

Helen Keller

Early on with Bitcoin, simply downloading the Bitcoin software started us on the road as Bitcoin miners. We started the software for Bitcoin, and it would show how our computer processor was mining Bitcoins as it solved the cryptographic code-breaking problem. It was a slow process for earning Bitcoins on normal PC's.

More powerful computers could dramatically increase the rate for solving the puzzles or hashing as it is referred to in the Bitcoin lexicon. The creator(s) of the software anticipated that Bitcoin mining would go big. The software code and mathematics creates more difficult problems to solve - or mine - as the number of Bitcoins in circulation increases.