Lately, I’ve been answering the same questions about Bitcoin and cryptocurrencies over and over again. I guess that means there’s not a good intro source about it. I decided to answer the most common ones in this chapter.
About getting Bitcoin and storing it
Where can I buy Bitcoin?
I personally buy either from friends or from a Bitcoin ATM. You can find a list of Bitcoin ATMs at coinatmradar.com. I hope you have one near you. Check out the fees as well.
I have created a detailed guide to buying your first cryptocurrencies at https://juraj.bednar.io/en/how-to-use-cryptocurrencies/. It contains video where I go through step-by-step wallet installation, buying cryptocurrencies and a demonstration of how to pay with them afterwards.
The cryptocurrency exchange wants my ID or passport and other documents
I think exchanges that require personal data are dangerous. And not just for people who “have something to hide”. Exchanges are required by international treaties (OECD CRS and FATCA) to share data with tax authorities, financial police and the like. Yet these organisations have proved unable to protect the data and leak it.
In addition, exchanges also share information with so-called chain analysis firms without telling you.
What wallet do you use?
I use the Trezor One or the newer Trezor T to store my savings (anything more than I would take with me in my physical wallet). The difference is that the Trezor T has a touch screen. The practical difference is that Trezor One does not support Monero and the so-called “Shamir scheme”, which can be used to split a backup into multiple parts. If you don’t need these features, the cheaper Trezor One is sufficient.
Please really invest in a hardware wallet. Trezor is a quality wallet that supports bitcoin properly. People often buy Bitcoins for “just a few bucks” and then can’t get them out of the wallet because they can’t choose a fee or the wallet is discontinued, etc. Unfortunately, I don’t have the capacity to help you with taking money out of weird wallets.
I tend to pay for regular things with Lightning network and Monero, which have usually lower fees than regular Bitcoin on-chain payments. A good wallet is for example Phoenix Wallet for Lightning, and Cake Wallet for Monero. But I also recommend Trezor T for storing Monero, if you choose to do so.
A good modern mobile wallet that can handle multiple currencies (Bitcoin, Litecoin, Monero, Bitcoin Cash, Ethereum, …) is Coinomi. It works on both Android and iOS, supports relatively new features, etc. Once installed, write down a seed – 12-24 words that represent your cryptocurrency. Write these down on a piece of paper that you won’t lose (not on your computer!). Anyone who gets these words in the right order (for example, by infecting your computer with spyware) can steal your cryptocurrencies. If, on the other hand, you lose your mobile phone and you don’t have these words, you have lost your cryptocurrencies and can’t get them again.
If you want to use Lightning Network, I recommend trying Phoenix Wallet or Breez. For more information, check out my mini course Lightning network for private bitcoin payments among friends and for products and services.
Often people write to me to say that their transaction is stuck in some strange wallet, or someone has stolen their wallet because of a virus on their computer. Please really invest your money in a hardware wallet.
I sent the merchant the money, but they claim they received less. But I only scanned the QR code
Please use the wallets I recommend. Really.
And you probably didn’t use your wallet, you used the exchange that can send out money to a cryptocurrency address. There is a difference.
About “home-brew” solutions
I invented a cool innovation – on linux on a five-year-old laptop I’ll run my wallet, there I’ll have a “cold wallet”, I won’t connect it to the internet
I’ll make a paper wallet and put it in my safe
I’ll save my wallet to an encrypted drive and the PIN will be the one I’m using, just a little shuffled
I’ll add a passphrase, I won’t write it down anywhere, after all, I’ll remember it. And I’ll shuffle the words in the Seed, that’s clear.
All these stories have one thing in common – they are supposedly “good ideas” on how to store cryptocurrencies safely. A lot of these stories end up with the person waking up and not being able to remember the password 5-10 years later. For example, like this gentleman who guesses the PIN to an encrypted drive where he has a wallet.dat with $240 million. He has two more tries.
When storing cryptocurrencies, we think about the fact that in 5-10 years the technology may change completely. Electrum may change the protocol and it won’t work. The paper will fade. That five year old laptop’s power supply will go out or overheat because the fan won’t turn on. And on the way, the disk goes up in smoke, or there is a solar storm.
In all of this, at the beginning there was an effort to save $100 on the hardware wallet. The losses are huge. The advantage of the standard approach is that many people follow this standard approach. This means that in 5-10 years there will be at minimum a tool to get your cryptocurrencies. No need to remember anything special, no need to remember what exotic wordlist we used or anything like that. Let’s think long term. If you’re somewhat serious about cryptocurrencies, don’t repeat these mistakes. It’s worth investing in safe cryptocurrency storage.
