Bitcoin Paper Wallet

Rasterbator, my 11 Teraflops personal super computer powering the Ethereum World Computer and my personal super breed of dog

Rasterbator, my 11 Teraflops personal super computer powering the Ethereum World Computer and my personal super breed of dog

You may be the lucky recipient of a Bitcoin paper wallet from someone. If this someone is me, my aim is to introduce you to the Bitcoin cryptocurrency, and/or to provide you with a long term lottery ticket with better odds than a normal lottery. The conversion rate between bitcoins and other currencies is volatile. In years to come, this paper wallet may be worth a lot, a reasonable amount, or nothing at all.

Your choice now is to either store the paper wallet securely and use it if it comes good, or you may “sweep” the contents of this paper wallet into an electronic wallet on your smartphone or computer and use it as a learning exercise. Sweeping the contents of this paper wallet involves transferring the value held at the paper wallet address to a Bitcoin address in your control so you may store it, transfer it or spend it.

Your Bitcoin paper wallet will include a public key and a private key.

Your public key is an address that can be revealed to other people – they will be able to send bitcoins to your public key address. Public keys are normally 34 characters long, start with the number “1” or “3” and looks something like 1BorkUsRjcvVkBYgEr98UZz1uHKVtcHMkN .

Your private key is a character sequence that will unlock the bitcoins held at your public key address. Private keys are normally 51 characters long, start with the number “5” and look something like 5Kh5Mi8L2Zv72iVWz5q7REGnWuzrViSJZ4heD6R6KMxoC7m6bYD .

Your bitcoin paper wallet may also include an graphical representation of your private key like:

1BorkUsPrivateKeyQCode

This is called a QR Code [wikipedia.org] and can be read by the electronic wallet software on your smartphone to sweep the bitcoins in your paper wallet into your electronic wallet.

Keep your Private Key and your QR Code in your paper wallet private and secure!

Note that the person who gave you your paper wallet knows your private key as they generated your public key and private key. This person can easily spend the bitcoins in your paper wallet if they really want to. If you are worried about this, sweep (i.e. transfer) the amount from the paper wallet into your own Bitcoin wallet – instructions are provided below.

And read on to find out more about Bitcoin …


Table of contents


Warnings

I’ll start with some warnings:

  • Bitcoin is a gamble. Seek help if necessary – see http://www.gamblinghelponline.org.au/.
  • Bitcoin is still an experimental system that started in 2009.
  • Bitcoin prices are volatile. The price may rise, fall and could even be worthless.
  • Bitcoin (and other cryptocurrencies) may be addictive – see first point above.
  • It is very easy to press the wrong key and waste or lose your cryptocurrency. Once the wrong key is pressed, the transaction is irreversible.
  • Cryptocurrency exchanges are unregulated, and trading by professional traders and trading bots make it easy to lose your virtual currency.
  • Bitcoin is not endorsed by governments. Income, capital gains and other taxes may apply to any profits you make on your Bitcoin holdings. It is unregulated, and goverments and/or institutions may try to dismantle the system.
  • Bitcoin payments are irreversible. You can easily make a payment to an incorrect address and your bitcoins are lost forever.
  • Bitcoin is not anonymous. All transactions are recorded in the blockchain and may be linked through time. There are de-anonymising services that provide data to governments and institutions.
  • Bitcoin transactions are not secure until confirmed. Transactions are recorded in a consensus network – transaction may be lost of the consensus says so.
  • Your private keys unlock your bitcoins. Lose this and you lose your bitcoins. If your smartphone or computer holding your wallet is compromised, your bitcoins may be stolen.
  • If you store your virtual currency in an online wallet, your online wallet may be hacked or the service provide may run away with your bitcoins (e.g. Mt Gox). Recently the cryptocurrency exchange Cryptsy admitted that it was hacked and lost millions of $$$ in coins in 2014 after customers complained they could not withdraw their virtual funds. They may have been  wallet had been hacked may have been trading while insolvent for a while.
  • When spending bitcoins, your change may end up in a new and hidden (in some wallets) “change” address in your wallet. This can be confusing at first, and you could lose your bitcoins if you only keep your main addresses and destroy your wallet.
  • I am not providing you with investment, financial, technology or legal advice in this post. This is just a guide and you should seek professional advice if necessary. Or just start small, be prepared to lose some, research it yourself, and don’t blame me.
    I do provide consulting services – contact me through the comment section below if you are interested.

See also Some things you need to know [bitcoin.org].


