Author: Travis

Founder of Diginomics.com

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Bitcoin Cybereconomy

Bitcoin Introduces Digital Scarcity

Bitcoin Introduces Digital Scarcity

Scarcity, the idea that some one thing is finite, has been thus far not applicable to the digital realm. Until the arrival of bitcoin, nearly anything that was of digital nature could be duplicated without recourse. Due to the ease of reproducing computer code, the problem of double-spending was the unsolved mystery of viable digital money. However, the innovation of the blockchain ledger has added a potent economic function to the equation of online exchange: digital scarcity.

The Introduction of Digital Scarcity

Beyond the realm of money supply, bitcoin has enabled everything from informational products, media, art, and more to be delivered in a manner where ownership is mathematically verified. Because digital ownership can now be determined, it proliferates a scarce quantity of goods. Digital scarcity marks the emergence of a new cohort of potential business models.

“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”

– Eric Schmidt, CEO of Google

The attribute of scarcity in bitcoin is not necessarily derived from the actual file information itself, but the method in which the information is stored. The difficulty in reworking the cryptographic proof-of-work which has hashed and timestamped the property with the creator’s digital signature represents the construct of scarcity. The difficulty of reworking this cryptographic chain then, is directly correlated with the difficulty of duplication (double-spending), as more hash power would be required to retroactively alter the information’s assigned ownership. Information hashed at the very beginning of the blockchain for example (such as the genesis block), could be viewed as nearly unforgeable in comparison to information hashed in the last 10 minute block because it would take magnitudes more computational power to rework that section of the chain.

The Digital Economy’s Missing Layer

Scarcity is a fundamental layer of any economic system. Without scarcity, there be no need for money. In a perfectly abundant world, resources would be limitless and money would serve no need because exchange would be entirely unnecessary.

Bitcoin introducing digital scarcity represents a milestone in the development of a totally digital economy, one which has the capacity to stand independent of national economies. In the years ahead, it is likely we will see new business models arise from the potent characteristic of digital scarcity.

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Bitcoin Cypherpunk

‘t Let Anyone Tell You the Identity of Satoshi Nakamoto Does Not Matter

Who Is Satoshi Nakamoto

The world’s first trillionaire by USD valuation could quite possibly be the creator of bitcoin, Satoshi Nakamoto. If bitcoin continues to climb the ladder of exponential price appreciation, than once Nakamoto decides to move their money and make transactions with it, there will be a seismic shift in the perceived supply of money.

In the numerous attempts to lift the veil of bitcoin’s mysterious inventor, people have gotten hurt. Homes have been raided. Journalists have been ostracized. Following these chaotic rumours however, seems to be a cultish mantra echoing from the chambers of bitcoin’s disillusioned – that “the identity of Satoshi Nakamoto does not matter.”

This is not only terribly untrue, but dangerous. Naive to the nature of the emerging bitcoin digital economy, the disillusioned will claim that the identity of Satoshi Nakamoto does not matter because the software is open source. Anyone can read the source code of bitcoin. Anyone can identify vulnerability in the protocol’s architecture. Anyone can fork it and create their own implementation. This is well known of bitcoin, and it is not the reason its creator’s identity still holds crucial importance.

The 21st Million

The Nakamoto wallets comprise roughly 5.5% of the total bitcoin which will ever be in circulation and about 9.3% which are available today. If there is one party controlling five percent of all currency that will ever be created in an economy, this poses a huge risk to the integrity of decentralization. One in ten bitcoin today lies dormant, but alive. Truly, the mammoth wallets owned by Satoshi Nakamoto are one of the biggest threats to price stability and the principle of decentralization of bitcoin.

In a world where we rage about the centralization of our current economic circumstances, it is plain to see that bitcoin may not be as different as it initially seems.

Satoshi Nakamoto Wallets

Almost all are owned by a single entity, and that entity began mining right from block 1 with the same performance as the genesis block. It can be identified by constant slope segments that occasionally restart. Also this entity is the only entity that has shown complete trust in bitcoin since it hasn’t spent any coins (as last as the eye can see). I estimate at eyesight that Satoshi fortune is around 1M Bitcoin. – Sergio Demian Lerner

World’s First Trillionaire

At this point, not much can be done about the large volume of bitcoin that lie hidden in Nakamoto’s wallets. We don’t know which addresses they belong to and we only have estimates of the amount they hold. What we do know is that Nakamoto has multiple wallets rather than one, and that they have since discontinued their mining activities.

