How to Buy Bitcoins Anonymously

For those just getting into Bitcoin, the first step is the hardest - figuring out how to buy bitcoins.  The Beginner’s Guide to Bitcoin explains that you have to make a choice when buying bitcoins. You can buy them quickly, you can buy them cheaply, or you can buy them anonymously - but you only get to choose one of those options.

This is the second in a three-part series about buying bitcoins. The first part can be read here - How to Buy Bitcoins Quickly.  The third part, How to Buy Bitcoins Cheaply, is coming soon.

One of the great advantages of Bitcoin is the ability to stay anonymous when making purchases.  Because no information is stored anywhere identifying who owns which Bitcoin address, there’s no way to know who controls which bitcoins.

But that anonymity can end quickly if you’re using services like Mt. Gox, Coinbase, or any other automated method to purchase bitcoins online.  They all require you to provide identifying information, which you have to assume is stored forever.  Should a government want to get that information, it’s only a subpoena (or your country’s equivalent) away.

If you do purchase your bitcoins through one of these services, you can “clean” the bitcoins by sending them through a service like BlockChain’s Send Shared, but there will always be a record of you having made the purchase.

If you want to retain a higher level of anonymity, you’ll have to avoid any of the automated purchasing routes, and stick to something more manual.  If you buy your bitcoins directly, either online or in person, you can get them without ever revealing who you are.

Local Bitcoins

It may take you a bit out of your comfort zone, and it is a bit strange to be buying an electronic currency from someone in the real world, but buying bitcoins a seller nearby is probably the fastest way to get bitcoins, and it also lets you stay anonymous.

You can use LocalBitcoins.com to find a seller near you.  Sellers on the site typically list their bitcoins for sale at some price above the Mt. Gox exchange rate, and can also specify upper and lower limits of money that they’re willing to change into bitcoins.

Always check out the profile of each seller to see how many previous sales they've made and the feedback score from previous buyers.  You don’t want to be bringing a lot of cash to meet with someone with a bad reputation.

The Bitcoin Bubble: Is It Time to Get Out?

Last night a friend messaged me, asking what I thought about the recent Bitcoin exchange rate volatility. He was wondering - should he invest now? Would it keep going up?

Now, my friend is a smart guy, but his timing has always been awful.  He was a mortgage agent right as the housing market imploded.  Then he got into gold right as it plateaued.  And now he’s looking at Bitcoin. 

I remember reading a quote (that I can’t find online despite my best googling, so consider this apocryphal and most likely mis-told)  about a stock market tycoon who was walking into his building one day, and was stopped by the doorman.  The doorman, all smiles, wanted to tell the tycoon that he had just bought a condo as an investment.  

The tycoon liquidated his real estate holdings the next day.  He said, “When a doorman is investing in a market, it’s time to get out.”

The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.

John Templeton

I believe in Bitcoin.  It’s advantages over fiat currency are not related to it’s exchange price.  And it has shown that it can survive a market crash already.

But too many people are getting into Bitcoin purely as an investment. To them, Bitcoin is no different than natural gas, oil, or gold - an investment that they WILL dump when they feel they’ve made enough money.

I think that time is coming, and soon.

Today I plan to sell 20% of my bitcoins.  Its not a huge amount, but it’s enough to cover my initial purchases, even if the market totally craters, while still leaving me plenty of room to enjoy the market if it keeps going up.

There’s No Such Thing as a Bitcoin

Bitcoin introduces newcomers to a lot of new concepts, but one concept in particular seems to be the hardest to grasp - you do not have any bitcoins in your “wallet”.  When you buy bitcoins, nothing is sent to you, no special file or code.

That’s because - and here’s the concept to wrap your head around - there’s no such thing as a bitcoin. At least, not as some kind of individual object you can inspect in any way.  Bitcoins only exist as transactions, which means that they only exist in the block chain, the record of transactions that every Bitcoin client has.

Let’s say Alice wants to buy a product from Carl that costs 100 bitcoins.  Alice got bitcoins from earlier transactions.  She generates a new transaction that references those earlier transactions (called the transaction inputs), which total 100 bitcoins, and sends them to Carl’s Bitcoin address (this is called the transaction output).  Carl has been mining bitcoins and successfully generated an additional 50 bitcoins, so he has a total of 150 bitcoins to spend. 

