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Getting Started with Bitcoin, Part 1: What is a Wallet?

So you're curious about getting into Bitcoins! Now comes the hard part: swimming through the mounds and mounds of information and opinion that stands between you and getting started... and there is a lot of it!

Before diving head-first into unfamiliar websites or downloading something to your computer, there are many important things you should learn about Bitcoin. In this series of articles, I hope to break everything down into smaller, conceptual blocks so that you can learn about the functionalities of Bitcoin, the options you have as a user, the risks associated with those options, and finally, the security precautions needed to mitigate your risks.

The first step in getting started with Bitcoin is procuring a wallet. This article will help you learn what a Bitcoin wallet is, and how it works.

A Bitcoin wallet is composed of two parts: your public address and your private key. Together, these two things are much like a post office box: it has an address that you can share with anyone, but a key that only you hold. Owning the key is what enables you to spend the Bitcoins that are located at your address.

Unlike a P.O. Box, your Bitcoin wallet is not necessarily stuck in one place. Like any computer file, it can be copied to a USB Stick, sent to another computer, or uploaded to (and accessed via) "the cloud". Duplicating your wallet, however, DOES NOT duplicate your Bitcoins. To explain this, allow me to modify the P.O. Box analogy:

Imagine that the space behind your P.O.Box is a cache which is located far, far away. And imagine that the door to your P.O.Box is actually a portal to that cache. Whenever (and wherever) you copy your Bitcoin wallet, you are creating a new door to your cache. You can create an unlimited number of doors and place them wherever you want, but you will still only have one cache, with the same number of Bitcoins inside. All these doors still have the same address, and they all open with the same key.

Now, just as doors can be created, they can also be destroyed. If the only door is located on your home PC, and your computer is hacked or your hard drive crashes, you *could* lose access to your Bitcoins forever.

The devil, of course, is in the details. What I am about to say in INCREDIBLY IMPORTANT, so LISTEN UP: Your private key is the DNA of your Bitcoin wallet. From the private key alone, one can determine your P.O.Box number (Bitcoin address), and create a doorway to your cache (access & spend your Bitcoins). Since the private key is the genesis of all this information and power, the only way to protect your Bitcoin wallet is to protect your private key. Determining how you will protect your private key is where your options come into play. But there's a little more you need to know about wallets before you make this decision.

Your wallet interacts with the rest of the Bitcoin network through a piece of software called a Bitcoin Client. As I mentioned in my article, "Why Bitcoin CANNOT be Controlled by Government", when a user sends Bitcoins to another user, the transaction goes through a number of audits. The very first audit is done by the Bitcoin client to ensure that the sender actually holds the Bitcoins he or she is trying to spend. In order to perform this audit, every client has to have a copy of what is called the "Block Chain", which is a lot like a general ledger for a business. It is a COMPLETE LIST of every single Bitcoin transaction, and the balance of every single Bitcoin Address. The public distribution of the Block Chain is at the very core of why Bitcoin works (but I will save the details of that for another article).

The Block Chain, as you might have guessed, is a VERY large file, and it is downright impractical for some situations (mobile devices). Luckily, third parties have helped make Bitcoin a very versatile technology. You have options for the type of client / wallet service you can select, depending on how you plan to use Bitcoin. In the next section, I will elaborate on these options, the different technology & knowledge sets required, and the different levels of security & trust needed. (On to Part 2!)

Please leave your comments and questions below, as well as ideas for articles that you would like to see!

-Jix



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That's what these articles

That's what these articles are for. To explain the reasons for the excitement. Atleast after reading these articles, you will actually be able to articulate your reasons in detail for sticking to gold and silver.

Personally, I think only the people that bought into gold and silver early will be able to retain their value. For one, if the second great depression hits, the government will cap the worth of the certificates from increasing in price (yes, THEY CAN DO THAT). This will not burst the gold and silver bubble, but it does put a user at more risk when they don't sell their gold and silver immediately at that exact point in time.

Why does it put you at risk? Because the gold and silver price HAS severely plummeted in the past during a great crises. That's when supermarkets run out of their stock and riots break out in order to obtain food. During a crises, people will start hoarding more food as a safety measure and supermarkets won't be able to keep up with increased demand. In those cases, it makes no sense to hoard gold, because you can't eat gold and silver during those times. As a result, the demand for food will exponentially increase and the demand for gold and silver will severely dwindle, lowering its price.