Will the Nakamoto funds ever move? Or have they already been purposefully destroyed? If Nakamoto were to take such a route, it might cause a bullish run on the rest of the bitcoin in circulation because of increased scarcity.

Lost coins only make everyone else’s coins worth slightly more.  Think of it as a donation to everyone. – Satoshi Nakamoto

If bitcoin should continue to challenge the status quo, it is indeed worthwhile to ask the types of questions which would uncover the identity of a party which controls the largest stake in an emerging economy. Satoshi has no obligation to reveal their identity, yet if bitcoin should become worth 10 or 100 times its current value, questions about their identity may haunt those who are deeply invested in this emerging digital economy, both in terms of financial and ideological investment.

Money has a profound way of influencing people. Business leaders recognize the opportunity to shake up the world that comes with owning massive capital. When it comes down to it, the effect bitcoin has on the world may correlate sharply with the causes Nakamoto dedicates their purchasing power to, if they do eventually move their money. Nakamoto can either use that ability to power the common good, or for less noble reasons. The causes this money is dedicated to will forever forge the legacy of the great anonymous wizard Satoshi Nakamoto.

Regardless, don’t let anyone tell you the identity of Satoshi Nakamoto does not matter.

Categories
Bitcoin Cypherpunk

Don’t Let Anyone Tell You the Identity of Satoshi Nakamoto Does Not Matter

Who Is Satoshi Nakamoto

The world’s first trillionaire by USD valuation could quite possibly be the creator of bitcoin, Satoshi Nakamoto. If bitcoin continues to climb the ladder of exponential price appreciation, than once Nakamoto decides to move their money and make transactions with it, there will be a seismic shift in the perceived supply of money.

In the numerous attempts to lift the veil of bitcoin’s mysterious inventor, people have gotten hurt. Homes have been raided. Journalists have been ostracized. Following these chaotic rumours however, seems to be a cultish mantra echoing from the chambers of bitcoin’s disillusioned – that “the identity of Satoshi Nakamoto does not matter.”

This is not only terribly untrue, but dangerous. Naive to the nature of the emerging bitcoin digital economy, the disillusioned will claim that the identity of Satoshi Nakamoto does not matter because the software is open source. Anyone can read the source code of bitcoin. Anyone can identify vulnerability in the protocol’s architecture. Anyone can fork it and create their own implementation. This is well known of bitcoin, and it is not the reason its creator’s identity still holds crucial importance.

The 21st Million

The Nakamoto wallets comprise roughly 5.5% of the total bitcoin which will ever be in circulation and about 9.3% which are available today. If there is one party controlling five percent of all currency that will ever be created in an economy, this poses a huge risk to the integrity of decentralization. One in ten bitcoin today lies dormant, but alive. Truly, the mammoth wallets owned by Satoshi Nakamoto are one of the biggest threats to price stability and the principle of decentralization of bitcoin.

In a world where we rage about the centralization of our current economic circumstances, it is plain to see that bitcoin may not be as different as it initially seems.

Satoshi Nakamoto Wallets

Almost all are owned by a single entity, and that entity began mining right from block 1 with the same performance as the genesis block. It can be identified by constant slope segments that occasionally restart. Also this entity is the only entity that has shown complete trust in bitcoin since it hasn’t spent any coins (as last as the eye can see). I estimate at eyesight that Satoshi fortune is around 1M Bitcoin. – Sergio Demian Lerner

World’s First Trillionaire

At this point, not much can be done about the large volume of bitcoin that lie hidden in Nakamoto’s wallets. We don’t know which addresses they belong to and we only have estimates of the amount they hold. What we do know is that Nakamoto has multiple wallets rather than one, and that they have since discontinued their mining activities.

Will the Nakamoto funds ever move? Or have they already been purposefully destroyed? If Nakamoto were to take such a route, it might cause a bullish run on the rest of the bitcoin in circulation because of increased scarcity.