What is Bitcoin?

Bitcoin is digital currency which is created and held electronically. Bitcoin is a system that runs across many thousands of computers around the world. Bitcoin is also known as a virtual currency or a cryptocurrency. Bitcoin is the main cryptocurrency (90+% by market capitalisation) among the 600+ other cryptocurrencies in existence. The Bitcoin market capitalisation (~ AUD 8.6 billion currently) is tiny compared to the amount and flows of fiat currency (legal tender backed by governments) around the world.

Bitcoin is run on a decentralised network – no government or entity controls this network. Bitcoins can be transferred from one public key to another public key with minimal transaction fees currently costing less than AUD 0.08 (currently) whether the value being transferred is worth AUD 1 or AUD 1,000,000. And this transaction fee is the same whether you are transferring bitcoins to your neighbour, or across the world. Bitcoin transactions typically take less than 10 minutes to be processed, although a seller of goods may wait an hour for confirmation before shipping their goods.

The Bitcoin cryptocurrency is not physically printed out on notes or coins. It is created digitally by Bitcoin miners who provide their computing, network and electricity resources to power the Bitcoin distributed network.

The Bitcoin network runs on a set of rules, called a protocol, that is implemented in the open-source software run on Bitcoin nodes. Anybody can run this software and become a node. Bitcoin transactions are transmitted across the Bitcoin network – Bitcoin miners (a mining node) collect these transactions and package them in blocks. New blocks are built upon the previous block, thus creating a chain of blocks which is known as a blockchain.

The Bitcoin protocol requires that miners solve a hard mathematical problem before being permitted to package the transactions into a block. Many Bitcoin miners around the world compete against each other to solve this hard mathematical problem. The first miner to solve this problem is rewarded with newly minted bitcoins. This reward amounts to 25 bitcoins currently. Currently a single unit of bitcoin (1 BTC or XBT) can be exchanged for ~ AUD 600. A single block reward amounts to ~ AUD 15,000 .

New blocks are mined approximately every 10 minutes. This amounts to 6 blocks per hour, or 144 blocks per day, or 52,560 blocks per year. This amounts to approximately AUD 3,600 per hour, AUD 86,400 per day, or AUD 31,536,000 per year. This amount is the compensation that the miners earn from providing their computing hardware, network and electricity to run the Bitcoin distributed network.

See also A beginner’s guide to bitcoin [coindesk.com] and Bitcoin Wiki [bitcoin.it].


Bitcoin Currency And Units

The currency symbol for Bitcoin is BTC, or XBT.

Bitcoins can be quoted to 8 decimal places, e.g., 1.23456789 BTC is ~ AUD 740. The main units used are:

  • 1 milli-bitcoin or mBTC = 0.001 BTC
  • 1 micro-bitcoin, μBTC or bits = 0.000001 BTC
  • 1 satoshi = 0.00000001 BTC
  • 1 BTC = 1,000 mBTC = 1,000,000 μBTC = 100,000,000 satoshi

Currently there are ~ 15 million bitcoins in existence, with new bitcoins being minted at a rate of 25 bitcoins per 10 minutes in the mining process. This minting rate will be halved every 4 years, with the next halving to 12.5 bitcoins occurring in mid-2016.

Under the bitcoin protocol, there will only be a maximum of (just under) 21,000,000 bitcoins and that maximum will be reached around the year 2140. Miners then will receive no block rewards, and instead have to rely on the fees they received from the transactions they package into the blocks.

See also Units – Bitcoin Wiki [bitcoin.it].


Is Bitcoin Anonymous?

No. Bitcoin is not anonymous. Bitcoin is pseudonymous. Your Bitcoin public key addresses are like pseudonyms. Once these pseudonyms are linked to your identity, all your transactions will be linked to you.

All Bitcoin transactions are recorded in the blockchain, a shared, distributed and public immutable ledger. Bitcoin amounts are created in the mining process, and then are transferred by transactions. Transfers from one address to another are therefore all linked. For example, see 3Nxwenay9Z8Lc9JBiywExpnEFiLp6Afp8v [blockchain.info] which shows all the linked transactions.

Where possible, a user should create new public key / private key pairs for each new transaction. Most Bitcoin wallets will automatically create new key pairs for each new transaction. This process makes it a little bit harder to link the separate addresses to your identity.

See also Protect your privacy [bitcoin.org] and Anonymity [bitcoinsimplified.org].


