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So, you're ready to get started with Bitcoin. That decision could be the best one that you have ever made regarding taking back your finances and empowering others to do the same. There are some common pitfalls that you will want to avoid, which this chapter will point out.
Using Your Exchange’s Wallet to Store Your Bitcoins
Exchanges are great places to facilitate the purchase of Bitcoins. They help keep the movement strong and moving forward. However, they have their limitations. Remember that they are third parties who are facilitating the purchase of Bitcoins; in effect, they run very much like banks. When you have money stored in your bank account, you don't physically have that money present on your person in the form of cash. Rather, you are trusting that the bank has on hand the liquidity necessary for you to use that money to make purchases. If the bank is no longer solvent, the money may be listed as being in your account, but it does not actually exist in the bank's vaults.
This scenario is what happened with several Bitcoin exchanges that collapsed, such as the colossal failure of Mt. Gox. Millions of dollars’ worth of Bitcoins were held by Mt. Gox; however, the company fell prey to an internal security breach that siphoned off 700,000 Bitcoins. When people who had accounts with Mt. Gox tried to access their Bitcoins, they simply weren’t there. The company did not have the liquidity to redeem them.
When you have Bitcoins, you don't actually have them in your physical possession. Even if you store them on a hardware wallet, they exist in digital form. What you do have is your own private key. When you store your Bitcoins in an exchange's wallet, what you are actually doing is handing it your private key and trusting that the Bitcoins listed in your account balance are actually present. In effect, the online exchange is the wallet, and you are putting your Bitcoins into another person's (company's) wallet instead of your own.
Instead, you should look for a dedicated wallet, either online or offline, depending on what your needs and goals are. In a dedicated wallet, your Bitcoins actually exist inside the wallet that you hold with your private key.
Storing all Bitcoins at a Single Place Without Proper Security
Remember that when you use Bitcoin, despite the high security inherent in the blockchain technology, you are responsible for the security of the Bitcoins that you hold. If you store them all in one single place with one single private key, then you run the risk of that private key being compromised and you losing all of your Bitcoins. Additionally, if that one place were to fail somehow, you would lose all of your holdings.
Standard practice is to hold Bitcoins in multiple places with different addresses and keys. This ensures that even if one private key is compromised, there is not a risk to all of your Bitcoins being lost. Make sure that the multiple wallets are not connected to each other so that if one is compromised, the other ones are not at risk.
A good idea is to keep multiple wallets for different purposes. One wallet could be a cold wallet for your Bitcoins to grow in value over time. Another wallet could be a hot wallet for you to make frequent online transactions. Another wallet could be a mobile wallet that you can use to buy a cup of coffee or pay for a restaurant meal. Because mobile wallets are the riskiest, that one would need to have the smallest amount of Bitcoins.
Panicking About Price Change
The value of Bitcoin changes all the time and is really nothing to be concerned about. It has proven its viability through multiple highs and lows and has shown that it is not going anywhere but is rather on an upward trend. The value of your Bitcoins will change, and that’s OK. The only time you should be concerned about a price change is if you tried to short the market but ended up losing a lot of someone else’s money. If you want to be extra safe about the ever-changing value of Bitcoin when you use it to make a lot of online purchases, click to approve the purchase when Bitcoin is on the uptake. Its value rises and falls all throughout the day, so you can potentially get your purchases for less if you complete the transaction when the value of Bitcoin is higher.
Frequently Changing from One Currency to Another
Bitcoin is not the only virtual currency that is growing quickly. Many other virtual currencies are on a fast upward trend as well. Some, such as the Ether, are actually growing at a rate faster than Bitcoin. Many exchanges allow you to exchange between Bitcoin and another virtual currency. Some naïve users take advantage of this feature because they think that in doing so, they can capitalize on a growth spurt of another virtual currency. For example, if Bitcoin is in a temporary slump and lost $10 in value within the past 24 hours, during which period the Ether grew by $15, users may think that trading their Bitcoins for Ether makes perfect sense. However, all virtual currencies are volatile by nature. The Ether could lose that extra value within the next 10 minutes, while Bitcoin could regain what it had lost and then some in an hour. Ultimately, the value of other virtual currencies is measured against the value of Bitcoin. If Bitcoin tumbles, other currencies will follow suit. What will ultimately happen is you will just lose a lot of money on exchange fees.
If you want to also invest in another virtual currency, by all means, do so. But be prepared to weather the ups and downs of both that currency and Bitcoin.
Not Training Yourself Enough or Listening to Media
Media coverage of Bitcoin has been both a blessing and a curse. The Time article published in April 2011 generated a surge of interest in Bitcoin that caused its value to increase dramatically over the ensuing months. It indicated that Bitcoin did have the potential to destabilize the current economic system. However, the media doesn’t always get it right. Forbes and Businessweek are just two economic-based magazines that have routinely said that investing in Bitcoin is a terrible idea. Do a Google search for Bitcoin, and you will quickly see that mainstream economists and magazines routinely predict the failure of Bitcoin. And they have been proved wrong every single time.
Instead of listening to what others say, you need to arm yourself with correct information about Bitcoin. Look at data on charts and graphs. Study historical trends of Bitcoin. Use that information to come to your own conclusions about how you should move forward.