Lost coins only make everyone else’s coins worth slightly more.  Think of it as a donation to everyone. – Satoshi Nakamoto

If bitcoin should continue to challenge the status quo, it is indeed worthwhile to ask the types of questions which would uncover the identity of a party which controls the largest stake in an emerging economy. Satoshi has no obligation to reveal their identity, yet if bitcoin should become worth 10 or 100 times its current value, questions about their identity may haunt those who are deeply invested in this emerging digital economy, both in terms of financial and ideological investment.

Money has a profound way of influencing people. Business leaders recognize the opportunity to shake up the world that comes with owning massive capital. When it comes down to it, the effect bitcoin has on the world may correlate sharply with the causes Nakamoto dedicates their purchasing power to, if they do eventually move their money. Nakamoto can either use that ability to power the common good, or for less noble reasons. The causes this money is dedicated to will forever forge the legacy of the great anonymous wizard Satoshi Nakamoto.

Regardless, don’t let anyone tell you the identity of Satoshi Nakamoto does not matter.

Categories
Bitcoin Forecasting

Bitcoin May Solve the Triffin Dilemma

Although the United States Federal Reserve Note carries with it many advantages for conducting commerce and serving as a world reserve currency, its makeup is not void of imperfections. One of the main shortcomings of the USD is the Triffin Dilemma, a problem which arises when countries must manage both short term domestic and long term international economic objectives. Such a dilemma can lead to trade deficits when a country must also satisfy international demand of its currency. Where the USD falls victim to the Triffin dilemma however, the stateless characteristics of bitcoin may hold promise to solve this international monetary flaw, and provide the backbone for a more interdependent global economy.

The Triffin Dilemma

Reserve Currency Status
Reserve currency status by country dating back to the 1400’s

The economist Robert Triffin first brought to light an international monetary issue involving the nation holding reserve currency status and the impact such a role would have on domestic trade deficits. Such a currency arrangement is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. The countries issuing a reserve currency, which foreign nations would wish to hold, must be willing to supply extra money stock to fulfill global demand. Such an arrangement would inevitably lead to operating a trade deficit.

In March of 2009, in the midst of the recent Great Recession, the People’s Bank of China Governor Zhou Xiaochuan voiced his displeasure of the current makeup of the world reserve currency. Known for his reformist tendencies, Xiaochuan made clear the need for creating “an international reserve currency that is disconnected from individual nations”. Such an international reserve currency, he insisted, could provide stable value, rule-based issuance, and manageable supply necessary for achieving prolonged financial prosperity.

Zhou Xiaochuan’s proposal went largely unheard, as economists were not clear if the IMF’s SDR had the global adoption to overtake the dollar. No solutions have since been proposed. Yet is it possible that such a “disconnected international reserve currency” has been in circulation since 2009? Is it possible that the digital cryptocurrency bitcoin could act as a domestically disconnected money supply and therefore solve the Triffin Dilemma?

John Nash on the Triffin Dilemma

John Nash
John Forbes Nash, who was said to have made a breakthrough on Einstein’s formulas just days before his untimely death.
Nash wanted to alter the measure of the curvature of space and time, or how the dimensions of space and time are altered by the presence of energy.

The late mathematician John Nash, whom some believe to be a contributor to the invention of bitcoin, was also an advocate of monetary reform in order to solve the Triffin Dilemma. The desirable goal, in Nash’s mind, was to create an international reserve instrument capable of operating independent of individual nation states while remaining stable in the long run, severing deficiencies found in credit-based money.

Such a money supply would be able to provide a national savings outlet while operating in an autonomous, global manner. With an obsessive focus on cryptography and ideal money, the introduction of bitcoin is covered with the fingerprints of John Nash.

Can Bitcoin Solve the Triffin Dilemma?

The Triffin Dilemma, where countries issuing reserve currencies attempt to simultaneously manage national savings levels with necessary international liquidity, remains to this day, a barrier to economic growth. However, could it be that the introduction of bitcoin brings forth a viable solution to the Triffin Dilemma?

If we assume that the prerequisites for a currency capable of solving the Triffin dilemma were to provide the following, it may be possible to argue that bitcoin is the perfect fit.

  1. stable value
  2. rule-based issuance
  3. manageable supply schedule

In a recent analysis of the price volatility of bitcoin, Eli Dourado estimates that the stability of bitcoin could match that of the Euro within 15 years. Largely a product of an increasing number of active users, the Federal Reserve Board of Washington also estimates that the userbase of bitcoin is doubling roughly every 8 months.

