Before ever buying your first bitcoin, there are some important things to know and take seriously. Unlike other forms of payment, cryptocurrency requires users to be 100% accountable for their own actions. This is both a pro and a con of peer-to-peer transactions with no middleman orchestrating the deal. There is no FDIC insurance for loss of funds and no recourse for recovery due to user error, exchange breaches, wallet hacks, or private key theft. You are advised to take security seriously from day one. Doing so will make your encounter with cryptocurrency less stressful and hopefully more profitable.
When selecting and creating your bitcoin wallet security must be a top priority. There are many options available, and one must remember that “convenience” doesn’t often mean “secure”. Think of a wallet like your physical wallet carried every day. Would you carry your life savings in your wallet or purse? Certainly not, and your bitcoin hot wallet should be viewed the same. However, your safe deposit or home safe is a place you would store valuable assets. You bitcoin cold wallet should be used for considerable amounts of cryptocurrency. Bitcoin provides very high levels of security if used and stored correctly, and the responsibility lies solely with you.
Once you’ve selected and created a secure wallet, the next important consideration is to fully understand bitcoin transactions cannot be reversed. A person receiving funds from you can send them back or refund you, but you can only ask as there is no recourse to force a reversal. There is no chargeback option as orchestrated by a credit card company, and no bank to place a stop-payment. There is no one involved but you, and the recipient of funds you are sending. So take care to conduct transactions with people and organizations you know and trust, or have a good reputation in the ecosystem.
To conduct a transaction, you need to enter a bitcoin address into the send field of your wallet. An address is a long string of numbers and letters that changes often, so mistakes can easily be made if best practices are not used. Many wallets, exchanges, and services provide a QR code which can be scanned if using a mobile wallet. If using a desktop wallet, copy and paste is your friend to eliminate mistakes. Bitcoin can detect typos and usually won’t allow sending funds to an invalid address by mistake, but taking steps to ensure redundant security is always the better play.
While it may seem odd one needs to revert to old-school security measures for such a high-tech asset, these words of caution should drive home the fact that this is “emerging technology” in its infancy. Those old enough not to have been born with a smartphone in hand surely remember the trials and tribulations of the first mobile devices. Still today, security measures must be taken when using smartphones – it’s just that service providers have long caught up to the tech, and have made it easier with apps. Remember when there were no apps for a cell phone?
Okay, now that you’re getting the idea we should also point out that unconfirmed transactions are not secure. Transactions get a confirmation score which indicates the level of irreversibility reached, sometimes in seconds. Longer if the transaction fee paid is low or otherwise atypical – but we cover all those details in another kp-post!
Bitcoin transactions are, contrary to popular belief, not 100% anonymous. All transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. That said, the identity of the user behind the address is unknown. While user information may be revealed during a purchase or other circumstances, if you adopt good practices, your privacy is protected like no other transaction.
Taxes and Regulations
It is also 100% your responsibility to report and pay income, sales, payroll or capital gains taxes on anything that has value – including bitcoins. We cover some details related to taxes and legal or regulatory mandates, but you must adhere to those issued by your government and/or local municipalities, as it is impossible for us to outline them all.
Bitcoin is an exciting, albeit experimental, new currency in active development. Every improvement makes it more secure and easier to use, but there will be challenges to overcome as adoption increases. Before making any major investments, do your own research to learn and properly use or store cryptocurrency. Consulting this knowledgebase is a step in the right direction, but keep in mind that no one can predict what the future holds for Bitcoin. Those that say they can, you should avoid.