Bitcoin safety: The FAQs

Thursday 12 June 2014

Got some burning questions about keeping your bitcoin safe? Jeran Campanella looks at some of the most common security questions and takes some time to answer them.

Are transactions in bitcoin safe?

bitcoin transaction safetyNow the answer to this depends. If you asked if riding your bike was safe, I’d say yes. But if you are riding your bike on a freeway, then that changes the answer quite a bit. Bitcoin is very much the same. The biggest threat to your bitcoin is probably yourself.

Bitcoin transactions happen virtually instantaneously, and the transaction is then verified by the peer-to-peer network of bitcoin users. The more positive confirmations you receive from the network, the more likely the transaction is valid and final. This can take anywhere from a few minutes to an hour. Once a transaction has been made, it cannot be undone, except by a second voluntary transaction of the same amount in the opposite direction. (This is unlike credit cards, where the merchant can lose the received money to a "chargeback" even after they have shipped the product.)

As a buyer using bitcoin, keep in mind that there is likely nobody to petition for help if a seller does not ship you a product. For this reason, buyers would be wise to deal only with reputable sellers, or use escrow services.

Can I lose my bitcoins?

Short answer: Yes. Your bitcoins' digital wallet can be lost. Just like with real wallets, if you lose your digital wallet, you lose your money. As with your other digital documents, you can make backups of your digital wallet.

Can someone steal my bitcoins?

Yes. If someone gets a copy of your digital wallet, they can spend your bitcoins. For this reason, some people encrypt their wallet, thus requiring a password to open it, making it more difficult for the thief. Remember to review password best practices for useful tips.

It is extremely important that at this point you are using a unique password for each unique site, that it is over 15 characters long, and contains all of the available character types. That includes upper and lower case letters, symbols and numbers.

Are online bitcoin wallet services safe?

safe bitcoin storageThere are sites that will keep a bitcoin wallet on your behalf, and allow you to send and receive bitcoins from them. As a rule, I’d say that these services are not inherently safe, but are perhaps "safe enough" to hold a small amount of bitcoins on your behalf.

What has become a bitcoin norm is for people to refer to two different kinds of wallets. You should have a “hot” wallet and a “cold” storage. A hot wallet is usually a wallet on your computer, an app on your smart phone or tablet, or a wallet online with a site like blockchain.info or Coinbase.com. You would want to treat this wallet as your “pocket cash.” Make sure that the amount in the wallet is small enough that if it were lost or stolen, it would not ruin your day. Only the money that you would use on a day to day basis should be in a hot wallet.

The rest of your bitcoin should be in cold storage or on a paper wallet. 

What does it mean that bitcoin is unbacked?

Historically, paper money was backed by precious metals such as silver and gold. This meant a paper bill could be exchanged at any time for an amount of metal. In modern times, governments have removed this backing, allowing them to inflate their currencies without acquiring more metals. Backed currencies tend to be more stable because their value cannot be devalued by government policy.

Bitcoin is basically backed by the network and the willingness of people to use it. It has no tangible backing.

Is bitcoin anonymous?

bitcoin anonymousThe best way to answer this is by saying that bitcoin is semi-anonymous, or pseudo-anonymous. All bitcoin transactions are public information. Anyone can know the amount, the time, and the wallet numbers of the two participants. They may not necessarily know who the human owners of the digital wallets are.

For example, if I am sending bitcoin to my friend Andy, and Andy generates an address from his bitcoin client, technically I am the only person who knows that Andy is the owner of that bitcoin wallet. If days later, I see that Andy sends those bitcoins to a new address, if that address also has no other transactions, I would have no idea if Andy sent the bitcoins to someone else or simply to himself.

However, it can be easy to find out who owns certain public addresses. Many of the bitcoin users display their addresses in forum signatures, public profiles, websites etc. When a company or bitcoin user does this, it should be known that they are allowing anyone to link their identities to their addresses, thus negating much of the anonymity offered by bitcoin.

Remember that all of the transaction history of any address is publicly available to anyone. It would be easy for example to perform an audit or check a given user without them knowing about it. For example, WikiLeaks identifies its donation address as “1HB5XMLmzFVj8ALj6mfBsbifRoD4miY36v” Checking the transaction history associated with it, one can see that they have received close to 4000 bitcoins in donations, worth at the time of writing about $2,250,000. Should the organization try to hide their bitcoin income from proper financial authorities, it would be easy for anyone to prove how many bitcoins that particular donation address received and proper legal actions could be taken if taxes weren’t paid as required.

You can read more on taxes HERE.

Are there any advantages compared to the dollar or euro?

Bitcoin offers some great benefits over government "fiat" currency such as:

➢ transactions with small fees ($0.06)

➢ no central bank

➢ no hidden creation of new units which causes inflation

➢ fast and global transactions

➢ semi-anonymous transactions

➢ no bank fees, overdraft fees, or other middle man fees

Will the value of bitcoin keep going up?

bitcoin valueThe value of bitcoin is entirely determined by the current market. The market is whatever other people are willing to give you in exchange for it. The value could go up or down over time. To date, we have seen a high of approximately $1200 per bitcoin and of course a low of about one cent.  

What could cause bitcoin to crash?

A flaw in the bitcoin technology could be found. The technology behind bitcoin is not a secret; on the contrary it is widely-published information. The only reason that bitcoin currently has value is because there is a level of confidence in the technology. Governments could threaten or regulate against users of bitcoin. Many think that this is likely to happen. The threats and/or news of prosecutions may or may not work to stop the flourishing of bitcoin.

An alternative to bitcoin could become popular, perhaps using different technology and offering different features.

Read more about bitcoin safety here.

Have any other questions? Why not ask or comment below.

As always… Be alert – Be accurate – Be aware.


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