Rule-based issuance is perhaps the most interesting aspect of the bitcoin economy. Here, we have a paradigm shift in the management of monetary policy. Where central banking and human decision making were the catalysts for monetary policy in the 20th century, that role is now filled by algorithmic time-bound issuance with cryptocurrency. A computerized function on the issuance of money has the potential to provide a sound basis for monetary policy because it is magnitudes more capable of adjusting to changing externalities, such as the bitcoin mining hash power index.

Finally, the supply schedule of bitcoin is relatively inelastic compared to traditional forms of money. We can predict with a high degree of accuracy the supply of bitcoin at any point in time (past & future) and make the necessary adjustments in domestic policy. Peter Šurda, an economist from Vienna, Austria, argues that the inelastic supply function of bitcoin could result in a reduction of business cycles on a domestic level. This inelastic function of bitcoin’s monetary supply could allow both domestic governments and businesses to forecast changes with a higher degree of accuracy, and therefore, could quite possibly mitigate the destructive nature of the business cycle.

Truly, as bitcoin gains new users in the form of individuals learning about cryptocurrency, transacting it, and crossing the psychological chasm of viewing it as a valid form of payment, it inches closer to its rightful place as a global reserve instrument. Such an instrument, would hold tremendous potential to solve the age old Triffin dilemma.

Categories
Bitcoin Cybereconomy

Did John Nash Help Invent Bitcoin?

John Nash

Hal Finney, one of the early developers of the bitcoin protocol, is often touted as one of the creators of the technology due to the optimizations to elliptic curve cryptography he made alongside Satoshi Nakamoto in the earliest days of its existence. As the first transaction recipient of bitcoin, Finney was integral to bitcoin’s operational takeoff, and can justly be described as one of its most crucial creators. In much the same way that Hal Finney is credited with being a core contributor to the implementation of bitcoin, could John Nash, someone who had been at the forefront of mathematical and economic thought into the prospect of ‘ideal money‘, be justly attributed credit for the formation of the electronic cash system of cryptocurrency?

The special commodity or medium that we call money has a long and interesting history. And since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like a bout of technology, such as a radio, to be used more or less efficiently.

– John Nash

Ideal Money

Nash described the concept of ideal money as having the function of a standard of measurement and, thus, it should become comparable to the watt, the hour or a degree of temperature.

He asserted an ideal form of money should provide a viable solution to the Triffin Dilemma – it should serve both short-term domestic and international long-term objectives where central banking money has utterly failed (the average lifespan of a fiat currency is 27 years).

Bitcoin Money Supply
The inflation rate of bitcoin asymptotically approaches zero as we inch closer to the currency limit of 21 million units.

Disinflationary Money Supply

Asymptotically ideal money focuses on the fluctuations and long-term perceived value of money, where the ideal inflation rate is as close to zero without being negative (deflation). Currently this accurately describes the economic nature of bitcoin, as it is a disinflationary money supply by design – that is, it is decreasing in its inflationary nature by halving the block reward at predetermined intervals. The inflation rate of bitcoin asymptotically approaches zero as we inch closer to the currency limit of 21 million units.

Nash described this ideal of money as something which could solve the Triffin Dilemma and provide a global savings outlet for people who would otherwise be subject to ‘bad money’, or money expected to lose value over time under conditions of inflation.

Nash described a nonpolitical value standard for comparisons of value, asserting that an industrial consumption price index could be “appropriately readjusted depending on how patterns of international trade would actually evolve”. Moreover, Nash described how actors that were in control of this standard could corrupt this continuity, yet the probability of damages through corruption would be as small as politicians who alter the measurements of meters and kilometers.

Bitcoin Consumption Index

Within the bitcoin network, the mining difficulty index, which can be viewed as a type of consumption index, is intelligently adjusted based on a regulatory algorithm which assigns the difficulty at a rate where new blocks are mined every 10 minutes, on average. Further, authorities of the bitcoin network (51% mining pools) could corrupt the standard of non-double spending, yet doing so would be an attempt to alter the calculation of transactions while not honoring their own incentive to remain an honest mining participant. The bitcoin whitepaper itself describes how such an authority would choose to ensure the integrity of this transaction standard as doing otherwise would devalue their own authority position in the mining network.

