The Essential Things to Know Before Getting Started With Bitcoin

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The Essential Things to Know Before Getting Started With Bitcoin


So you are thinking about getting into bitcoin? Good choice, it may be one of the best decisions you ever make. But there are a few things you should know before you get started buying or earning bitcoin with Lolli.

1. Bitcoin is more than just digital cash.

You’ve probably seen pictures of physical bitcoins minted by some bitcoin enthusiasts early on in its history.

While this is a cool visual aid, there is much more to bitcoin than what meets the eye. One bitcoiner named Kai Kurosawa said:

“Bitcoin is not just a software project. It is a method of coordination for a large group of people who face extremely hostile and powerful adversaries.”

When you buy bitcoin, you’re not just making an investment. You’re becoming part of a social movement working to separate money and state. And even if you are not interested in being part of a revolution, what makes this revolution so powerful is that the more committed its participants are, the more money everyone stands to make.

Bitcoin is known for its volatility; it takes strong nerves to handle the big price swings. But, the overall trend is up - bitcoin is brilliantly designed to continually appreciate in value. By "hodling" (holding/not selling it) your bitcoin you are causing the price to slightly increase. The better you understand that the day to day dips and jumps don't matter but that the overall trend does the easy it will be to hodl.

2. Not your keys, not your bitcoin.

Basically, bitcoin is like a big worldwide bank, except only you have access to your account. While this protects users from hostile third parties, it also means users have greater responsibility. They need to protect and hold their private keys, which is the password for your bitcoin wallet.

Bitcoin uses public-private key cryptography. This brilliant mathematical method allows the bitcoin network to verify you own your coins (i.e. have your private key) without seeing the key itself. For clarity, compare this to your email provider: they hold your password on a database. This means they could potentially access your emails, lose your password or even lock you out of your account.

It's worth noting the situation is the same for bitcoin if you keep your coins on an online service. Providers like Coinbase, Kraken, or Lolli, are trusted with your bitcoin so long as you keep them in one of their wallets. A lot of people prefer this because they are intimidated by handling cybersecurity themselves.

If you decide to keep bitcoin with an online service, you should make sure to choose a reputable, well-known service. Even if these services are trustworthy, the amount of bitcoin that they hold makes them attractive targets for sophisticated hackers. In early 2014, one of the largest and most infamous Bitcoin exchanges in the world, Mt. Gox, discovered that it had lost most of its users' bitcoin to hacks.

Additionally, third-party access runs the risk of governments seizing the company's assets. With self-ownership, neither of these risks are as prominent.

For the short term, you are probably fine trusting a reputable company to buy and store your bitcoin. But in the long term, for maximum security, you will need to learn about your wallet options. Here are three types of wallets.

  • Paper wallets: A paper wallet is a piece of paper with your private key written on it. It often has a QR code for easy copying of your private key. It’s very secure against hackers (as long as you keep the paper safe), but it’s a bit of a hassle to withdraw any funds.
  • Hardware wallets: A hardware wallet is a chip that contains your private key. It usually has a USB interface for connecting it to a computer where you can then send your bitcoin. This offers a good balance between security and convenience.
  • Mobile wallets: There are a number of mobile wallets that are available as smartphone apps. They are very convenient, but if your phone gets hacked there is a chance the funds could be stolen. Generally, mobile wallets are best for carrying small amounts of bitcoin.

3. Taxes: if you make a profit by holding you bitcoin, you may owe taxes on it

Different countries have different tax laws surrounding bitcoin. In the US, the IRS recently went after a number of bitcoin investors to collect taxes on their profits.

Unless you plan on emigrating to a tax haven (which many bitcoiners are doing, or at least considering) you may want to familiarize yourself with local tax laws to avoid running afoul of the authorities.

                                                          The only certainties in life are death, taxes, and bitcoin!

Read more about bitcoin and taxes here.

4. Bitcoin is psuedoanonymous, not anonymous.

You may have heard that you can use Bitcoin on online marketplaces where you can buy drugs. While true, you should know that unless you buy your bitcoin for cash on the street, your bitcoin can probably be linked back to you. Even if you are not doing something illegal, there are legal reasons why privacy matters.

There are ways you can cover your bitcoin tracks, but it’s important to always assume that someone can trace a transaction back to you if they want to badly enough.

5. Bitcoin transactions are irreversible.

When you are sending bitcoin, you better double-check all the details, because once sent transactions are final. There is no customer service line to call and get a refund. Personal responsibility is required.

6. Transactions

When you first send a bitcoin transaction, it goes into a waiting room called the “mempool.” Eventually, it is collected and added to a block, which is then added to the blockchain. Once the block is added to the blockchain, it is considered to be “confirmed.” This usually takes between 10-20 minutes.

If you are buying bitcoin, it is quite unlikely, but theoretically possible that an unconfirmed transaction could be reversed. But once two or three blocks have been added to the blockchain (or about an hour has passed), it is practically impossible to reverse.

Not every transaction that uses bitcoin is settled on the main bitcoin blockchain - side-chains exist that offer lower cost and lower volume amounts. Once closed they are finalized on the main chain.

Lighting is one such side-channel. People open a decentralized account together on a separate ledger and use it to pay each other. Once they are done making transactions, they close the account and make the final settlement on the bitcoin blockchain. 2nd layer projects like Lightning are helping to make transacting in bitcoin faster, cheaper, and allow for greater total volume.

7. Don’t worry.

Now, bitcoin may sound somewhat unstable or complex, but don't worry.

Hacks are kind of like car accidents — terrible when they happen, but the odds of one happening are relatively low if users take simple precautions.

And bitcoin is getting easier and easier to use, especially when getting it for free from Lolli!

It’s important to be aware of issues and tradeoffs, though, because the bitcoin price can go up very quickly, making bitcoin a very attractive target for thieves. It certainly doesn’t ever hurt to be prepared.

Thanks for reading & don't forget to check out our Twitter page @trylolli.

Love,
The Lolli Team 🍭


Walt Smith

Walt Smith

Walt is a Research and Editorial intern at Lolli, a browser extension that lets you shop from 750+ brands online. He currently studies economics at Grove City College.

Newport Beach, CA