And in today's world, supermarkets run an even greater risk of selling out their stock than during the last great depression. For the simple reason that many supermarkts now employ the JIT method in order to reduce storage costs:

http://en.wikipedia.org/wiki/Just_in_time_(business)

The JIT method requires STABLE DEMAND. If the demand suddenly increases, you will get shortages. Because of this method, a run on food can deplete supermarket stock in less than two days making the scenario I described that much more likely to happen in today's world. You can kiss your "storage of value" mantra goodbye in such an event.

And it isn't just gold or silver. I wouldn't reccommend holding BC during such times either. The best way during such a severe crises is transforming your money into LAND and not gold/silver or BC, because land can produce food. But you need to buy it early, because land is getting more expensive as time goes by.

I disagree

It's not easy to sustain yourself simply by having land. I takes time and resources to grow food.

Meanwhile, gold has had value for thousands of years. That won't change anytime soon. If you could gather ALL of the gold ever mined into one place you could only build about 1/3 of the Washington Monument.

My recommendation is people put roughly 80-90% of their wealth in gold/silver, 2-10% in fiat (cash form), 2-10% in bitcoins, depending on comfort levels. That's after having food, shelter and protection taken care of.

Yes, diversification is key.

Yes, diversification is key. But my main point is that the buy in point is important. Just look at the story of this guy's old dad:

http://www.getrichslowly.org/blog/2011/05/10/investing-in-gold/

The way people talk about gold here, it's like there are NO risks involved whatsoever and you will never ever lose money no matter which time you buy in. If that were true, stories like the above wouldn't exist.

The key is that the only people that don't really have to worry about holding gold are those that bought gold EXTREMELY early, just right at the moment when worry about the economy starts to hit. For those people, it really does not matter if the exchange goes up or down, they will really retain their value in whatever scenario pops up.

But if you step in late when prices are high, the risk of losing money when the economy recovers (or food shortages) grows with each moment you delay buying gold. Because these two times are the moment the goldprice plummets. Because its fear that fuels the gold price in a crises. You can see this by simply looking at the goldprice during a crises and the prices after the crises ends. It's during crises that the goldprice is high. But after, not so much. In other words, gold prices plummet after a crises ends.

What does this mean? It means that people who buy gold close to its peak price are screwed.

Now, I'm not saying that you shouldn't invest in gold. It's EXTREMELY smart to invest in gold at this moment. That's because gold IS likely to increase a considerable amount in the near future and that gives you alot of room to step out at any moment. But you must realize that any goldbuyer at this moment that is buying TODAY is actually a little late to the game. For those buying gold late, it's ESSENTIAL to sell it for a price between its peak price and the buy in price and to keep watching the exchange.

The exact peak price is hard to determine, the only thing I can say to people just dabbling in these kinds of things, is to watch the prices with a close eye and not let greed get in your way. Be extremely risk averse regarding these matters.

Regarding land, land also has the same problem that anyone buying land TODAY would also be late to the game. One also needs to watch the prices of land periodically.

The best most risk averse strategy is to only invest that amount of money in gold and silver you can sell quickly (look up sites or exchanges where you can sell large amounts). And then whenever you read the news about foodproblems or when you notice the crises dying down, that's when you sell. Now, it's possible that prices will continue to go up for gold, so you may lose some potential profits. But rather that than risking a loss. You can always buy back in later.

I still disagree

Gold retains value, period. It has done so for thousands of years.

If you had 1 ounce of gold 100 years ago or 500 years ago you would be able to trade that for a certain quantity of food, probably enough to eat for one week, for example.

Today if you have one ounce of gold you can trade that for a certain quantity of food. At current rates that would be about $1,600 worth of food (certainly enough for 1 week). So you can see that gold has held value as compared to the past.

I can pretty much guarantee you that 1 year from now or 5 years or 10 years, 1 ounce of gold will STILL get you a week's worth of food (if not more).

When the dollar collapses so that whatever is in your pocket won't buy you food, gold will. So it's not possible to buy gold "too late" IMO.

I hate to disagree, but we

I hate to disagree, but we have LIVE EXAMPLES IN REALITY that what you say cannot be true. Are you saying that the old guy's story is a myth and that there doesn't exist anyone out there who actually lost money on gold? Because I myself know one oldtimer that lost money.