The nonpolitical industrial consumption price index Nash described in his 2002 paper is represented by the bitcoin network’s intelligent design towards regulating mining consumption power and readjusting the difficulty and block rewards accordingly.

Given that the bitcoin network is inherently regulated by an algorithm which adjusts the consumption index to an average of 10 minutes, could it be argued that the standard of measurement is time itself?

Is Bitcoin Nash’s Ideal Money?

Nash’s work on ideal money is represented in the most fundamental aspects of bitcoin’s economic nature. His insights into a form of money which can be used as a true measuring tool and one which solves the Triffin Dilemma by serving as a viable domestic and international money supply, have made bitcoin into what it is today – a practical opportunity to achieve an international standard of ideal money.

Is bitcoin the closest thing we have thus far seen to the concept of ideal money? John Nash’s work into the field did indeed make its way into the invention of bitcoin. Although he was very likely never behind the guise of Satoshi Nakamoto, his work lives on in the monetary policies built into the bitcoin protocol.

Categories
Bitcoin Cybereconomy

Bitcoin Is Backed by Time Itself

Bitcoin Is Backed By Time Itself

One of the most commonly heard criticisms of bitcoin is that it is not backed by anything. What investors and enthusiasts must understand, is that bitcoin is not only a financial asset with considerable valuable, but it is regulated by a universal constant unlike any man-made money system which has come before it: time itself.

Algorithmic Regulation

If the USD is backed by the authority of its government and the largest force of military might on the planet – then what is backing bitcoin? Even if programmable, digital money brings intrinsically valuable capabilities, how can we have faith in it if there is no core party which oversees its acceptance and adoption?

This regulatory construct of bitcoin allows us to plot the supply schedule in a manner which is highly predictable while being uncheatable through manipulation found in traditional monetary policies. At the very root of what makes the bitcoin network tick, is a regulatory algorithm which determines that new blocks of bitcoin will be mined on average every 10 minutes. These ‘uncheatable’ maths which are intelligently constructed by system design, ensure that nothing can alter the predetermined issuance rate, nor the block reward halving rate, of bitcoin.

Every 10 minutes, more bitcoin become available at a disinflationary rate. That mathematical guarantee formulated by a crude form of artificial intelligence is the backing of a system which boasts remarkable intrinsic value.

Friedman’s k-percent Rule

American economist, statistician and writer Milton Friedman once posed the idea of replacing central banking institutions with a computer capable of mechanically managing the supply of money. He proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be calculated by known macroeconomic factors, targeting a specific level of inflation. Under this rule, there would be no leeway for the central reserve bank as money supply increases could be determined “by a computer” and the market could anticipate all monetary policy decisions.

Will we ever see Friedman’s computerized banking institution put into action?

Considering the mining network of cryptocurrencies are the closest thing to an authority, and mining will only get more specialized and thus centralized in the future, we may well already have arrived. Friedman predicted the rise of a computer capable of automatically adjusting the inflation rate of money, and this is precisely what we see in the case of bitcoin.

As a regulatory algorithm intelligently adjusts the mining difficulty to make the issuance of blocks more or less difficult, bitcoin well resembles a working prototype of Friedman’s k-percent rule.

Bitcoin boasts the economic backing of a force magnitudes more intelligent and pervasive than the promise of men & military might: an uncheatable, highly predictable, chronologically enforced supply schedule.

The computerized function of the bitcoin system boasts remarkable intrinsic value. The cumulative value of this network will continue to grow as more users join the fold and payment in bitcoin becomes more accessible for every participant.

No money system we have seen to date can claim it is regulated chronologically. Bitcoin is backed by time itself.

Categories
Bitcoin Cybersecurity

How to Store Bitcoin Securely

Bitcoin Has Redefined Money

As one of the most important topics on cryptocurrency, learning to store your money securely is absolutely essential if you are to use digital payments systems with the peace of mind that your money will still be available when you return. If you make a mistake in the area of storing your bitcoin or another cryptocurrency, there is a chance they will come under the control of someone else, so take heed when we say this is the most important aspect of being a holder. Storing bitcoin securely is a topic cryptocurrency holders must appreciate. Without the necessary understanding, your money susceptible to theft and hacking attempts.

