Where Bitcoin is Stored
Bitcoin is not technically "stored" anywhere. They exist digitally through a complex technology called the Blockchain. This is a digital ledger (list of who has how many Bitcoin) that is backed up among many different computers distributed across the globe.
Bitcoin is accessed through something called a wallet, but the phrase keychain actually is a more accurate way to describe the way it works. Since Bitcoin is digital, you could make copies of a wallet. With the description of a keychain, you can make copies of your keys and store the same keys on different keychains so you have multiple ways to access your secured content.
Your wallet holds something called a private key (kind of like a password) that gives the user access to their funds on the Blockchain. In addition, the wallet generates something called private keys (kind of like an email address so we know who to send the Bitcoins to). These public keys are given to people so they may receive funds from anyone. For example, I have a private key displayed on the home page so people may tip me in Bitcoin.
Please be sure to read the topics below carefully. The last section is by far the most important if you want to make sure you don't lose your Bitcoin.
Before you can hold onto Bitcoin, you will need a wallet to hold said Bitcoin. The wallet will allow you to not only access your holdings in Bitcoin, but will also enable you to generate receiving addresses, send Bitcoin to others, and offer many other features unique to that wallet. Here are some suggested wallets to research:
- Mycelium Wallet - Android Apple
- Breadwallet - Android Apple
- Blockchain.info - Online Wallet
- Multibit - Desktop Wallet
- Hardware Wallets: These wallets are used on physical hardware. Be sure that you get them from a reputable source!
- Some online exchanges offer a wallet service for their customers. While this may seem safer to those without much experience, you are trusting these companies with the private keys that control the money. It is recommended that you keep most of your Bitcoin and other cryptocurrency off of exchanges when you feel confident enough to store it yourself.
Note: While I do recommend these wallets, I insist you do your own research to see which wallet will best suit your needs. Furthermore, trust is a major aspect concerning these wallets, as you are giving full access to your money. A malicious wallet could steal your Bitcoin if you are not careful, so make sure you do extensive research on your own. This recommendation absolves me of all responsibility while you choose, utilize, and maintain your Bitcoins on a wallet.
How to Receive Bitcoin
When you have your wallet set up, it will most likely have a section for receiving Bitcoin. You will be given a QR code and/or address to offer publicly to people. When people send Bitcoin to this address, it will appear in your wallet once the transaction is validated by miners. Below is an example of a receiving address in both QR code form and a text form. In addition, I made it a clickable link that may work with some software wallets built onto the device viewing this webpage.
How to Send Bitcoin
While every wallet will be different, the idea of being able to send money is a key component. You should be able to figure this out by exploring the options on your wallet. Usually there is an option labeled "SEND" or "TRANSFER". Before we explore that, carefully read this section.
When you send someone Bitcoin, you will encounter the following options:
- Amount - This is where you indicate how much money will be sent to the receiving address
- Miner Fee - This is where you can indicate how much of the funds should be given to the miners in exchange for verifying transactions. Lower fees implies you do not place a priority on your transaction being verified immediately.
Once you send the money, it is announced to the Bitcoin network and "signed". A "signed" transaction basically means that through a technical process, your private key is used to verify that you had control over the wallet and it authorizes the transfer of the money. When the transaction is announced, you can be almost certain the money has been spent. Your announcement has been sent to the network, but you should wait for a few confirmations. Your wallet should verify this process over time. After a couple of confirmations have been completed, you can be very confident your money is spent (if sending a small fortune, you may want to wait until 6 confirmations are made). Please note that once you send the Bitcoin and it is confirmed, you cannot initiate a refund or anything similar with today's version. There is no one to call, no "refund" button. The only way you can get a refund is if the receiving person sends it back to you. It is predicted that in the future, a feature will exist that allow a user to "lock" the money for 30 days, similar to how a credit card does not release money to merchants until a specified amount of time.
Why does it have to confirm beyond my announcement of spending the Bitcoin? (warning: technical description ahead)
If you read the What is Bitcoin section, you may recall that miners verify the transactions and put them into the "block". In some rare situations, a miner may successfully build Block A at the same time another minder successfully builds Block B and both blocks are accepted onto the network at 1 confirmation. From here, it is a race to see who can complete the next block as fast as possible. If Block B has a block built on top of it, that is now the most advanced block, and all nodes will verify it as the "correct" series of blocks. As a consequence, if a transaction in Block A was somehow not included in Block B, the transactions of Block A will not register. While the odds of two different blocks being verified at the same time is very small, having another instance of this is incredibly rare. At three instances of this, we are talking astronomically low chances of this happening. This is why it is very, very safe to assume the transaction is valid after 5 confirmations. Most people consider two confirmations to be fine, especially among people that trust each other. If selling something larger, like a house or a car, you may want to wait for 4 or 5 confirmations.
Ready to test your skills? Perhaps you would to Tip Me in Bitcoin? Send something small if you feel I earned it. If not, you can generate another wallet and move money from one wallet to another, but I think you should really consider sending me a dollar using the receiving address in the previous section ;)
Backups are VITAL
Hopefully your wallet will suggest making a backup for your wallet. If you do not make a backup and your wallet stops working, YOUR MONEY IS GONE FOREVER. This is a consequence of having ultra-secure money. You must accept that there is no way to recover your money if you do not make a backup. There is no one to call, no email to send, no "password reset option" or anything similar. Bitcoin's security is so strong that if you applied every computer on the planet constantly trying to crack the private key to a wallet, it would take over 1,000,000 years!
When you take your wallet's backup, it may be in digital form. For the Mycelium wallet, you are given a 12 word phrase. These 12 words translate to the private key associated with your wallet. My suggestion is to write these words down on paper and save them in very secure locations such as a safe, safety deposit box at a bank, with a trust friend or relative, etc. I do not recommend putting these on a digital device such as a flash drive or computer, as a virus could easily look for things that resemble one of these phrases and send those words back to someone so they can steal your Bitcoin.
The degree of security that you take is up to you. Just make sure you keep these words safe!
Want to read more? Check out The Lightning Network