Mastering Bitcoin for Beginners - Neil Hoffman
Using Your Exchange’s Wallet to Store Your Bitcoins
Exchanges are great places to facilitate the purchase of Bitcoins. They help keep the movement strong and moving forward. However, they have their limitations. Remember that they are third parties who are facilitating the purchase of Bitcoins; in effect, they run very much like banks. When you have money stored in your bank account, you don't physically have that money present on your person in the form of cash. Rather, you are trusting that the bank has on hand the liquidity necessary for you to use that money to make purchases. If the bank is no longer solvent, the money may be listed as being in your account, but it does not actually exist in the bank's vaults.
This scenario is what happened with several Bitcoin exchanges that collapsed, such as the colossal failure of Mt. Gox. Millions of dollars’ worth of Bitcoins were held by Mt. Gox; however, the company fell prey to an internal security breach that siphoned off 700,000 Bitcoins. When people who had accounts with Mt. Gox tried to access their Bitcoins, they simply weren’t there. The company did not have the liquidity to redeem them.
When you have Bitcoins, you don't actually have them in your physical possession. Even if you store them on a hardware wallet, they exist in digital form. What you do have is your own private key. When you store your Bitcoins in an exchange's wallet, what you are actually doing is handing it your private key and trusting that the Bitcoins listed in your account balance are actually present. In effect, the online exchange is the wallet, and you are putting your Bitcoins into another person's (company's) wallet instead of your own.
Instead, you should look for a dedicated wallet, either online or offline, depending on what your needs and goals are. In a dedicated wallet, your Bitcoins actually exist inside the wallet that you hold with your private key.
Storing all Bitcoins at a Single Place Without Proper Security
Remember that when you use Bitcoin, despite the high security inherent in the blockchain technology, you are responsible for the security of the Bitcoins that you hold. If you store them all in one single place with one single private key, then you run the risk of that private key being compromised and you losing all of your Bitcoins. Additionally, if that one place were to fail somehow, you would lose all of your holdings.
Standard practice is to hold Bitcoins in multiple places with different addresses and keys. This ensures that even if one private key is compromised, there is not a risk to all of your Bitcoins being lost. Make sure that the multiple wallets are not connected to each other so that if one is compromised, the other ones are not at risk.
A good idea is to keep multiple wallets for different purposes. One wallet could be a cold wallet for your Bitcoins to grow in value over time. Another wallet could be a hot wallet for you to make frequent online transactions. Another wallet could be a mobile wallet that you can use to buy a cup of coffee or pay for a restaurant meal. Because mobile wallets are the riskiest, that one would need to have the smallest amount of Bitcoins.
Panicking About Price Change
The value of Bitcoin changes all the time and is really nothing to be concerned about. It has proven its viability through multiple highs and lows and has shown that it is not going anywhere but is rather on an upward trend. The value of your Bitcoins will change, and that’s OK. The only time you should be concerned about a price change is if you tried to short the market but ended up losing a lot of someone else’s money. If you want to be extra safe about the ever-changing value of Bitcoin when you use it to make a lot of online purchases, click to approve the purchase when Bitcoin is on the uptake. Its value rises and falls all throughout the day, so you can potentially get your purchases for less if you complete the transaction when the value of Bitcoin is higher.
Frequently Changing from One Currency to Another
Bitcoin is not the only virtual currency that is growing quickly. Many other virtual currencies are on a fast upward trend as well. Some, such as the Ether, are actually growing at a rate faster than Bitcoin. Many exchanges allow you to exchange between Bitcoin and another virtual currency. Some naïve users take advantage of this feature because they think that in doing so, they can capitalize on a growth spurt of another virtual currency. For example, if Bitcoin is in a temporary slump and lost $10 in value within the past 24 hours, during which period the Ether grew by $15, users may think that trading their Bitcoins for Ether makes perfect sense. However, all virtual currencies are volatile by nature. The Ether could lose that extra value within the next 10 minutes, while Bitcoin could regain what it had lost and then some in an hour. Ultimately, the value of other virtual currencies is measured against the value of Bitcoin. If Bitcoin tumbles, other currencies will follow suit. What will ultimately happen is you will just lose a lot of money on exchange fees.
If you want to also invest in another virtual currency, by all means, do so. But be prepared to weather the ups and downs of both that currency and Bitcoin.
Not Training Yourself Enough or Listening to Media
Media coverage of Bitcoin has been both a blessing and a curse. The Time article published in April 2011 generated a surge of interest in Bitcoin that caused its value to increase dramatically over the ensuing months. It indicated that Bitcoin did have the potential to destabilize the current economic system. However, the media doesn’t always get it right. Forbes and Businessweek are just two economic-based magazines that have routinely said that investing in Bitcoin is a terrible idea. Do a Google search for Bitcoin, and you will quickly see that mainstream economists and magazines routinely predict the failure of Bitcoin. And they have been proved wrong every single time.
Instead of listening to what others say, you need to arm yourself with correct information about Bitcoin. Look at data on charts and graphs. Study historical trends of Bitcoin. Use that information to come to your own conclusions about how you should move forward.
Mastering Bitcoin for Beginners - Neil Hoffman
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