Wallets

When someone says that you hold bitcoin in a wallet, it is not entirely true. Think of a wallet as a key which unlocks a certain amount of bitcoin in circulation. There are never any bitcoin being transferred from wallet to wallet, but rather the ownership of the bitcoin is what’s being transferred. In fact, there is no such thing as bitcoin as a “currency” in the first place. There is no computer file or data to represent the unit of account itself. The only file associated is a wallet data file which acts as your representation on the blockchain ledger. Instead, when you buy bitcoin, you are essentially increasing the percentage of the blockchain which you claim control over. Your wallet is your key to that amount of ownership. In this sense, Satoshi was correct in labeling it as an “electronic cash system” and not a digital currency, because it is a payment system which was built and not simply a unit of currency. For the sake of simplicity, everyone still views bitcoin as a type of currency, when in truth the control of the blockchain ledger is what is being transferred, not the unit of account itself.

A wallet address functions much the same way an email address might function. Payments are capable of being sent from, and received at, a wallet address. These are the primary purposes of a cryptocurrency wallet. Each wallet is randomly assigned a string of characters which designate its address. For example, if you create a new wallet address you may have a string of 34 characters such as:

1KuCSoMhnahkJuFCL3TQWRW8bX6EnkR3t9

This would be the address shown in the blockchain ledger when you send and receive payments. As we have discussed, keeping your real-world identity separate from this string of characters is crucial if you wish to have your cryptocurrency holdings remain private.

Public Key Cryptography

There are two parts to a wallet address. The first is the public key, which is the 34 character string wallet address we just displayed, and the second is the private key. We must always keep our private key unknown to other parties, else the contents in our wallet are not truly controlled by the person using the wallet. Whomever holds the private key to a wallet, controls the ownership associated with the wallet on the blockchain. These two keys in combination are known as public key cryptography and they are what makes using and transacting with bitcoin so secure.

In order to transfer bitcoin from one address to another, a request is broadcast to the network that a certain amount of bitcoin now belong to the receiver’s address. This transfer is authorized by the sender’s private key and the miners verify the transaction through a hashing algorithm. Once the transfer is fully verified, they are added to the next block in the chain of transactions.

Bitcoin addresses are created by first picking a random number and creating an ECDSA (Elliptic Curve Digital Signature Algorithm) public/private key pair with them. This operation alone generates the private key – but bitcoin addresses are not simply public keys, but rather modified versions of them. The generated public key is then put through several SHA-256 and RIPEMD-160 operations, until eventually being converted into a format called Base-58. Base 58 is an encoding that removes the possibility of similar looking characters, such as lowercase L and uppercase I, as well as 0 and O. Finally an identifying number is added to the beginning of the address – for most bitcoin addresses, this is 1, indicating it is a public bitcoin network address.

Operating Systems

The first recommendation in regards to using bitcoin securely, is only managing your funds on a computer that has a clean operating system. By this we mean free of malware, viruses, and other hidden key logging programs you may have no idea lurk in shadows on your computer. These programs will crawl your computer hard drive for wallet files and passwords, sending sensitive information to the attacker. Some programs even have the ability to take control of your webcam, microphone, and files without you being aware of it. If you suspect your computer is infected, use another one or reformat your computer in order to erase your hard drive and install a fresh copy of your operating system.

Not all operating systems are created equal. The most inviting operating system for hacking attempts is Windows. Although it is user friendly and compatible with most programs, it is relatively vulnerable by design. In contrast, the safest operating system you could use is a Linux system which runs 98% of the world’s supercomputers and comes in a variety of distributions. Linux can come with a steep learning curve and is not your operating system for typical mainstream needs, but when the essentials of security and performance arise, none best it. Take as many security precautions as you can, and remember that there is no such thing as a computer system which is impossible to hack. Because Linux provides the most resilient and reliable operating system, it is your safest bet, but not guaranteed to prevent hacking attempts to steal your holdings.

Dangerous hacking programs can get onto your system by opening email attachments, transferring files from media storage devices, and browsing unscrupulous corners of the web. The most common way hackers infect your computer is through email attachments. Therefore it is imperative that you never open an email attachment or download a file when you are unsure of the implications it will bring. Always obtain as much information about the properties of the file before you transfer it to your local hard drive.

Passwords

When you are confident in the security of the computer you are using, the next biggest threat is that of handling your wallet information with complete confidentiality. When settling upon a password to access your bitcoin wallet, it is imperative that you tattoo the phrase into your mind in a way that you will surely never forget.

