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cryptocurrency, trading

Crypto ATX Bitcoin Primer

This article was originally published as a Google document for our investment group’s Bitcoin outreach activities. It is meant to be a quick and concise primer for people with little to zero knowledge of cryptocurrency, specifically Bitcoin.

What is cryptocurrency?

Cryptocurrency is a form of digital money that is implemented using cryptographically defined tokens. It is also known as virtual currency or digital currency. They can either be centralized or decentralized. A centralized cryptocurrency will have a central server that is authoritative over the ledger of the network (i.e. they are the highest and final authority over who has a certain balance in their accounts). A decentralized cryptocurrency does not have a central authority and instead uses a consensus mechanism among all nodes on the currency’s network to verify transactions and balances as legitimate.

What is Bitcoin?

Bitcoin is a decentralized cryptocurrency- peer to peer money for use via the Internet. There is no central authority managing the currency supply, only the shared consensus across all Bitcoin nodes on the network. New bitcoins are created by a process called mining. That process also helps to verify transactions, thus transaction fees are sent to miners. The maximum amount of coins possible to create on the bitcoin network is 21,000,000. There is no limit to the amount of bitcoins that can be sent in a single transaction. After bitcoin is sent from one wallet to another, you can wait for transaction confirmations to have assurance that the bitcoins were spent as advertized. Every confirmation received drops the likelihood you’ve been defrauded by 10 fold. One confirmation is usually enough for most transactions under $100 in value. Some look for 3 to 6 confirmations before they are satisfied that a big transaction (>$1000) safely occurred.

The Bitcoin protocol is based on private key cryptography, which is a system for keeping keys (which are nothing more than a string of characters meaningful to the cryptographic system) used for reading and writing public and private data. For instance, a wallet address can be regarded as a public key. You can use that public key to read the balance associated with that account on the network. However, to actually spend the balance (being a write operation), you need the wallet’s private key. The holder of a private key can also encrypt messages that can only be decoded with an associated public key, giving the holder of that private key the ability to prove that they actually have access to it.

Storing bitcoin

There are 4 platforms for storing bitcoin. Each have particular use cases. You can visit bitcoin.org to setup each.

Mobile

There are a number of wallet apps available for both Android and iOS devices. Using these makes it easy to do reliable, in person transactions with merchants or friends. Note that many of the pros and cons involved in web wallets described below also apply to mobile wallets because they operate similarly.

Desktop

The Bitcoin Core desktop client is the standard bitcoin wallet software. Running it makes your computer part of the Bitcoin network. Desktop clients typically download the entire blockchain, which is essentially the entire transaction history of the bitcoin network, and store it locally. Downloading it can take a considerable amount of time depending on your computer and network resources.

Web

Sometimes it is convenient to be able to access a wallet remotely. This way you don’t have to install a new piece of software on the device you are wishing to spend bitcoin with- the advantage being is that you don’t need to download the entire blockchain locally which takes time initially and disk space permanently.

While these services are extremely convenient, if you store your bitcoins in a web wallet service, it is prudent to be aware of how your private keys are stored. Some services keep the private keys to your wallet, and in that circumstance you must trust that the organization keeping your wallet is secure. Others will encrypt your private keys from your web browser with a password such that it is impossible for the organization (or an entity with unauthorized access) to spend your bitcoins without that password. These are known as hybrid e-wallets and exist to provide an extra layer of security. But keep in mind that security is not absolute. Therefore, it is not advisable to store a large amount of bitcoin in any web service unless you have a full understanding of how they operate and what your recourse is if things go wrong.

Hardware

Hardware wallets are essentially a mechanism for storing your private keys via some sort of portable, dedicated solution for that purpose without a computer. Some hardware wallets allow you to spend a balance stored on the wallet either by connecting to a general purpose computer such as your home PC and using your internet connection or by wi-fi communication directly. They can exist in many forms, such as stand alone devices, or dongles that store encrypted private keys and only need to be attached to a host computer with internet connectivity via a usb port to spend any balance kept by the device, to even physical coins or printed paper wallets usually with the private keys embedded in a readable but tamper evident manner.

To spend bitcoin kept on a physical/paper wallet, you usually have to import the private keys into the particular piece of software you used to create the paper wallet initially via qr code similarly to how you would scan a qr code for a wallet address to send to. Hardware wallets, especially paper wallets, are useful for what is known as “cold storage.” Keeping the private keys on a piece of hardware not connected to the internet or a sheet of paper in a safe or safety deposit box is a common method of storing large amounts of bitcoin without the fear of them being stolen by a lack of networked computer security. It is also conceivable that you might exchange your paper or physical wallet directly for goods or other currency as long as the advertised balance remains on the wallet and there is some assurance as to who may have had access to the private key- hence the need for tamper evident or tamper proof features.

How to get bitcoin

There are many ways to acquire bitcoin. Many times the easiest and most direct way is to find someone around you that already has bitcoin and is willing to sell you some for cash. The site localbitcoins.com is an excellent resource for that. You can use it to search for people in your area selling bitcoin for various prices and amounts. All sellers will likely accept cash, but many times you will find one willing to also accept Western Union, PayPal or even direct deposit. You can also sell bitcoin there yourself if you wish. Note that the spread between buying and selling prices can be rather high compared to other venues because people who trade there often want to make money providing the service of exchange, not just by profiting from price changes.

Another way is to use coinbase.com or circle.com. These sites allow you to link your US bank account to use for buying and selling bitcoin. When you buy or sell, money is automatically withdrawn or deposited into the bank account you associate with your account at these services. However, they do not allow you to keep a dollar balance and do not have an order book, so they do not function as an exchange. Instead, they track major exchange prices to determine their own rates for orders. The price is usually quite close to rates quoted at exchanges, but Coinbase, for instance, charges 1%. Another service known as , on the other hand, will allow you to buy bitcoin with check or money order as well as cash deposit.

The third way is via exchanges such as bitstamp.net or bitfinex.com. On an exchange you can place an order to buy or sell bitcoin on an order book at whatever price you wish and the system will match your order with other peoples’ orders as they come in. This is generally how the market price of bitcoin is established. However, there is no one set price of bitcoin- exchanges might have slightly differing prices because they have separate order books. Using an exchange allows you to convert between bitcoin and dollars very quickly, and allows direct access to cumulative market activity and information. One issue is that, while bitcoin deposits and withdrawals are reasonably quick (on the order of hours), to get dollars to and from exchanges requires a bank wire transfer and can take a few days to clear and show up in your account, and only after you have your account validated with your identification. Also, most exchanges are located outside the US and surely many people would rather not be bothered wiring money internationally to buy some bitcoin.

Yet another way is to use a bitcoin ATM. There are various incarnations of bitcoin ATMs, the most prominent of which are Robocoin ATMs. They are useful in lieu of finding someone locally to trade dollars for bitcoin with. In Austin, TX, for instance, you can find a bitcoin ATM in Handlebar, Bennu Coffee, Central Texas Gun Works, and there are more coming. Bitcoin ATMs also require extensive personal information, much like starting a bank account. But once you are in their system, it is a pretty straightforward process to deposit and withdrawal from the ATM.

News & Information Resources

In the bitcoin ecosystem there are many news and information resources which are useful to keep abreast of news relating to bitcoin and various market reactions to that news. Also, there are quite a few charting and analysis resources available as well. Lastly, much of the most timely information can be found in the various bitcoin fora.

News

Charts and Analysis

Forums

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