Getting your first Bitcoin; Choosing a wallet

There are at least four ways to acquire Bitcoin and three ways to store it…


Acquire Bitcoin: You can trade Bitcoin in person, accept it as a vendor, mine it, or buy on an exchange.

Store Bitcoin: You can keep your Bitcoin in an online/cloud service (typically, one that is connected to your exchange account), keep it on your own PC or phone, or even print it out and store it on a piece of paper. Like a physical coin, the piece of paper has value. It can be placed in your lock box or under your mattress.

Let’s look at the market for Bitcoin Wallets (all of these are free), and then we shall talk about Bitcoin exchange services. This includes my personal recommendation for the typical consumer or coin enthusiast…

1. Choosing a Wallet

You can start your search for a wallet on this page at Bitcoin.org. Use the drop down tabs to refine your search by platform: Mobile, Desktop, Hardware gadget or Web. Don’t overlook the web option. For many users, the wallet (and VAULT) included with an online exchange account is all you need.

Each wallet platform is further distinguished by operating system. For example, you can find a smartphone wallet for Android, Apple, Windows Mobile or Blackberry. Some popular apps are listed under more than one OS or platform.

When you click on any of the app logos, you will see a checklist of five key traits, according to reviewers at the Bitcoin Foundation:

  • Control over your money
  • Simplified validation
  • Basic transparency
  • Secure environment
  • Weak privacy

These are not necessarily critical traits/features. It depends on your needs and preferences. For example, everyone wants good privacy and security. But not everyone wants to control their private keys. That places the risk of loss, backup and/or the burden of inheritance issues on you, rather than a standardized recovery process. The feature comparison simply helps you to begin your own comparison and evaluation.

For Android users, my personal recommendation is Bitcoin Wallet by Andreas Schildbach (the logo is a tilted orange ‘B’). It is simple, secure, well maintained and very popular. (iPhone users: See my my suggestion in the recommendations, below).

2. Portable –vs– Online

Despite the simplicity and low cost of spending or sending Bitcoin between individuals and vendors, getting your first Bitcoin can be confusing, complex and even risky. For this reason, I suggest that Newbies open an account at a very established and trustworthy exchange.

In the near future, this will include most big banks. But for now, the safest and most reputable exchange is Coinbase in San Francisco. They are also the one with the highest level of regulatory compliance. Bitstamp of Slovenia and Great Britain is a close second. In my opinion, using either of these organizations as a currency exchange or a secure place to park your digital currency is a safe bet.

Both of these exchanges include a cloud wallet service that—when used properly—is safe and secure. But, because Bitcoin is still in its infancy, you will need to learn about sweeping funds into a ‘vault’ (to better protect against hacking) and you should also learn about portable backups and multi-sig (to protect your assets, in the event of forgetfulness, death or incapacitation).

With either type of wallet—device storage or online with an exchange—I recommend that you install and play with a portable wallet on your phone, just to get the hang of a few basic functions: Display wallet address for incoming money, Send money, Request money (i.e. send an invoice), and Pay with the QR-camera feature. All wallets serve these basic and critical needs.

Recommendations:

  • Coinbase is a most reputable exchange for buying/selling & storing Bitcoin
  • Bitcoin Wallet by Andreas Schildbach is an excellent choice for portable, secure storage. This app is available for Android phones only. Apple iPhone users may wish to try Bitcoin Wallet by Blockchain. I have not reviewed it. It has a slightly less friendly user interface but it is stable and very popular.

Related Reading:

Ellery Davies co-chairs Cryptocurrency Standards Association. He produces The Bitcoin Event, is board mem-
ber at Lifeboat Foundation and will deliver the Keynote Address at Digital Currency Summit in Johannesburg.

Bitcoin Arbitrage: Can you profit?

At Quora, I occasionally play, “Ask the expert”. Several hundred of my Quora answers are linked at the top right. Today, I was asked if the difference between quotes at various Bitcoin exchanges presents a profit opportunity.

In addition to my answer, one other cryptocurrency enthusiast offered pithy, one-line response: He said “Buy local, sell internationally and pocket the difference!” I tend to believe the opposite is more likely to generate profit: Buy internationally and sell locally. But, I am getting ahead of myself. Here is my answer [co-published at Quora]…


Question:
A Bitcoin exchange in my country quotes a different rate than
international markets. Can I profit from the price difference?

Answer:
Buying and selling a commodity with the intention of profiting from the difference in price in various markets, regions or exchanges is called arbitrage. Typically, the item must be widely traded and fungible. Although it can be a tangible item (one that must be delivered or stored, like gold, oil, frozen orange juice or soy beans), arbitrage is more practical when applied to an ‘item of account’, such as foreign currency, equity shares, stock futures, or Bitcoin.

