10 mistakes of Bitcoin newbies

Funny pic of Napoleon riding a donkey
Let’s talk of mistakes

Keep all the money on Coinbase or other online wallet

I’m not questioning the value of Coinbase, Kraken and the like. However, online wallets and online exchanges have an unpleasant side effect: they must manage your coins in your behalf, that means that they manage the private keys. Remember, in blockchain land no keys means no money. Few years ago the most important online exchange called MtGox collapsed and many Bitcoiners found themselves in the uncomfortable position of having no access to their funds. Moreover, such online services must comply with a lot of regulations anti money laundering, know your customer and in principle they always must obey to authority warrants and if required by police or tribunals they can lock your funds against your will. Coinbase has been recently required by the IRS to “monitor” share information on their users. Keep in mind that Bitcoin was born to keep the banks out of the equation and make digital payments and money management possible without the middleman. Using such online services is like going back to the jurassic  age of banks: you have no control over your wealth. Bitcoin is the only cash you can use for remote payments, would you give your cash to someone else? Kraken, Coinbase and the others have their business case, let’s use them to buy and sell Bitcoins and to store small amounts and only for a short time. For serious long term storage of our coin let’s use other means: Electrum and Bitcore are standalone wallet that you can install in your laptop keeping you private keys safe and encrypted in your disk. Another option is a paper wallet: a private key printed on paper and stored in your safe or under the mattress.

Buy on breaking news and when price soars

Bitcoin is breaking records over time. In some cases volatility is especially high, price soars, and main press starts talking of Bitcoin. Unfortunately, when news break it is too late, or at least it is the sign that some artificial rise in prices is going on.

Bitcoin has in general a positive, but pretty steady and calm trend. So any moment seems good to buy and hold. On the other hand, buying when everyone talk about Bitcoin is probably not that wise. When price soars many newbies join discussion forums to ask for help, informations and instructions. Having more adopters is good for the community, however, some of them simply join in the wrong moment and will be disappointed getting some losses and will probably quit soon the community complaining about the “scam” nature of Bitcoin.

If you believe Bitcoin is good for you, then plan a long term strategy. Buy periodically, don’t focus on the daily price, look at the big picture.

Sell all Bitcoins because now there is “Dudecoin”

This mistake is somehow related to the previous one. Is comes with panic selling for security breaches or simply because new promising alt coins are launched in the market. Price takes an adjustement and people who bought at 1000 resell at 400$.

I’m not against alternative coins, I believe cryptoeconomics is vast and larger than the mere Bitcoin community. However, Bitcoin is the king of crypto, like gold for the non digital wealth. It has the longest history, the larger community and the greatest market capital. Getting rid of Bitcoin to embrace something else, well, it is risky. You must know what you are doing.

Stubbornly buy with credit card and paypal

I totally understand. I’ve been in the same situation for a couple of times, seeking for a fast buy via credit card or Paypal. This is a kind of lightweight shopping, without hassles, less paperwork, no IBAN/SWIFT and trying to get coins smoothly. Unfortunately this comes with a cost: 7-10% more than main exchanges. With Paypal is even worse, if I am not wrong the only way to buy with Paypal is to transact with Linden dollars and this double transactions charges a lot of fees.

Hi folks, I want to mine Bitcoins.

This is likely the most popular and exciting aspect of Bitcoin. How can I mine Bitcoins? The short answer is “don’t do it”. The long answer is: Bitcoin mining is an industrial activity that requires investments at scale and a lot of energy. Only few actors can really do that, most of them are based in China or other countries with low cost energy. Keep in mind that mining is a very competitive game and you must figure out how you position in this game. As example, if you run you Mac Book Pro on mining, with the current mining difficulty, you might be able to generate a new block after 10 millions years. However, in the meanwhile the difficulty will change of course, and not in your favor. Solo mining is out of question. You could mine inside a mining pool, but in this case instead of getting 12.5 BTC in 10 millions years, you’ll get some satoshi every 24h. Another option is to buy some ad-hoc hardware, the so called ASICS, but still it might result in a loss of money. The reason is that the cost of the electricity is pretty high and the hardware is expensive as well and reaching the breakeven might reveal to be impossible. That said, you might object – Ok understood, what if I have access to free energy? I want to mine!!. I’m afraid also in this case you can generate more profit selling your energy rather than using it to mine. It seems that today only two categories can mine: large server farms in China and makers that mine with a loss just for fun but not for profit. Learning is indeed a great value.