What about the XYZ wallet or the ABC exchange?
I don’t know, I don’t follow news closely enough to know the current status and security of all the wallets and exchanges. You need to ask around. But it’s probably not worth it experimenting with exotic wallets and exchanges unless you have a really good reason to. Stick with what people use.
How do I exchange BTC for another cryptocurrency or vice versa?
Many wallets have an integrated currency exchange service. Crypto for crypto often goes without identity verification (KYC), but it’s possible that if it’s a larger amount, even an exchange that didn’t require it suddenly asks for an ID scan or at least personal details.
You can also use the Invity metasearch engine to exchange without an account. You enter what cryptocurrency you want to exchange for what and it will show you the exchanges with the best rates. It also shows you the KYC (identity verification) policy for suspicious transactions. There are practically two options – an exchange may always require KYC for suspicious transactions, but some exchanges will allow a refund (return of the original cryptocurrency) without KYC in such a case. Invity also informs you about this.
Any other safety recommendations?
Never leave money on the exchange. No exchange is safe. If you want to buy or sell on the exchange, then send it in, make the exchange and send it to your hardware wallet.
Your computer and mobile are not secure. Not even if you have antivirus and updates. Buy a hardware wallet for anything you would miss if you lost it.
Important note – if you have the “keys” they are your cryptocurrencies, if you don’t have them (and the exchange has them) they are not your cryptocurrencies, you store them with the exchange. Several of them have gone bankrupt in history and people have lost money. Please don’t use the exchange as a bank, it’s not designed for that.
When initialized, the wallet creates a seed, which is your backup. It’s a few English words that, in the right order, will allow access to bitcoins even if the hardware wallet breaks or you lose it. Don’t write these words down on your computer, there are viruses that look for them and can steal all your cryptocurrencies. Write them down on paper and put them away well.
Might not hurt to buy a physical vault and store them in a tamper-evident envelope.
About investing in Bitcoin
What do you think, will Bitcoin go up now? Can it fall?
I don’t know. My magic orb is no better than yours or anyone else’s.
Is it worth investing now?
Please read the chapter on Bitcoin strategies.
Is Bitcoin worth mining?
No, unless you have an edge. Short answer: if you are asking this question, the answer is no.
How to tax cryptocurrency income, transfers between cryptocurrencies, etc.?
I do not give tax or accounting advice, I am not an accountant or a certified tax advisor. Consult the experts.
One important caveat: If you ask about taxation in Facebook groups, on the Telegram or in discussion forums, you will usually get the wrong advice. The answers make sense, the problem is that the law usually makes much less sense. So really consult the experts, that’s what they are for.
Other cryptocurrencies
Do you know (new cryptocurrency)?
Probably not, there are so many cryptocurrencies at the moment that I don’t plan to follow them until they are very well known. I’m interested in innovative cryptocurrencies that bring something new, but in most cases my answer is “Bitcoin is better”.
Of course, thanks to the transaction fees, we have no choice but to use either other cryptocurrencies or the Lightning Network for regular payments. Litecoin and Monero are interesting and usable in my opinion. For other things, such as derivatives, Ethereum is also a good network and within the Ethereum ecosystem, I like DAI / MakerDAO.
Should I invest in any cryptocurrencies other than Bitcoin?
If you have the time to learn and deal with it, feel free to play or speculate, I recommend only up to an amount you don’t want to lose. Please start with labeling what you are doing correctly – it is called gambling, or as we like to call it “shitcoin casino”. It is good entertainment, but please be aware, that you will probably lose in shitcoin casino.
Personally, I still think the best decision is to go into Bitcoin unless you really understand cryptocurrencies in depth.
Also make sure to read the chapter on How not to fall for a cryptocurrency scam. It is also online, so feel free to share it with friends.
Is it worth mining other cryptocurrencies?
I don’t know, I don’t do it. So far my experience is that I have learned how to mine, but it is always easier and more profitable in the long run to buy a cryptocurrency than to mine it.
What wallet do you recommend for XYZ cryptocurrency?
I don’t know because I probably don’t use cryptocurrency XYZ. I would choose the official project wallet. And watch out for computer security.
If the cryptocurrency supports Trezor, Ledger, or any other reputable hardware wallet, I recommend using that.