With this in mind, Bitcoin qualifies as a fungible item of account. If you see a different price at various exchanges (or if you believe that you can source personal sales at a higher price than the market spot price), then you have found an opportunity for arbitrage. But hold on! It is not so easy…

  1. The arbitrage opportunity is often illusory. For example, the cost difference that you observe in market quotes may be overshadowed by the bid/ask spread or by fees, which can be both fixed and a percentage.
  2. The arbitrage opportunity is transient. It is there for a few seconds and then it vanishes in the next quote. For this reason, successful arbitrage players must be very adept at day-trade techniques. To avoid massive risks, you need up-to-the-second quotes, fast trading tools, and the ability to simultaneously freeze your purchase and sale price.
  3. Trust is never golden! Even with these tools and promises, when a commodity begins to move in either direction, you will find that a buyer or seller often finds a way to renege on the agreed price. These are not random events…When a trading partner abandons a transaction, it always work against you.
  4. Some exchanges (and even some national regulatory agencies) prohibit rapid and repeated trading. This may be to discourage speculation or it may be designed as a circuit-breaker (a mechanism to avert the cascade effect that sometimes results from pre-programmed trades). These halts on quick trades can wipe out your gains, or worse. They can turn your investment into a horrible mess.
  5. Some big exchanges have built-in arbitrage mechanisms that quickly adjust prices and even buy and sell on their own account to keep their limit order books in sync. They are on the front lines and you aren’t! This fact, alone, should give you pause. Opportunity for an outsider is severely limited by these ‘inside’, self-adjusting trades.
  6. Other legal risks: If the transaction is later deemed to be illegal in the jurisdiction of any party, your exchange accounts may be frozen, fined, or your privileges revoked. Unlike p2p Bitcoin transactions, exchange transactions can be reversed. Again, these legal snafus will always work against you. In fact, sometimes, they were pre-planned scams from the start!
  7. Finally , there are sometimes good reasons for different prices in different markets. For example, national and local regulations may burden the consumer cost for an item, or the seller may be required to pay a fee or tax to some authority or regulatory agency. If you dodge these costs, you may be violating laws and subject to penalties or punishment. You may even put your customer at risk.

What about arbitrage pools or affiliate programs? Don’t be a sucker! If Gladiacoin could double your Bitcoin every 90 days, they wouldn’t need to set up a multi-level marketing scheme. They would simply start with a few hundred dollars and become billionaires by endlessly doubling their money.

I am neither an arbitrage player nor a day trader. These are just a few warning bells that come to mind when I think about such activity. You can be sure that this list of risks only scratches the surface. Bitcoin is remarkably fluid and many people flaunt regulations. For this reason, I am confident that opportunities for profitable arbitrage are rare and very tiny (small gain for a big risk).

Have I scared you away from Bitcoin arbitrage? If not, proceed with extreme caution and don’t bet the family ranch! Once you have some experience, come back and post feedback below. I have dabbled in options arbitrage, but never with Bitcoin or any currency. Since I don’t have first-hand experience, your feedback will be appreciated.

Ellery Davies is a frequent contributor to Quora. He is also co-chair of Cryptocurrency
Standards Association, host of The Bitcoin Event (New York), and editor at A Wild Duck.

Trust a Bitcoin Exchange without Regulation

Yesterday, after the spectacular failure and bankruptcy filing of Mt. Gox, the world’s largest Bitcoin exchange, Peter Finn, an IBM architect, launched a survey within a LinkedIN discussion group. The single question and multiple choice options were:

“In Light of MTGOX what level of transparency should there be for Bitcoin Exchanges?”

1. None. Exchanges Can do as they please
2. All Public Keys Disclosed and Signed
3. Show Public Keys, Source Code, Processes
4. Fully Regulated, Monitored, Audited

One day after it was published, respondents were decidedly negative on the option #1 (no regulation). They responded like this: 1–14%, 2–28%, 3–28%, 4–28%. I am among the 14%: No regulation. But only because Peter failed to cover all the bases. There is a far better option than regulation. But I am getting ahead of myself…

Regulation in a Decentralized, P2P
market, with Open Source Tools 

Suggesting that Bitcoin be “fully regulated” is like demanding that feral cats be licensed to procreate. Perhaps the point can be better illustrated by a metaphor closer to home: Perhaps we should regulate the use of file encryption or bit torrent clients. After all, they can both be used for circumventing copyright law or transmitting illegal content.