How to Check Your Balance

You can check the amount of bitcoins associated with your public key at https://blockchain.info Enter your public key (NOT the private key) into the search box on the top right of the page and press enter.

Exercise – find out the batch payments I have made by entering your public key and following the transaction (click on the transaction hash – the 64 character sequence). You can find the public key address I send the bitcoins from, and you can deduce the public key address of the change from the transaction I receive.

An example showing the balance at 3Nxwenay9Z8Lc9JBiywExpnEFiLp6Afp8v [blockchain.info] follows:

BlockchainInfoBalanceCurrently this public key address holds 169,731.8121 bitcoins, valued at ~ AUD 91 million. Unfortunately this public key and the associated private key does not belong to me.

You can find the conversion rate of bitcoins to your local currency (AUD for Australian dollar for example) by searching the Internet for “convert bitcoins to AUD”. If you have 0.1 bitcoins, you can try searching “convert 0.1 bitcoins to AUD”. Enter your bitcoin amount and the page will calculate your AUD equivalent.


The Bitcoin Market

You can find out more about the Bitcoin market (and the other 600+ cryptocurrencies) at https://coinmarketcap.com/ . Currently the Bitcoin market capitalisation is ~ AUD 8.7 billion and the total market capitalisation for all 600+ cryptocurrencies is ~ AUD 9.5 billion. Bitcoin is about 91% of the total cryptocurrency market capitalisation.

Bitcoin is traded against other cryptocurrencies on over 61 exchanges – see https://coinmarketcap.com/currencies/bitcoin/#markets .

To find out what the exchange rate between Bitcoin and the Australian dollar, see http://www.xe.com/currencyconverter/convert/?Amount=1&From=XBT&To=AUD#rates. You can find a chart of the exchange rate at http://www.xe.com/currencycharts/?from=XBT&to=AUD&view=5Y , which is shown below:

XBTAUDChart

The Bitcoin all-time-high occurred around the 4th of December 2013, when 1 bitcoin could be exchanged for AUD $1,362. It is now ~ AUD 583.


Bitcoin Wallets

Bitcoin wallets store your list of public key / private key pairs securely. The first wallets randomly generated the public / private key pairs as you needed them. Newer Deterministic Wallets [bitcoin.it] generate the same set of public / private key pairs from an initial list of “seed” words, for example “acquire shaft very either style very roast license magnet long raise organ absurd”.

If you remember your seed words, you can always generate the same set of public / private key pairs, at least when you use the same software. If your bitcoins on stored on key pairs generated from the seed words only kept in your memory, you are a Brain Wallet.

There are software wallets that you can install on your smartphone or computer. If your smartphone or computer is compromised or hacked, your wallet data can be stolen and your keystrokes may be recorded, making it possible for someone to spend your bitcoins. So make sure that your smartphone or computer is secure enough before using software wallets to store your bitcoins.

There are hardware wallets that provide a bit more security. These are still fairly new and you should check the reviews before trusting these to store your bitcoins.

There are online wallets where your bitcoins are stored on an online service like a cryptocurrency exchange. Do not store more bitcoins on online wallets than you can risk, as the service provider can run away with your bitcoins, or they can be hacked. This scenario occurred with Mt Gox [wikipedia.org].

See also Choose your Bitcoin wallet [bitcoin.org].


Installing A Software Wallet

I have used or seen used the following free and open-source software wallets:

  • Breadwallet for Apple phones and tablets
  • Bitcoin Wallet for Android phones or tablets
  • Electrum for Linux, Windows or Mac OS X computers

For the software wallets on phones or tablets, you can purchase these for free from the application store. For Electrum, you can download the software from https://electrum.org/ and view the source code at https://github.com/spesmilo/electrum.

After installing the software, you will be prompted to create your wallet and be provided with the seed words used to generate your own set of public / private keys. Remember that losing these seed words could mean losing your bitcoins, so store the seed words securely. You will also be prompted to choose a passcode or password to spend bitcoins in your wallet – remember this.

And if you suspect that your smartphone or computer may be compromised, don’t store any bitcoins you cannot afford to lose on this device.

See also Choose your Bitcoin wallet [bitcoin.org]


Sweeping Your Paper Wallet Content Into Your Software Wallet

The software wallets in the previous section will have a “sweep” function that will transfer the bitcoins from a private key (or QR Code) into an address in your software wallet. A small transaction fee will be deducted from the bitcoin amount held in your paper wallet (~ AUD 0.08). Once you have swept your bitcoin amount from your paper wallet into your software wallet, your paper wallet will no longer hold any bitcoins and can be discarded, or stored as a keepsake.

