Practical advice for keeping Bitcoins

The article below is aimed at people who like the Bitcoin idea and would like to buy some Bitcoins, but don’t know how to go about it.

First and foremost, you should make sure that there aren’t any viruses on your computer. Of course, that’s not a bad idea anyway.

The next step is to generate a virtual wallet. Numerous programs can be downloaded for that purpose. I recommend the following program: Next, select Windows Installer (if you want to install the program on a Windows machine). Run the downloaded file (you need to click on it and then keep pressing next, next…) to install Electrum, whose icon will then appear on your Windows desktop.

Launch Electrum. The first time you do so the following message will appear:

Wallet file not found. Do you want to create a new wallet, or to restore an existing one?

Press “Create” to create your wallets. Next your wallet generation seed will appear, which consists of 12 English words. I strongly recommend writing these words on a piece of paper and putting it somewhere safe, because if your computer breaks down, then you can restore your wallets using these words. If you don’t take note of them and your computer calls it a day, then your Bitcoins will be stuck in the wallet forever and nobody will be able to access them again. For verification the program then asks you to enter the words.

Next you need to select the server. Accept the server which is suggested as default. The final step involves giving a password, which will be needed in future to confirm transfers that you make. This should be sufficiently complicated. Write it on a piece of paper and put it away in a safe place, because if you forget it, as before, your Bitcoins will remain stuck in your wallet forever.

Once those initial steps have been completed, the Electrum control panel appears. Below left you can see your balance: 0 BTC. Electrum has immediately generated 5 wallets for you, and it will generate more in the future as you use them. Here you can see the combined balance of the wallets. Electrum places particular emphasis on anonymity. The idea is that you can give the public keys of different wallets to the various partners expected to transfer Bitcoins to you (or you can ask for each transfer to be made to a new wallet, which would then be something like a disposable bank account number). If you had only one wallet then everyone who knows its public key and can link it your person could monitor your balance and Bitcoin traffic exactly, since the details of Bitcoin transactions are public. That’s clearly undesirable. On the other hand, if everyone knows the data of different wallets, then they can only track the transactions of a single wallet, which won’t bring them far. The default setting in Electrum is to always have 5 wallets that haven’t been used before, but you can also set it so that you have more than five.

By clicking on the “Receive” tab you can view the public keys of your wallets, which means, at the start, five sets of characters similar to the following: 19J6DhKc9UDAvzWKkuPTE5GMF7iW1XL33n. These act as an account number. You should give one of these sets to the person you want to transfer Bitcoins to you. If Bitcoins arrive on one of these, then a new, empty wallet is automatically generated.

If you already have Bitcoins and would like to make a transfer, click on the “Send” tab. The public key of the wallet to be transferred to should be entered in the “Pay to” field. If you’re very grateful for my articles, then feel free to transfer donations to my wallet, whose public key is above! The sum to be transferred should be entered in the “Amount” field. In the “Fee” field you can enter the transaction fee that the miner who manages to verify your transaction will receive. You can set that as zero, since there will be a miner who is willing to verify the transfer even with that setting. At most the process may take slightly longer.

Now that you have a wallet, it’s time to top it up with Bitcoins. Currently these can be purchased through the unregulated online Bitcoin exchanges, which are still somewhat rough and ready. The reason for that is that the websites of the exchanges were coded by a few programmers who were early Bitcoin enthusiasts, and although they have 2 to 3 years of operating experience, they (and the users) can be taken by surprise. They’re unregulated because no regulation of decentralized virtual money has yet been adopted. There has been progress in this field recently, but naturally this poses an additional risk. If even that doesn’t put you off purchasing Bitcoins, then I recommend that you only keep your money or Bitcoins on your accounts on the exchanges for the shortest time possible.

Here you can find a table summarizing the volumes and current prices on the exchanges. The most liquid Bitcoin exchange is mtgox, and within that trading against the dollar. It doesn’t take long to register (only a user name and an email address are needed), but I don’t recommend trading on this exchange primarily (though there is no harm in registering here, since it doesn’t cost anything). If hackers want to cause panic (and a fall in the price) by attacking the Bitcoin infrastructure, as has happened in the past, then they are likely to attack that exchange first. That means that you won’t be able to purchase or sell on the disabled mtgox site, just when you have the greatest need to. There’s nothing worse than helplessly watching the price dive.

When it comes to money transfers, the Bitstamp exchange is faster and less expensive. With regard to liquidity, it’s the second largest Bitcoin exchange and I think currently it’s worth using this exchange for trading. You can register within seconds here too: after entering your name, email address and country, you will receive an email with the ID number and password of your newly entered account, and can log in straight away.

After logging in it’s worth changing your password by going to the “Account” tab at the top of the screen, and then under “Settings”, “Change password” on the left.

By clicking on the “Deposit” button in the above menu, you can start the process of putting money on your account. There are basically two options: You can take advantage of living in the Single Euro Payments Area (SEPA) and transfer in EUR. In that case it will typically take 1 to 3 working days for the money to appear on your account. Since it is only possible to trade in dollars on Bitstamp, euros are converted to dollars at a fairly reasonable exchange rate. In that case you should click on the “EU bank (SEPA)” button on the left, fill in the data, and then click on “Deposit”. You will be given an account number to transfer to and the text to enter in the comment section. The other option is to select a normal international transfer (using the “International Bank” button on the left), enabling you to transfer in Australian dollars, pounds, yen, Swiss francs or US dollars. In this case the payment is booked within 2 to 5 working days. A fee of 0.1%, or a minimum of 15 USD is charged, which is a pretty hard hit if you’re only transferring a small amount. That’s why it’s advisable to pick the first option since there’s no extra fee and you only “lose” the cost of the currency exchange. After completing all those steps, don’t forget to make the money transfer at your bank!

Once the money has appeared on your Bitstamp account, you can start trading by clicking on the “Buy/Sell” button. By clicking on the “Buy Bitcoins” icon, you can make an instant order. Or you can make limit order by clicking on “Limit order” in the left-hand menu. The trading fee is 0.5%, which decreases progressively with the volume generated. By clicking on “Order book” you can view your complete order book.

As I‘ve mentioned, the risk can be reduced by not keeping more money or Bitcoins than strictly necessary on your exchange account. Let the story of the bitcoin-24 exchange serve as a caution. Its accounts were frozen by the German and Polish authorities in April on the grounds that fraud and money laundering were committed in collaboration with the exchange. I know people whose money is still stuck there and whether they’ll ever get it back is entirely uncertain. In the longer term it’s advisable to keep your Bitcoins in your own wallet. Click on “Bitcoin” under the “Withdrawal” menu item and enter the public key (from Electrum) of one of your wallets and the amount to be transferred. You need to confirm the transfer by clicking on the link sent to your email address. Bitcoin transfers are free of charge.

You can verify your account under “Verify account” in the “Account” menu. You need to send a scanned copy of your official ID documents for verification of your personal identity, and a utilities or telephone bill for verification of your address. That’s only necessary if you intend to trade or transfer large amounts (several thousand euros).

Interestingly, there’s also the possibility to open a business account. To do so, you need to register on Bitstamp in your name as described above and then have the account verified in the name of the company by sending the company documents. Then your accountants can wrack their brains over which code to classify your company’s Bitcoin purchase under.

Should you have any further questions, you can ask the Bitstamp support staff for help in English under the “Support” item in the “Account” menu. You can expect a response within a few hours.



Original date of Hungarian publication: 06 June 2013