Resources and further study
Are Cryptocurrencies/Bitcoin safe?
Bitcoin, in my opinion, is largely secure. Why is that? If someone manages to steal Bitcoins, the reward is somewhere in the billions of dollars before anyone notices. This means that it is certainly worth it for attackers to invest millions to billions of dollars in finding security vulnerabilities. You can already do custom hardware and the like within that budget. Bitcoin is the largest bug bounty program in the world. I know a little bit about it, since I’m the founder of Hacktrophy, which is a bug bounty program for ethical hackers. The idea is that companies can reward people for finding and reporting (i.e. not exploiting) vulnerabilities.
With Bitcoin, that bounty is orders of magnitude higher than any other bounty in information security. Of course, an attacker would have to exploit the security flaw, which is the opposite of ethical hacking, but the economic motivations work very similarly (the difference is that an unethical hacker has to factor in the risk of detection and punishment, which in this case is quite high, and reputational risk, whereas with an ethical bug bounty program he has reputational gain and no risk of punishment).
With other cryptocurrencies, the problem is the size of the bounty, the time the project has been public and funded and many other problems, so I would use the Lindy effect – the longest, oldest cryptocurrencies are better than two week old ICO or DeFi project. Also note, that the bounty safety guarantee only works if you have your keys secure, you verify the addresses you use independently (on the screen of the hardware wallet, not on the screen of the computer), if you hold your private keys (not the exchange). There is theft of Bitcoin, but not due to Bitcoin insecurity, but due to users not following the advice on how to secure Bitcoin – use your own hardware wallet, verify everything on the screen of the device, do not save the recovery words on computer and do not keep your coins on an exchange.
Why are Bitcoin and other cryptocurrencies growing so much now?
I don’t know if they are growing now, maybe when you read these lines it is just “crypto winter”.
There are several reasons for the growth. Cryptocurrencies are gaining awareness. Bitcoin is the oldest of them. Thanks to so-called network effects, the value of the network grows quadratically with the number of nodes. This is due to the fact that the utility of a payment system is determined by the possible connections between individual users of the network. If one user is added to the network, the utility of the network increases significantly because suddenly the whole rest of the network can transact with that network user. Thus, a large part is the natural quadratic evolution of the value of the payment network. This effect is known as Metcalfe’s Law and was first described for telecommunications networks.
The second reason is something called the Lindy effect – the lifespan of non-perishable items is directly proportional to age. An example is the latest iPhone. It has been on the market for just over a year, and we expect that in a year’s time it will be completely replaced by another model, and in two years’ time it will not even be easy to buy. By contrast, a chair, for example, that has been around for at least 2 000 years will probably be around for another 2 000 years. The Lindy effect on Bitcoin is that it is the oldest cryptocurrency. People used to ignore Bitcoin as an experiment. But when it’s been on the market for ten years, we expect it’s something that’s going to stay with us for a while (at least ten more years). And that expectation translates into price.
Another reason is, of course, speculation. People have realised that they may have missed the chance of a lifetime to get rich quick and want to believe that it is not too late. The rising value of Bitcoin reinforces that belief and brings more people into the system. How this will play out, of course, we cannot say in advance.
And the final reason is the disappearance of banking secrecy and distrust in the classical state-regulated financial system. In recent years, bank secrecy has been ending around the world, states are declaring war on cash, and storing value in Bitcoin is an effective way to defend against these changes. At the same time, the more people defend themselves, the higher the value of Bitcoin. Among the regulations that Bitcoin and other cryptocurrencies are protected from are the OECD’s international CRS agreement and the US FATCA rules, which ensure that banks must report account balances and significant taxable events to countries where the account holder is tax resident. In practice, this means that hiding assets in offshore bank accounts is not as easy as it used to be. Of course, the banking system has found various solutions for wealthier clients, but for most people who care about banking secrecy, Bitcoin is a much safer and more efficient solution. Bitcoin is also accessible to everyone, regardless of age or country where they live.
Why is Bitcoin’s market capitalization ratio declining relative to other cryptocurrencies?
Depends on when you read these lines. If it is falling, there are probably two reasons. First of all, people would love to see the gains that were possible with Bitcoin and believe that the same growth could have occurred with other cryptocurrencies. And so they speculate with the understandable goal of making a profit.