Trading the crypto

Support, resistance, Bollinger bands, Fibonacci and the like. You have no idea where to start and your experience is equal to zero, but suddenly you feel you can sort it out and you have a strategy to be the market winner. Let’s trade crypto then. Unfortunately, beside the fact all the above technique are almost rubbish, kind of Voo Doo IMHO,  keep in mind that many cryptocurrencies have little or no capitalization and some are pre-mined. Pre-mined means that few developers launched the network keeping the large majority of coins in their wallets. This makes cryptos very prone to market manipulation. Even Bitcoin, with his $15B of capitalization, can be easily impacted by a relatively small number of individuals that have accumulated a lot of coins since the dawn of time, when $10.000 Bitcoins were just good to buy a pizza and nothing more. Hence, pump-n-dump schemes are frequent and dangerous. My personal thought is that trading is a game where one makes money when “others” get a loss. Don’t be surprised to realize that being the “others” is just easier than being the guy who makes money.

How can I revoke a wrong payment

Diamonds are forever … Bitcoin transactions too.

You can’t. Period. If you send Bitcoins to someone and this guy refuses to give them back, you can do very little and you have very little hope to succeed. You could report to authorities, but only if you know who is she/he. In such a case, a warrant from a judge or equivalent legal procedure could go through goods confiscation to repay the debt, still Bitcoins can’t really be confiscated. A mindblowing property of Bitcoins is that they are not stored in our computers. Our balance is the result of many chained transactions inside a decentralized and immutable database that no police authority neither hacker can crack.

Rich soon with Faucets.

Faucets are web sites or apps that reward you with some Satoshis if you spend time on them. Satoshis?! Keep in mind 1 Satoshi = 10^-8 Bitcoin. This brings some 0.1 cents of dollar per hour. It is not enough to pay the carbs needed by your body to keep you alive and breathing after your screen. Your time must be really of no value if you use it to play with faucets. I would suggest to work as waiter, earn 50 bucks and buy some Bitcoins instead.

Bitcoin payments are anonymous …uhm think again.

Technically speaking, Bitcoin addresses are pseudonyms, not actually anonymous. To get Bitcoins all you need is an address and to send coins what you need a private key. You can generate keys and addresses on your own and that’s great.

However, if you use this address to receive payments in your web page or in any other way that allows an observer to link your personal identity with a Bitcoin address then your privacy is lost. This link between the real you and one of your Bitcoin addresses can be less evident at your eyes but some firms have now the knowledge and the tools to inspect the Blockchain to find those links. Keep in mind that the whole Blockchain is shared in clear text and is available to everyone. Even if your name is not written in the transactions there is still a probability someone can link you with a payment. For better privacy you should use other cryptocurrencies, one remarkable example is ZCash.

I lost my keys, how can I recover them

Two things are pretty solid in the Blockchain: the non revokability of transactions and the impossibility to spend coins without the proper private key. No key no coin. Worse, if someone else casts an eye on your private key and he is quick enough to transact, he can steal all the spendable coins and you’re pwned. Be paranoid, especially if you have lot of coins in a wallet. Plan a backup and recover strategy of your private keys and addresses. Keep them printed under your mattress. Remember you can build paper wallets and use hardware wallets as valid alternative to software. Write in a safe place the 12 words needed to regenerate your wallet from scratch.

Like this article? You can find more valuable content in my ebook “Bitcoin under the mattress” available for download in the Kindle store.

Don’t want to buy? Don’t worry, I totally understand. Yet, if you want some practical advice you may consider to “like” my Facebook page here or to connect to my blog. I’d love to read your comments and answer your questions.

Last but important, I want to stress that what I write is not a solicitation to invest your money. It is just an invite to read, study and know as much as possible on the subject. If you decide to buy Bitcoins keep in mind that you can lose all your money, the technology is amazing but the human being is greedy. I wouldn’t invest in anything I don’t fully understand.