And we can simply demonstrate that what you say cannot be true by simply looking at the historic goldprice:

http://goldprice.org/gold-price-history.html

Look at the last chart at the bottom. If you bought gold in 1980, it would take you 20-25 years before you could sell it at a profit. Simple math.

Now, it MIGHT be possible that you are right and that it is still not too late to buy in without fear of repeating a 1980 mistake. But that doesn't mean that there's no possibility of such occurring. There is no deal sweet enough in existence where no risk exists. Such people simply live on a different planet.

You're talking

about something different than I am.

You're talking about losing money. I never said it's impossible to lose money. I said you won't lose VALUE. Big difference.

Fiat currencies come and go as they have for centuries. What's happening now to the world's paper money is nothing new. Fiat currencies have failed throughout history.

What has never failed is gold. Like I said, 1 ounce of gold will get you nearly the same amount of food (or more) whether past, present, of future.

Hmmm, I did hear RP say

Hmmm, I did hear RP say something similar. And it's true that this chart doesn't take into account inflation. Value is determined by how many goods and services you can buy with that ounce of gold.

But still, if you have chart handy where you can demonstrate that an ounce of gold TODAY can buy the SAME amount of goods and services today as it did in the past, I would be much obliged.

Edit: Found a shadowstat graph, inflation adjusted goldprice chart.

http://dailybail.com/home/chart-inflation-adjusted-gold-pric...

As a matter of fact, it's even worse than I thought. Buying gold in 1980 would mean no chance of selling for profit even if you sold it AT THIS MOMENT. Yes, and this time we ARE talking in terms of value (goods and services bought with the same amount of gold).

Sure

First view here:

http://www1.eere.energy.gov/vehiclesandfuels/facts/2005/fcvt...

In 1919 a gallon of gas was $0.25, and in 2005 it was $2.84, which is a 1,036% increase.

Gas prices follow food/grocery prices (or vice versa) so it's reasonable to say one would need to increase their purchasing power the same amount to buy as much groceries from 1919 to 2005, as gas. So that's a 1,036% increase in purchasing power needed.

Now view here:

http://www.nma.org/pdf/gold/his_gold_prices.pdf

An ounce of gold was $19.95 in 1919 and $444.74 in 2005, which is a 2,217% increase.

Clearly gold kept up purchasing power.

The hubub

is Bitcoin picks up payment liberty deficiencies where gold leaves off.

I'm a gold bug too. Unfortunately, gold is not ideal to do transactions. The government confiscated gold in the past, because they could. Gold, being a physical thing, limits it. You can't easily send gold to another location, like overseas. You can't easily make change for a gold coin. Gold is subject to things like shaving or fraudulent bars, etc. Gold is awesome, but truthfully, deficient.

Bitcoin solves all the deficiencies above. The one thing gold has which Bitcoin doesn't is guaranteed value. That's why people should still hold gold; that what it's good for, but also be aware of how using bitcoins can be beneficial too.

I understand how bitcoins

I understand how bitcoins could be beneficial. What I don't understand is this blind trust so many people seem to be willing to put into a system. Or do people really believe it can't be compromised?

Gold and silver, for the foreseeable future, cannot be compromised. And that's after thousands of years of attempting to.

Elliptic curve cryptography is NOT "blind trust"

rpcongress is right. I have talked to atleast 20 computer SUPER GEEKS all over the world (99% of them didn't even know about bitcoin) and once I got them to look into it, NONE of them questioned the cryptographic security of the protocol.

This still doesn't mean it will never be cracked, but it suggests that it will not be anytime soon!

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

It's not

blind trust. There are many people with degrees in computer science, engineering, and math, for example, who have looked thoroughly at Bitcoin under the hood and found it does work as described.

EDIT: take a look at this video to see what I mean:

http://www.youtube.com/watch?v=JszfLU4ysEM

IMHO, in a certain way the

IMHO, in a certain way the precious metals are compromised by using paper contracts and all kinds of rehypothecation tricks to manipulate the market and thus price.

Yes, it may not directly influence the coins in your pocket or safe, but it will definitely influence the perceived value of them.

How many times I've not heard in the last months "Stock market is up, precious metals are down" from colleagues... while they don't measure the stock market performance using gold or silver as a yard stick, but their fiat currency..