A brainwallet refers to the concept of storing bitcoin in one’s own mind by memorization of a passphrase. As long as the passphrase is not recorded anywhere, the bitcoin can be thought of as existing nowhere except in the mind of the holder. If a brainwallet is forgotten or the person perishes, the bitcoin are lost. The importance of remembering your password cannot be stressed enough. If you forget your password and do not have your private key, your money will be impossible to ever be reclaimed. Writing down your password somewhere private is a helpful deterrent in the event you forget your password, but it makes it accessible to someone who may come across it. Furthermore, the complexity of your password cannot be understated. It is very important when creating a brainwallet to use a passphrase that would be not be susceptible to a dictionary attack or brute force attack. If this is not done, theft is an eventual certainty if a hacker uses a high level of computing power. In the event of a brute force attack, an attacker will unleash a machine to continuously attempt passwords until they are locked out. Another method, a dictionary attack, will figuratively throw the dictionary at your login system, using word combinations found in the dictionary.

“The simple fact of the matter is that hacking a brainwallet password is a mathematical exercise that requires no internet access, no communication, and leaves no trace, so hackers can collectively try multiple trillions of passwords every second in the privacy of their own homes with the very same equipment they use for mining bitcoin.” (Bitcoin Wiki, 2012)

Backing Up Your Wallet

You may also want to consider making a copy of your wallet file and storing it with a cloud computing service (Google Drive, Dropbox, Microsoft OneDrive). In the case where you lose access to your wallet, you can restore it by opening your saved wallet file and using your password. Access to your wallet file alone will not give the user the ability to move your bitcoin unless you have left it unencrypted with no password.

As well as storing an electronic copy of your wallet file, you can also print out what is known as a paper wallet. Bitcoin storage does not entirely require the use of computers, and using a paper wallet is one of the safest methods of storing your bitcoin holdings. This method of storage works because the private key to your bitcoin wallet is printed on the paper, making it easy to enter the information when you want to access your wallet file. If you use a paper wallet, realize that it represents the key to accessing your bitcoin and should be kept in a safe location.

A final method to storing your bitcoin is keeping your wallet file on a hard drive belonging to a computer which has never connected to the internet. To achieve this, many large bitcoin holders have purchased an old computer, wiped the hard drive clean, and transferred their wallet onto this system. This gives you the most security because you know the operating system is clean. Without an internet connection, an outside attacker cannot make changes to your wallet file.

You can also put your wallet file on an external media device such as a USB stick. Many large holders of bitcoin put their wallet file on a USB and then lock that device in the safe at their bank. That’s about the highest level security for your bitcoin you could come across. This is known as cold storage and is the most effective way of storing bitcoin safely.

Additional Security

A further step in securing your bitcoin, and one that is highly recommended, is using 2-factor authentication to gain access to your wallet. Online exchanges offer 2-factor authentication which involves an outside source to verify the request before granting access, even if they know the password. Typically this is done by sending a text message to a smartphone or by inputting a code sent to the email associated with the wallet. Always enable 2-factor authentication on your bitcoin wallet and always associate a secure email address with an exchange account.

Generally, the safest way to store your bitcoin is to do so offline or with a paper wallet. One sure way of putting your bitcoin holdings in jeopardy is by keeping them on an exchange. In a world filled with tech-savvy criminals, even businesses which promise to practice security procedures and guarantee the safety of your money are susceptible to hacks. These exchanges are targets for some of the most skilled hackers in the world and leaving your money on the exchange means when that service goes down, your money sinks with it.

Already many times exchanges have been on the receiving end of a calculated hacking attempt or an unanticipated technical glitch, causing users who kept their holding on that exchange’s server to lose everything. Don’t let this happen to you. Move your money off the exchange if you do not plan on actively trading it. Furthermore, be wary of phishing attempts (hacking attempts which attempt to imitate trusted services and ask you to submit sensitive information) on your wallet information and passwords. Always check the URL an email or webpage is being broadcast from and use common sense when dealing with customer inquiries. You will never be asked for your password from any legitimate business because it would be more sensible to simply reset the password.

Remember, the magnificence of bitcoin is that it is a financial obligation between you and your money, no third party need be involved. Never, under any circumstances, should you reveal your private key.