Eventually you have decided to get into the Bitcoin space! Getting some coins to start with is highly spontaneous and motivating but is far from being the perfect way to begin with. Quite the contrary, you have to do your homework, form up a plan to get you in, and place yourself into a position not only to enjoy the financial freedom Bitcoin brings but also keep your stake as safe as possible. Here are a few things to know in advance that will help you avoid early mistakes and save you a lot of trouble down the road.
Literally, you are setting up your own bank. While this sounds fun, which definitely is, it comes with great responsibility as well. So get prepared to face a few hardships and expect satisfaction through hard work. To begin with, your bank shall be constituted at a bare minimum by a Bitcoin wallet, a Bitcoin liquidity market to interact with, security procedures to safeguard your operations, and optional but highly recommended, a full node that facilitates your interaction with the Bitcoin peer to peer network.
The bulk of your bitcoins shall be safeguarded under “cold storage” which is equivalent to using a “hardware signing device”, more commonly referred to as a “hardware wallet”. A hardware wallet holds the master private key and all associated children keys that control your funds. These keys live exclusively in the device and all the necessary signing is done inside its secure space. In other words, the keys never leave the device, so even if your computer or mobile phone is compromised, the keys are well protected from being exposed. However, you always have to remember, loosing your keys is equivalent to loosing your funds. This is irreversible and should probably be one of your biggest concerns.
This is where a good back up and restore plan is needed so you can have access to your keys even if your hardware wallet is broken, lost or stolen. During the initialization phase of your wallet, a seed, which is a list of 12 to 24 words, is created and is equivalent to your master private key that controls all the coins in that wallet. That seed is your only way to recover your keys in the future. Make sure to back it up and keep it in a secure place, following your wallet’s suggestions. Reviewing and testing the recovery procedures and the compatibility of your wallet to other wallets are of equal importance. A broken hardware wallet is stressful enough by itself, if you already feel comfortable with the back up procedure and you are well prepared, you will spare yourself from a huge amount of stress!
I cannot stress enough that who controls the private key has custody of the coins. To satisfy that requirement, you should take out of your mind leaving your coins under a crypto exchange or any form of custodial wallet. The risk of exchange collapses are common enough and there is also the risk of someone from their management team running away with your funds. These risks are just too big to handle, plus treating your coins that way directly undermines the reasons Bitcoin was created in the first place.
Now that we have measures in place to safeguard our future funds, we need to take care away another risk, privacy leaks. You do not want the whole world to know what is your worth in bitcoins. In order to maintain reasonable privacy levels you should not publish your Bitcoin addresses to anyone that does not satisfy need to know. What is more, never use the same address to receive coins a second time. Even if one address is linked to your persona, that does not reveal to the world anything else than just the amount of that singular transaction. Your wallet can create fresh addresses easily so use that functionality by default.
But lets say that you have done all that and took all those precautions. Now you want to perform your first transaction and get some coin. You sent a fresh address to a friend of yours and she sends you some coins, or you have even decided to get some bitcoins from an exchange. They have sent them to you, but where are they? Bitcoin’s most obvious restriction comes from the fact that a transaction is not cleared instantly. Soon enough, you will be informed by your wallet that the transaction is pending, but it will only be finalised within the hour. This is normal for Bitcoin so do not panic. For the system to prevent double spending it needs to enforce a procedure known as proof of work which is performed by the miners who include your transaction in a block at the Bitcoin ledger – most commonly known as the Blockchain. That takes time and is considered to be concrete after 6 confirmations, i.e. six more blocks on top of the one containing your transaction. Each block takes approximately ten minutes to be mined by design. Only then you will be able to say that these coins are now yours to hold and to spend at will. This time delay is the price you have to pay for getting all of the Bitcoin advantages. Improvements on that are addressed by layer two systems such as Lightning and Ark but these also come with a few added risks that accompany the conveniences. On a final note, now that you have your coins delivered, do not forget to store the respective transaction record in case you need it for the IRS!
Most probably you will notice that your hardware wallet’s associated desktop or mobile application is connecting to a default Bitcoin node provided by the wallet vendor. If you want to go the extra mile of paranoid privacy you have to set your own node preventing even the wallet vendor from collecting information about your persona. Just because the processing power requirements for running a full node are very modest, you can run a node on a single board computer. The biggest requirement is disk space which at the time of writing is approximately 700 GB. Attaching a big enough SSD to your board computer is relatively easy. After setting up your full node and letting it download the whole of the Blockchain, you can point your wallet to use your node instead of the vendor default.
I understand that all these steps are not trivial for a non IT person. However, in order to use Bitcoin to your advantage you have to adapt yourself to the mentality and the technology innovations it brings to the table. As Warren Buffet use to regularly say, do not invest in anything you do not understand. In this way, you will have confidence using it and trust your coins to a distributed system rather than a greedy bank.
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