The main problem with BitCoin

is that it is not user friendly. The average person does not want to bother with learning all this stuff. Someone needs to come up with a user friendly app so that everything you need to do with BitCoin can be done with a few clicks.

“The welfare of the people in particular has always been the alibi of tyrants.” — Albert Camus

Yes! I TOTALLY AGREE!!!

It is not iPhone-style user friendly, yet!

Sure, there are a bunch of easy-to-use, simple wallet programs and services popping up, but to REALLY USE IT SECURELY... well, let's just wait for JixMainstreams other posts!! :)

I think that this un-friendliness is what gives it GREAT INVESTMENT potential for the moment and the near future. Of course there will probably HUGE SWINGS in price/value... but overall, I think it will go up. Way up!

http://falkvinge.net/2013/03/06/the-target-value-for-bitcoin...

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

Much technology

goes through ease-of-use progression, where it starts off hard then gets easier.

You used to have to know how to type DOS commands into a black screen to get your computer to do what you wanted like saving/moving files. Did that stop computers now being used globally?

you proved my point

Computer use took of in the general public with the advent of a graphic GUI. Until BitCoin has something similar, it will remain in the domain of nerds and libertarians. Don't get me wrong, I am a fan of BitCoin. I am just pointing out where this needs to go.

“The welfare of the people in particular has always been the alibi of tyrants.” — Albert Camus

Also

a good learning site covering the most common questions is:

http://bitcoinquickstart.com

Just as diversity is

Just as diversity is important to protecting investments, wouldn't the existence of multiple Bitcoin wallets/accounts be important for security reasons? I think many wallets with no more than $5K or $10K in each would be prudent protection from hackers.

Yep, and that is a choice of

Yep, and that is a choice of the individual. You can also spread BTC other ways, like keeping some in exchanges or investments.

Just like any currency, there is no such thing as no risk, so whatever secure solution suits you best, is going to differ from someone else.

"...exchanges or

"...exchanges or investments..."

Interesting. How does one do that? Can Bitcoin accounts be used to buy stocks from the brokerages? How do the BTC exchanges hold your Bitcoin?

Nice to see a non-biased

Nice to see a non-biased Bitcoin post up-voted more than 10.
Good job!
I'm anxious to know what you are planning for your next one.

“I’m fully diversified. I’ve got some under the mattress, some under the floor boards, some in the backyard.”

WordPress users may already know this

but WordPress can accept bitcoins!
http://www.forbes.com/sites/jonmatonis/2012/11/16/whats-your...

11/16/2012 @ 5:49AM
What's Your Bitcoin Strategy? WordPress Now Accepts Bitcoin Across The Planet
WordPress - Best CEO

Best CEO Toni Schneider in 2007
I awoke to incredible news this morning. Leading web publishing service WordPress.com announced that they will begin accepting the nonpolitical cryptographic money Bitcoin as a payment method for various upgrades.

(go to above link to read more)

You can also install a data miner on your WordPress website -
http://www.bitcoinplus.com/miner/plugins/wordpress

WordPress Bitcoin Miner
This is a bitcoin miner that can be included on any WordPress blog so that your visitors will mine bitcoin for you. This uses the Bitcoin Plus miner for websites.

This is good

This is good information....

Why not create a free website and add all this same information including pictures. You could create multiple help guides to get people started in Bitcoin and have the sites published to the web.

Great Idea

That's a great idea. A blog is probably the easiest, but they're usually not too robust... Unfortunately I don't have any better ideas.

There are literally probably

There are literally probably hundreds or thousands of 'free website' type sites. Here is one I've personally used and it quite easy:

http://www.webs.com/

Bitcoins @ 89$

I really hope this is a bubble to buy more once it goes down.

"We’ve moved beyond the Mises textbook. We’re running in the open market." - Erik Voorhees

Hit $95.70 today. Not bad.

Hit $95.70 today. Not bad. Impossible to know what the real growth curve on Bitcoin is... unless someone has a multi-year chart.

Please be careful people are

Please be careful people are panic buying, so this is a classic bubble.

I'm still in evaluation mode.

I'm still in evaluation mode. Bitcoin may or may not be heading for a pop. Due to the relatively high degree of difficulty in moving in and out of Bitcoin (in other words, compared to moving dollars or gold/silver) ensures that widespread adoption and use will not be immediate. It is still a tool for the highly educated and for risk takers (this is not a criticism).