For the uninitiated and curious, here is an introduction to using bitcoin for the first time.
If you have heard a lot of bitcoin buzz in the last year but thought it was too complicated to understand, let alone use, you are not alone. Count me in that crowd. But the promise of bitcoin was so great and my curiosity so peaked, I decided to give it a try. What I discovered was that it was very familiar, but a slightly different, way of doing things. Overall, it was easy peasy.
In some ways, using a bitcoin is very similar to what we are used to. Just like a using a dollar bill, you will need a wallet, you will buy some bitcoin to put in your wallet and then you can spend your bitcoin. This week I’m covering how to get a wallet. The next two weeks I will cover getting bitcoins and then spending them.
Your initial step is getting a wallet. There are two considerations. First, where the wallet resides, and second, how much privacy and security give you peace of mind.
Wallets can reside in three different places: downloaded and run on your desktop, on the web and downloaded and run on a mobile device.
Desktop wallets are generally viewed as the most secure because you have control over your wallet and not a third-party service that provides the wallet. It also has the most storage and bandwidth, which also means that some may take up to a day to comprehensively synchronize with the public ledger recording all bitcoin transactions. But having direct control over your wallet means you are responsible for backing up your wallet. Popular desktop wallets include Armory, Bitcoin Core, BitcoinQT, Electrum, Hive OS X and MultiBit.
Web wallets can be used wherever you have access to the Internet, usually on your desktop or mobile device. That makes is easy to use, but potentially less secure because a third-party service hosts your bitcoins and can lose them (like a bank can be robbed). Always check whether you control your private keys (these keys allow the holder to move the bitcoin in that wallet). Popular web wallets include BitGo, Blockchain, Coinbase, CoinJar, Coinpunk, Coinkite and Green Address.
Mobile wallets are like carrying around a wallet in your pocket. Your bitcoins go wherever your go, which offers maximum convenience. Some wallets reside on your mobile device and are considered more secure, but you can lose your wallet if you lose your mobile device. Some wallets reside with a third party where you have the same risks of losing your bitcoins if your third-party service is compromised or if you lose your mobile device. Popular mobile wallets include Bitcoin Wallet, Hive Android and Mycelium Wallet (third party).
You can have one or more types of wallets and they will interoperate with each other just like having multiple email accounts. And just like your traditional wallet, you should take reasonable steps to protect it. For example, I would not carry tens of thousands of dollars in my wallet, but just what I thought I needed that day or week.
Another example is that if my wallet was hosted by a third party, I would make sure that third party has adequate protection against security breaches, much like I would make sure my bank or safety deposit box had adequate security measures.
And just like you would only carry a minimum amount of dollars in a traditional wallet and keep the rest in a bank savings account until needed, you should store your unused bitcoins in an offline (also known as paper) wallet. This is the highest level of security because it is immune to hackers and computer viruses. This involves creating a physical document that looks like a paper bill and is the physical record of your unused bitcoins.
Just note that when you need to withdraw bitcoins from a paper wallet, you have to empty the entire contents of the paper wallet into the desktop, web or mobile wallet. Then you can keep what you need and put the rest into a new paper wallet. Popular paper wallets include BitAddress, Bitcoin Address Utility, BitcoinPaperWallet.com, OfflineAddress.com, SafePaperWallet.comand Bitcoin Vanitygen.
Finally, there are a few ways that a bitcoin wallet is different than a traditional wallet is. For example, a bitcoin wallet can be both backed up and encrypted. And a big bonus, unlike a traditional wallet, a bitcoin wallet is usually free.
Next week, how to buy bitcoin.
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