Now Carl purchases a product from Dave and sends him 101 bitcoins, referencing the output of the transaction from Alice, and the bitcoins he generated. Because those two transactions total 150 bitcoins, he has to send the remaining 49 bitcoins back to himself as “change”, which he can spend later.  Carl’s Bitcoin client automatically sends the change to a new Bitcoin address Carl controls.

Now Dave wants to send those 101 bitcoins to Ed, so he generates a new transaction that references the output of the transaction from Carl, and the new transaction is recorded on the network. 

Dave is now unable to send the bitcoins again, because the output of the transaction from Carl has already been used up and recorded on the block chain. Until Ed uses the bitcoins in a future transaction, the transaction that Dave made just sits unclaimed on the Bitcoin network.

Why Bitcoin Addresses are So Screwy Looking

Bitcoin addresses are not pretty.  They’re between 27 and 34 characters long, and start with a “1” (they can technically start with a “3” for a “pay-to-script” address).  They look something like this:

11uEbMgunupShBVTewXjtqbBv5MndwfXhb

How did we end up with such a something so weird looking?  It’s because the Bitcoin address you have is a direct result of the cryptographic algorithms Bitcoin uses.

It all begins with the generation of an Elliptic Curve Digital Signature Address (ECDSA) “private” key.  This key is, essentially, a very long random number.  Given a private key, you can generate the corresponding  "public" key.  While you can generate a public key from a private key, you cannot generate the private key from the public key.  That’s why it’s ok to share it with the world.

The Bitcoin address you get is the result of several hashing algorithms being run on the public key (along with a few other steps like including the Bitcoin version).  So, just as you can generate the public key from the private key, you can generate the Bitcoin address from the public key.

And that’s why the addresses look so strange - they’re meant for computers to use and validate, not humans. Since each piece is mathematically related, it ensures that only the holder of the private key can claim bitcoins sent to the related Bitcoin address.

Simple Ways to Earn Bitcoin

Bitcoin has recently gained a lot of awareness from the press, due to its exponential price growth. People from all over the world are beginning to use the digital currency, looking to strike it rich, or simply take advantage of its unique features.

Scrape Bitcoin faucets

Bitcoin faucets have played an essential role in the history of Bitcoin. Faucets are websites which automatically dispense free BTC to a user who enters his or her Bitcoin address. This is an ideal way for newbies to get a small amount of BTC for free.

There are many different faucet websites, each with its own unique features. For example, some websites require players to complete a simple game, instead of solving a boring old CAPTCHA. A number of Bitcoin casino sites give out coins which can be used to bet on a dice roll or sports event. You could potentially earn a lot more from these sites, compared to regular faucets.

Mine Bitcoin

Mining is the process of generating Bitcoins through solving computationally-difficult problems. It also serves the purpose of confirming transactions, which secures the network. In layman’s terms, this simply means that you can use computers to crunch numbers, and earn BTC as a reward.

Bitcoin mining is actually a lot harder than it sounds. In 2009, when the virtual currency was first released, you may have been able to mine hundreds of BTC with any regular computer effortlessly. Today, miners employ specialized devices in a race to earn the 25 BTC block reward. In fact, the Bitcoin network is around 256 times faster than the world’s top 500 supercomputers combined.

So is it possible for ordinary people like you and me to take part in the Bitcoin gold rush? The answer is simple. You can join a mining pool to work with other miners, and then split the reward based on how much computational work you did. USB-powered mining hardware, such as the ASICMiner Block Erupter, are readily available, and affordable to the average Bitcoin user. Although there is a chance that you won’t make back the money you spent on purchasing hardware, you will still learn how Bitcoin works, and earn some extra money along the way.

Sell goods and services

Instead of simply purchasing Bitcoins on an exchange, you can also earn it through selling useful items and services to the community. If you’d like to sell something, you should consider accepting Bitcoins, instead of simply listing the item on eBay. Even a number of Subway shops now accept BTC as payment.

One of the key features of Bitcoin is that it allows you to send and receive money from anywhere in the world. That means that you could make money by providing useful services to international customers. If you are skilled at a particular job, such as programming, or graphics design, you could earn a good amount of Bitcoin doing freelance work.