A Practical Guide on How to Buy, Save, and Spend Bitcoins

So you’ve decided you want some bitcoins. Sounds simple enough, but what now? An important decision to make is what, exactly, you want to do with the bitcoins you obtain. First things first: forget about getting a significant number of bitcoins for free. For reasons I will explain in an upcoming chapter, it is no longer feasible for the average user to obtain bitcoins through mining—the process that creates more bitcoins. There are things called faucets that will dole out small numbers of bitcoins for free or in exchange for watching ads, but they only provide fractions of a cent at a time. It is a far better idea to simply buy the bitcoins. The question then becomes: where and how do youbuy them and what do you want to do with them once you have them? Let’s tackle the first question.
You can buy bitcoins either directly from another person or from an exchange. Currently, the most reputable exchanges in the United States are Circle and Coinbase. Signing up with these exchanges means you will have to follow the relevant regulations, namely the Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulations. This means there will be some level of identity verification, typically a scanned government ID and a bill that proves your place of residence. Either exchange, Circle or Coinbase, will link up to your bank account, credit card or both. Once verified, you can then purchase bitcoins. They are usually delivered into your account almost instantly, though it has been known to take a few days if either exchange finds the purchase suspicious or if it is a large amount.

Both exchanges—and most others that enable fiat-to-bitcoin transactions—will provide you with what is called a web wallet. In the case of these kinds of exchange, they are acting as Bitcoin banks. They will hold your private keys—the unique and randomized set of characters that allows the holder to send bitcoins from a particular wallet—for you, and although you are free to send the bitcoin wherever you like, either exchange could theoretically lock your account. If either exchange goes insolvent, then your bitcoins are likely lost. Despite that remote possibility, many users still hold their coins on these exchanges. Coinbase and Circle don’t appear to be going anywhere soon. Both have had millions in venture capital cash funneled into them and both aim to be the leaders in the Bitcoin space for decades to come. In any case, the benefit of web wallets is the convenience they offer. They are easily accessible from a PC or cell phone and both have very friendly UIs (user interfaces). The downside is a sacrifice in privacy and security. Two-factor authentication is available for both services and is highly recommended. “Two-factor authentication” is a term used to describe any security system that requires two pieces of information: a password and something else. That “something else” is often delivered via text messaging or through the popular cell phone apps Authy and Google Authenticator.

Now that we have bitcoins, what do we do with them? If you plan to buy a significant number of bitcoins, you will likely want to move them to someplace more secure than Coinbase and Circle. There are multisignature web wallets out there that provide a bit more security while still being convenient to users. Coinkite and BitGo are two popular ones that have impeccable security measures. BitGo, which is what I have experience with, will give you several options on how to determine your key. It can be randomly generated through your browser, a third party can generate it, you can have an app—currently iOS-only—generate it, or you can generate it yourself. Using the
third-party service will mean you can recover the key if you lose it. However, this will require that you trust the third party to protect the key properly. All of the above options are fairly straightforward, other than the offline generation, i.e., generating an encrypted key while not connected to the Internet. In that case, you’ll want to find some BIP32 key generator software. I suggest bit32.org. You generate your key following the instructions, grab the
BIP32 extended key and copy it into BitGo. For best security, this last step should be done on a
computer other than the one you normally use.

Now that you are armed with a multisignature web wallet and have some control over the private keys, the next step is sending that wallet bitcoins from your Circle or Coinbase wallet. Simply grab the “public key”—the key you are free to give out to the public and that allows people to send you bitcoins—which starts with a 3 and will look something like 3Bi1fhng5LfoDzue5MTfGw9PgHNKKgRkVt. (Your Circle or Coinbase public key, which by default
is not multisignature, will look similar but will start with a 1.) Click “send” or “send bitcoins” in your Coinbase or Circle wallet, and then copy your BitGo, Coinkite, or paper wallet address into the “To:” space and click “send.”
From there, you can send or receive bitcoins to any other Bitcoin address while still keeping your bitcoins reasonably secure. This is acceptable for medium-sized amounts of money—whatever amount that means to you—that you may want to spend but don’t want to quickly turn back into fiat.

Recently, Coinbase started its own multisignature wallet service called the Vault. It is a userfriendly option that allows you to give keys to other people or yourself. BitGo has a few more years of experience—and reputation—in the space, but it is a viable option. If and when you want to cash those bitcoins into fiat, your options will be to either sell them to a person directly for cash (I do not recommend accepting PayPal or any other reversible transaction unless you plan to sell bitcoins as a business) or to put it back into Coinbase or Circle and sell it there, where the cash will be put directly into your bank account after a few banking days.
I will cover the actual process of buying and selling bitcoin for cash—and other payment methods
—in detail in Chapter 10.

For long-term savings, printing out a “paper wallet” is a good idea. To do this, the software with the best combination of security and usability is, in my opinion, bitaddress.org. It creates Bitcoin addresses based on random actions you perform in your browser—moving the mouse, typing keys, whatever—then allows you to create an address from that. For a more secure wallet, it is recommended that you download the software itself (a link is provided on the site that lets you do this). After that, simply print out the wallet and use your previously created web wallet to send bitcoins to the public address that was created for your paper wallet using the QR code (or by manually entering the public address). There is, of course, the option of doing everything yourself; that is what Bitcoin is all about, after all: money without third-parties. By downloading your own copy of Bitcoin Core—about which we will talk more in a moment—and the blockchain, you can have a Bitcoin wallet that is as secure as the computer you put it on and help secure the Bitcoin network while you are at it. This is called a local wallet. A local wallet that is disconnected from the Internet is called an offline wallet and is often referred to as “cold storage.”
It isn’t exactly a user-friendly process and is not something that I recommend someone does for their first Bitcoin wallet. That said, it is something every Bitcoin user should do at least once if theyplan on holding Bitcoin long-term. Anyone planning on saving large amounts of money with an eyetoward saving for retirement should
absolutely create a local wallet and offline wallet—if not putting the long-term savings in a paper wallet.
Bitcoin Core and Armory, which offer multisignature services for offline and local wallets, are the
two most popular local wallets. Download them from their respective sites—currently bitcoin.org and bitcoinarmory.com—and install the program. Upon launch, you will begin the long (more than 50GB) download of the Bitcoin blockchain. Once completed, you’ll be a legitimate part of the Bitcoin network as something called a full node. You will keep a continually updated version of the blockchain and will propagate transactions confirmed by miners (more on mining in a later chapter). It isn’t necessary to be a full node—and doing so will use significant bandwidth—but every node does help make Bitcoin’s network move smoothly and securely. The software should handle everything on its own but if you run into issues, make sure port 8333 is open. You will have to check your individual router settings on how to do that.
From there, the process is again pretty straightforward and not unlike using a web wallet. If you’d like to turn the wallet i nto an offline wallet, find the “wallet.dat” file in the program’s folder and move it to a USB stick or similar storage device.
One last option that bears mentioning is what is called a “hardware wallet.” These are wallets created by various companies that allow people to hold and spend bitcoins with minimal connection to the Bitcoin network. Unfortunately, I haven’t used one and can’t speak directly on their effectiveness. KeepKey, TREZOR, and Ledger are the current leaders in the industry. So now you know how to obtain, store, and spend bitcoins. But why would you want to? That takes a bit longer to explain. I’ll start with a short history of Bitcoin.