Governments are inevitably weakened by legislating against what cannot be regulated. The US has already tried to regulate encryption (PGP/Zimermann and Clipper chip) and they tried to legislate against the use of torrents (Actually, it was a prelude to torrents. Who remembers Napster?)

You can enact laws and regulations, but when you ignore motives, access and facts in evidence, you promote bureaucracy with a head-in-the-sand morality. Feral cats don’t read edicts. Their compulsion to reproduce is strong and they possess the tools they need to procreate. The same is true for bit torrent, encryption and a fully-distributed, low-cost, p2p payment mechanism that is adding users like a wild fire.

Considered in another light, Bitcoin was created to circumvent—or at least—transcend regulation. For many legitimate users, the whole point of a distributed, p2p network built upon open source tools is to unfetter users and disentangle government.

So the real question is not whether we should engage in useless legislation that ignores the facts on the ground. A better question is “How can we make the Wild West a bit safer?” I understand the need for public trust. ! But trust comes from transparency, accountability and outside audits. It doesn’t come from government regulation. Peter alluded to this in the very last sentence the text accompanying his sruvey. He said:

Certified-01

“Will users decide through consensus that
exchange XYZ chooses to fully disclose?”

Bingo! Create standards and practices—especially for security and transparency. Then, make it simple for anyone choosing an exchange or entering into a transaction to determine if the organization complies with industry best practice. Finally, offer a modest level of consortium insurance (to the user, or at least compliant exchanges), so that public trust can be tied to something tangible.

On Feb 25, one day after championing a joint statement from the few credible Bitcoin exchanges, Coinbase took a big step toward this goal when then invited a research analyst from a competitor to audit their internal security practices and randomly compare a customer transaction log to the public blockchain. The report includes an explanation of the test conditions and the results.

Laws are meaningless in a market that cannot be regulated. But industry standards, audits and certification can certainly step up to the task. They can build trust, confidence and stability. Just as importantly, they won’t interfere with the fraction of users who demand personal, private, p2p transactions without auditing or oversight. After all, we must never forget that these individuals started the revolution from which we will all benefit… even the “legitimate” commercial transactions that require transparency, security and an audit trail.

So, let’s revisit Peter Finn’s survey: What level of regulation should be mandated for Bitcoin exchanges?…

I propose Option #5: None. Exchanges can do as they please. But establish an easily verified, independent certification of standards & practices that can be tested at the URL throughout user interaction. Users can avoid the tool, add the tool, or ignore its warning. The certification (and a gut-simple way to see it & test it), empowers the user instead of the government. It also avoids entangling a new technology with unimaginable potential in red tape.

Incidentally, a group of individuals from this discussion group is working toward this goal right now. Although they have barely completed introductions, the Virtual Currency Collaborative Cryptocurrency Standards Association [CRYPSA] has hammered out a charter that will lead to a set of voluntary standards and practices to facilitate open, transparent, safe and auditable transactions within a community that often takes pride in their inherent freedom from regulation. Taming the Wild West will not be too difficult. And it won’t even be necessary to restrict gunslingers from walking into the saloon at high noon.

Mt. Gox: Comeuppance for a Bitcoin king

Feb 24 Update: Coinbase, Blockchain.info & other execs issue statement:

■  Refer to Mt. Gox ‘insolvency’.  ■  Web site vanishes.
■  Mysterious loss of more than 700,000 Bitcoins.

I have never been a fan of Mt. Gox, the big Bitcoin exchange based in Japan. From early in their history, I have complained that they lack the standards, oversight and methodology to hold their position as de facto linchpin in an emerging field.

Glitch —vs— Catastrophe

I used to run a large email service. We earned all the top Editors’ Choice awards and were featured in every tech publication.

Like any service provider we had occasional glitches that prevented a fraction of users from accessing mail in a timely fashion. Occasionally, a denial-of-service attack or an upstream peering dispute would degrade service to all users. But, there was one time that all users were locked out of our servers. It happened at the worst possible time — during a summer holiday. Imagine the gooey stuff hitting the fan as our clients started their holiday without email.

Even though we posted service updates to our web site, our phones were under siege from the very beginning. After all, email is the primary communication medium for many individuals.

We developed expertise in preserving good will. Most importantly, we informed users about the problem, updated them frequently, and learned from our mistakes. But, we sometimes deflected blame. When problems were related to an upstream provider or a situation ‘beyond our control’, we learned that with selective disclosure, we could avoid the full brunt of user frustration. It was a bit was disingenuous, because, in most cases, the problems could have been avoided with a more robust fail-over implementation.

