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7. Cryptocurrency – The basics before you start.

If you are considering exploring Bitcoin there are a few things you should know first:

Because it is a bit Geeky, there’s a few con-artists and scams that claim to have a secret formula to earn (or mine) Bitcoins or some other alternative crypto-currency. Generally the price you will pay for their secret is far greater than what the secret will earn you.

Originally, mining bitcoin was very profitable but as more and more of bitcoins are mined, the profitability of the process decreases. The algorithm that creates bitcoin grinds to a halt at 21,000,000 bitcoins. There can be no more in circulation. This is the main reason why bitcoin is the ideal cyber currency – no government can manipulate the value by creating more bitcoins, like they currently do with fiat currencies. Thus it is universal for all countries. With fiat currency the value is adjusted by the treasury. If it wasn’t, you be paying around $75 for a loaf of bread today. A despotic or incompetent treasury can ruin the value of their currency.

Bitmining -cold store wallets
Bitmining -cold store wallets

Transacting with Bitcoin is different, rather than talk of whole coins, we tend to use decimal fractions of a coin. Unlike physical money, cyber money can be cut up into smaller pieces easily, with no loss in value. If I wanted to pay you 50 cents, pulled out a hacksaw and cut a dollar coin in half, it would not be worth two pieces of 50 cents each now. However the same is not true for cyber currency; it is simply divided up with each part retaining it’s proportional value. So if one bitcoin is worth $97USD a transaction of 0-010309 BTC would be equivalent to one US dollar.

Using Bitcoin you exchange funds a little differently than you would with online banking but the actual transaction process is every bit as secure as any online banking, probably more so because it is so visible and cannot be reversed or in any way tampered with. The system is self auditing for every transaction, unlike fiat money (folding stuff backed by the government) transactions.

It’s important to realise that Bitcoins are valuable and targets for theft, the same as real money in your bank account would be. The difference is, your digital wallet is the equivalent of your bank account. The onus is on you to secure your digital wallet. Use a two password recognition system with non dictionary words. Do not store access codes on your computer. Keep your malware and antivirus ware up to date. Back up your digital wallet onto a flash drive or removable disk.

Your digital wallet is a software program that requires a password or two to access. Lose the password(s) and you lose access to your wallet permanently! There’s no way to recover the password(s).

Recently you may have heard of hacks that broke into the companies that were brokering/trading bitcoins. Millions were stolen because of their weak security. The real losers (aside from the companies that went into bankruptcy) were the people who relied on them to store their bitcoins and those doing transactions at the time the company data was stolen. As I have said all along, this is a totally new way of transacting, there’s no precedents to rely on for advice, so we are learning as we go. The lesson is, don’t rely on any company to store your bitcoin and don’t store them on your computer. Store your bitcoin in your wallet on a flash drive (memory stick etc.) and physically remove it from your computer when you are not transacting. Should any one try and hack an exchange etc. you have proof that your bitcoin was not used. If it sounds scary, it’s no different to your bank, except if they get hacked, they have your records and can take up to 90 days to investigate it. With bitcoin, you have proof the transaction did not come from you.

There are a few different varieties of digital wallet software. Some back up your digital wallet to a secured server (like the secured ones that were hacked recently). If your computer crashes, you can retrieve a backup copy but it required typing in 25 words in the exact order you were given them when you created the digital wallet. Not an easy task!

There are no free lunches and this is very true with Bitcoin mining or working online to earn Bitcoin. If you treat it as a financial system rather than a get rich quick scheme, it will serve you well. Treat it as an investment at your own risk.

Unlike currencies, purchasing with Bitcoin is simpler because there is no exchange rate, however there is a delay in the transaction going through as it gets verified.