Project #1 Today: BitCoin
Today’s first item on the agenda was to figure out how BitCoin works and then invest some money into the thing. I had thought that anonymity was a cool part of BitCoin but it looks like if you ALSO want the convenience of sitting in your underwear at home you’ll need to give some of that up.
Step 1. Research Research Research
Lots and lots of reading. I read pessimistic articles, positive articles, neutral articles, articles by fanatics (the true anarchist BTC believers online are a bit nuts), articles that focused on tech, articles that focused on the economics of it, all sorts of reading and videos.
Conclusion: Seems potentially legit but risky. Possibility for extreme shady activity but ALSO possible for regular transactions. Subject to wild ass price fluctuations. Be prepared to have your financial or legal ass handed to you if you’re not careful and try to do something stupid. Don’t do anything illegal.
I learned that you need to have a secure wallet with a secure backup, or use a trusted online wallet. Coinbase.com is a generally respected online wallet and Multibit is a trusted lightweight personal wallet. Backup your shit onto a DVD, USB, paper, whatever if you’re going the personal route. Learn how PGP signatures work. Learn how secure mail and messaging works (this part is just for fun – not really required).
At this point you should now have a wallet with an address.
Step 2. Get some BitCoins (BTC)
This part is where you’re making a trade off between anonymity and ease of use. You could go to a face to face person local to your area willing to trade cash for BTC. This preserves your anonymity but you’ll have to put on pants. Also – this person is essentially a money changer so I believe they have certain things they have to follow or else they’re in a shady financial / legal area.
So let’s trade in my anonymity for convenience and a more ethically firm approach. Coinbase.com comes up again as a site where a Bank Account can be linked by ACH transfer. Once you verify your identity you have some trade restrictions lifted and get the ability to perform immediate transfers from USD to BTC and back.
So we’ve done an ACH transfer between Coinbase and our bank account. You’ve gotta have some serious trust here at this point because you’re disappearing real world money for cryptographic virtual assets. Gird your loins – you just typed your bank account info. It might be preferable to setup a small real world bank account with just a bit of cash in it for this exact purpose rather than linking your life savings to this site.
At the end of this step we should have some fraction of a BTC based on how much money we foolishly threw to the wind. You can keep this money in the online Coinbase wallet, you can spend it at merchant, or you can transfer it to another wallet offline.
Step 3. Transfer to another wallet (just for fun)
I purchased 0.1 BTC today just to see what would happen. Turns out that was roughly $100 USD. Enough that I felt I have some stake in things and so little that I wouldn’t mind if “terrible things” happened. As I write this it’s now worth $108 USD. ANYWAY – we have the money sitting there in an account. Now you can send some portion to another wallet via a BitCoin Address which might look something like
Feel free to send BTC to that address by the way if you found this article useful
Let’s look at that address. BitCoin uses something called a shared ledger. You can think of this as a big checkbook for EVERY transaction. Everyone has a copy of the checkbook and to make updates into the checkbook you need to be cryptographically verified. This means EVERYONE can see EVERY transaction. So that account above – let’s see what it’s been up to:
That account has a .001 transfer into it as the only history. Here is where the BitCoin Address comes into play. If I spent from that address you could track my actions. Coinbase has a way (that I don’t understand yet) to have the transfer out come from a different address than the transfer in. That’s an anonymity best practice I’m still trying to wrap my head around.
Step 4. ???
Here I don’t really know. I guess buy some things with your BitCoins. Hold onto them for a while. Cash them out immediately. Whatever you want to do, so long as you don’t forget to report any profits on your taxes! I’m interested to see if CoinBase will provide any documentation to me at the end of the year to facilitate claiming any loss or profit (like my stock accounts do for me now).
Step 5. Bask in your new-found knowledge
Now you know a thing or two about BitCoin. Annoy your friends (like I’m doing RIGHT NOW). You can hang out in the SubReddit for BitCoin or watch the SUPER boring FinCEN / Senate hearing which had some interesting parts.