Calamity Hits Mt. Gox

mtgoxBy now, anyone who dabbles in Bitcoin is aware that the exchange purported to be the biggest, baddest gun in the west is blocking all withdrawals. That’s right. You can put money in, but you can’t take it out. The excuse: “We have identified suspicious transactions.”

Of course, with millions of dollars of client assets in the balance, even an unregulated organization cannot rest on that explanation for long. And so, Mt. Gox has clarified their radical move, claiming that there is a bug in core code maintained by the Bitcoin Foundation. They refer to this bug as “transaction malleability”.

Mt. Gox implementation protocol: Serious risk to customers

Not only does Mt. Gox blame the Bitcoin Foundation for transaction malleability, they conclude that “Bitcoin is a very new technology in its early stages.” Yeah, sure! That’s another way of saying that some companies lack the resources to keep up with a reference design or to practice due diligence in testing proprietary implementations. Read between the lines, wild ducks: The problem is not with Bitcoin prime, it is with Mt. Gox’s convoluted attempt to create sidecar code in an effort to achieve scale and proprietary advantages.

Mt. Gox tossed the reference code and developed their own wallet process. Then, they failed to keep up with published changes to the reference standard—many related to security, distributed reporting and scaleability! If Mt. Gox thinks that they have an edge on these issues, they should reconsider their complaint about the early nature of the art. Instead, they ought to join established working groups and improve the process from within. In that way, they can avoid forking far from the tracks and throwing customers under the bus.

Coinbase_Logo

It’s no surprise that the Bitcoin foundation turned the table on Mt. Gox, blaming them for the problem. Likewise, here is the response from Coinbase, the San Francisco based exchange (also pasted below). As for me, I will bite my tongue and withhold further commentary. Suffice it to say that I agree with the Coinbase position and that

I have never felt that Mt. Gox was deserving of trust or of being the heavyweight in the room.

Was a spectacular failure inevitable?

Glitches are an inevitable result of new technologies—especially when the technology relates to a dramatic shift or emergence of a new mechanism, like cryptocurrency. But fiascos of this magnitude are typically avoided in a shakedown that occurs early on. In this vignette, I the ‘glitch’ is the uncanny survival of Mt.Gox as a credible entity through the first months of 2014.

Stacks of BitcoinWhat does it mean for Bitcoin?

In the days after the Mt. Gox fiasco, the Bitcoin exchange rate retreated 48% to $480. Clearly, many stakeholders were shaken and there a sufficient number of them have sparked a panic, heading for the exit door.

So what does this mean for Bitcoin? Is the fat lady rehearsing the closing aria? I have never considered Bitcoin be an equity play—Ultimately, it is a currency and not an investment. In fact, it is a near perfect exchange medium and adoption is growing like a weed. As such, those with a BTC in their wallet will almost certainly see an increase in value. That’s the inevitable fallout when you factor the intersection of increased adoption and fixed supply cap.

For individuals sitting patiently on the sidelines, waiting for a good moment to fund a their transaction kitty, this current event makes for a spectacular buying opportunity. There is every reason to believe that Bitcoin will be a respectable world currency, despite objections over its lack of intrinsic value. And with permanent market cap of 21 million units, the a value under $500/coin will one day seem to be an incredible bargain.

___________________

Coinbase Response to Mt. Gox problems…
Bitcoin’s Transaction Malleability Issue  (Feb 10, 2014)

Earlier today, Mt.Gox released a press release highlighting the “Transaction Malleability” issue with the Bitcoin protocol.  Gavin Andresen, Lead Developer of the Bitcoin protocol later released a statement confirming that this is not a problem with the Bitcoin protocol, but is a challenge for creators of bitcoin wallet software (like Coinbase).

The malleability issue would allow an attacker to change the identifier of a transaction (but not the sender or recipient of bitcoin, amounts, or other information).  If not accounted for carefully, this could lead some wallets to duplicate transactions.

After conducting a review of our wallet software, we could not find any instances of such an attack being used. We also looked into the technical details of the transaction malleability issue and just this morning added additional security measures to our software to further prevent such an attack. From our current analysis, there weren’t any users affected by this issue, but we’ll continue to monitor transactions to make sure.  If you have any questions about a transaction on your account you can contact support.

Bitcoin is a truly exciting space to be in. Every day, more and more consumers and merchants are experiencing the value of bitcoin – simple, instant transactions – exactly what payments should be in the age of the Internet. With nearly 1M consumer wallets and over 23,000 merchants on our platform, Coinbase will continue to stay vigilant and do everything we can to make Bitcoin as easy as possible for customers.