The second reason is Bitcoin’s scaling issues and some of the characteristics of alternative cryptocurrencies. The specific reasons for each cryptocurrency are as follows:
Litecoin – has lower transaction fees than Bitcoin. Bitcoin is often not suitable for small payments on chain (for example, for paying at a coffee shop) and Litecoin fills this role quite well. At the same time, it is the second oldest cryptocurrency after Bitcoin, so people have experience with it, and this cryptocurrency has a fairly good technological infrastructure – wallets, exchanges, merchant solutions.
Monero – Bitcoin is often presented as an anonymous cryptocurrency. However, this is only partially true. With Bitcoin, there is no login and password or anything that directly identifies the account holder. Bitcoin addresses look like random clusters of letters and numbers. In addition, most users use a different address for each payment. On the other hand, all transactions are fully transparent and everyone can see which accounts the Bitcoins were sent from. In the so-called blockchain database, where transactions are stored, it is possible to see who sent which Bitcoins, to whom and how many. The sender and recipient are only identified by the Bitcoin address, but if the user is tied to the address in some way, it is possible to see who it is by tracking the movements of the money in certain circumstances. This problem is solved, for example, by the Monero currency. Using clever cryptographic protocols, the authors devised a way to hide the sender, receiver and amount in a public database of transactions. Thus, Monero works very much like Bitcoin, but the transactions are not publicly traceable.
Ethereum – Ethereum enables the creation of new currencies and even more complex decentralized applications. Imagine, for example, a sharing economy app, or a betting company that has no central authority. It works by voluntary usage of these decentralized apps (dapps). It is the ability to create additional cryptocurrencies using so-called Initial Coin Offerings over Ethereum that increases the value of Ethereum itself. Imagine walking into a supermarket where you can buy shares in companies or a number of other tech toys that are cool right now. But you can only pay using a single currency, Ethereum. This means that the whole economics of this trade increases the value of Ethereum as a medium of exchange.
Isn’t volatility a problem?
Volatility may or may not be an issue, it depends on what you want to do with the cryptocurrency.
It is true that the prices of goods and services denominated in BTC change quite often. Therefore, most merchants do not use Bitcoin as a unit of account and set prices in another unit of account. For example, even in Parallel Polis – a Bitcoin cafe and coworking space, although we only pay in cryptocurrencies, the prices are determined in euros or Czech crowns, although we do not use euros nor Czech crowns for payment.
It is important to realise that volatility is not necessarily a disadvantage and, on the contrary, trying too hard to stabilise the price level can have fatal consequences, as we learned in the Soros vs. the British Central Bank case in 1992.
You can read about how Bitcoin can be used in an environment of price volatility in the chapter on Bitcoin strategies.
What are the other advantages and disadvantages of cryptocurrencies?
The advantage of most cryptocurrencies is the decentralization of society. There ceases to be a division between “bankers” and others. Every user in the Bitcoin network has the same rights and responsibilities. Central banks are no longer needed.
Some people may see this as a disadvantage, others as an advantage. Mostly it depends on people’s beliefs – is manipulating and stabilising the price level good or bad? There are some people who have got used to central planning and for them this decentralized nature of cryptocurrencies is clearly a disadvantage. Other people prefer other features and consider the non-manipulatability of the currency to be an advantage.
Do cryptocurrencies need regulation or state recognition?
No. Regulation is ineffective to say the least, sometimes it even helps criminals. States need to realize that cryptocurrencies are outside their jurisdiction. Cryptocurrency does not exist in any state or territory. Cryptocurrency will not start behaving differently if a country regulates it. At the moment, states are mainly trying to regulate the buying and selling of cryptocurrencies that fall under their jurisdiction. But here it is important to note that criminals will not blindly follow regulation. It’s similar to the regulation of explosives – it applies to ordinary people, but a terrorist is not going to go to a government office to ask permission.
Accounting is neutral towards cryptocurrencies. Income and expenses are accounted for, regardless of how they were paid. In this case, states can simplify the accounting by specifying exactly how the payment is to be accounted for, what suffices as proof of payment, and so on. States do try to regulate certain types of payments, such as cash, and this can be a problem for accounting, even with cryptocurrencies.
In general, efforts to regulate the tax aspects of cryptocurrencies will not lead to increased tax collections or prevent crime. Regulation is only followed by actors in the classical economy, the black and gray economy is more or less uninterested in regulation and thus any regulation only affects those who choose to participate in the official state regulated market. This is why regulation can have the opposite effect – it pushes economic actors who would otherwise operate in the classical regulated economy over the edge, into the so-called shadow economy.