Novice Beware
By Steven J. Grisafi, PhD.
I thought it best to address the first blog post to the issue of common pitfalls investing in Bitcoin. Those who wish to invest in cryptocurrency are best advised to maintain a core wallet for the selected coin one wishes to use primarily. Most often the coin of choice is Bitcoin. However, for someone only now starting to maintain a Bitcoin core wallet this can be a frustrating experience. The block-chain is now approaching a size of approximately 300GB, which would take literally months to download over a high speed Internet connection. The task would hog the available bandwidth on the Internet connection rendering it useless for all other purposes. Few persons are willing to make that sacrifice for Bitcoin. Consequently, most will turn to the use of a wallet on a public server. There are varying degrees of accommodation to be found at such commercial service providers. Some will provide access to the private keys contained within a user’s wallet and some will not. Our first admonition of precaution is: Always hold the private keys to your wallet.
Trading Bitcoin does not require that one keep a Bitcoin wallet. Anyone can open an account at any of the various cryptocoin exchanges to buy and sell Bitcoin without ever creating a Bitcoin wallet and holding its private keys. If such is the case, then one ought heed certain difficulties that can arise. For example, a common question posted to the Internet is: How do I move Bitcoin from one wallet to another? If one never maintains a Bitcoin wallet this query may seem irrelevant. But it brings into focus an important distinction that all users of cryptocurrency need to understand. If one were to ask Google that question the most common replies would be to explain how one can transfer Bitcoin from one wallet to another in a process that incurs transfer fees. But what if, for example, one wishes to give Bitcoin as a gift from Father to Son, Mother to Daughter, etc. etc.? Why must Mom and Dad pay a fee to some Bitcoin miner half way around the world when they wish to give a birthday gift? The cognocenti understand that one never transfers Bitcoin between two wallets that one owns in the manner of spending Bitcoin.
Nowadays Bitcoin is expensive. Currently one Bitcoin costs more than $13 thousand. That is an exorbitant amount of money for something having absolutely no intrinsic value. The minimal cost of a spending transfer is 0.0005฿ (Bitcoin). Fees are often much higher than this depending upon the network traffic. Why would Mom or Dad want someone else to take more than six dollars of their gift? Well, there is no reason to incur any fee when transferring Bitcoin between any two wallets to which one has access. The trick is to use the private keys.
Depending upon how one has acquired Bitcoin, one’s stash of Bitcoin is usually distributed along several block-chain addresses. When spending Bitcoin one has the option to select which addresses, containing certain amounts, that one wishes to use to achieve the total amount that is to be spent. One can proceed in a similar manner when transferring between two wallets under our control by selecting the private keys holding the amount one wishes to transfer. Then the procedure is a simple matter of exporting the private key from the wallet holding the gift and importing it into the wallet receiving the gift.
This exercise ought make apparent to the reader that, whenever possible, it is always best to maintain a core wallet. When that becomes no longer practicable, it would be best to use a public server that provides access to the user’s private keys. One further word of caution: Even when using a core wallet, one should never “prune” the block-chain. Although it may seem unreasonable to hold all 250GB of Bitcoin block-chain, containing transaction addresses to which one holds nothing, when one prunes the block-chain one loses the capacity to re-scan for imported private keys.