If you have a QR Code on your paper wallet, you can scan this QR code with your smartphone and it will automatically sweep your paper wallet amount into your software wallet. In Breadwallet, click on the “scan QR code” button and point your camera to the QR code.

If you do not have a QR Code and you want to sweep your paper wallet amount into your smartphone, copy your private key into your smartphone’s clipboard. This can be done by creating a new mail message, typing in your private key from your paper wallet, selecting the text by pressing on the text and selecting the whole line, then select “Copy”. Switch to your wallet software and you should be able to click on “pay address from clipboard”.

If you are using Electrum, select the menu Wallet -> Private Keys -> Sweep and enter your paper wallet private key into the dialog box. Click “Sweep” and confirm that you want to sweep the paper wallet amount into your software wallet. You may also be able to import your paper wallet private key into your software. This is not advisable for deterministic wallets as you cannot restore this private key from your seed words if you lose your software wallet data.


How To Spend Your Bitcoins?

You could purchase goods and services using your bitcoins. In the Sydney region, there seems to only be dental and landscaping services that accept bitcoins. But there are many places on the Internet that will accept bitcoins – search “spending bitcoins” in your browser.

You could also donate your bitcoins anonymously to Wikipedia [wikimediafoundation.org], Wikileaks [wikileaks.org] or your bitcoin-accepting-charity of choice. Search for “bitcoin accepting charities” in your browser.

Otherwise, just hold your bitcoins until more services start accepting bitcoins.


How To Acquire Bitcoins

Mining for bitcoins is near impossible for the normal person. Search the Internet for “Buy Bitcoins {location}”. You will find several sites that will exchange bitcoins for cash – normally a cash deposit over the bank counter, or into a bank’s Smart ATM which counts the notes that you insert into the machine. You may be required to write “NO REFUND” on the cash deposit receipt and send a photo to the seller.

Check and compare your deposit, withdrawal and/or exchange fees, and restrictions across several services. Also check what verification the service requires from you. Some just require an email address, some an email address and phone number, and others require further verification (e.g. photo id, bank account or other documents). The level of verification may determine whether you can deposit and exchange, and further verification may be required to withdraw. And research the service’s reputation.

This is not a recommendation, but one service is LocalBitcoins [localbitcoins.com] from Finland. This is an exchange allows you to trade with other individual sellers and buyers who post advertisements with exchange rates and instructions for conversion of fiat money to and from bitcoins.

Note that most of these exchanges are not regulated, and are located in other countries. Several Australian exchanges had to move their operations overseas to avoid having to pay the Australian 10% GST on each trade. Do your research, start small and be prepared to lose some in the learning process.


How To Exchange (Or Squander) Your Bitcoins

Hop onto Crypto-Currency Market Market Capitalization [coinmarketcap.com]. There are 627 cryptocurrencies on this exchange currently – Bitcoin and 626 alt-coins (alternative cryptocurrencies). Click on the Bitcoin currency  link. You will see a chart showing the price of a bitcoin in US dollars. Click on the Markets tab. Currently you will see 62 exchanges where you can exchange bitcoins with other alt-coins and/or fiat currencies. Click on any of these exchanges. You will find URLs on the page to access these exchange services.

Again, check and compare your deposit, withdrawal and exchange fees, and restrictions across several services. And again, there are different levels of verification required by the different exchanges. And research the service’s reputation – one has recently stopped allowing withdrawals and disappeared from their office.

Reiterating a few paragraphs back, most of these exchanges are not regulated, and are located in other countries. Do your research, start small and be prepared to lose some in the learning process.


Is Bitcoin Legal?

This is not tax, legal, financial or investment advice, but here are some links:

  • Tax treatment of crypto-currencies in Australia – specifically bitcoin [ato.gov.au, 18/12/2014]. Read the details in full at the ATO link and seek professional advice if required, but here are some points relating to personal use:
    • This guidance paper provides an overview of the tax treatment for transactions associated with crypto-currencies, specifically bitcoin. Where other crypto-currencies have the same characteristics as bitcoin, the information in this guidance paper applies equally to the taxation treatment for other crypto-currencies.
    • Summary
      Transacting with bitcoins is akin to a barter arrangement, with similar tax consequences.The ATO’s view is that Bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.The records you require in relation to bitcoin transactions are:
      a. the date of the transactions
      b. the amount in Australian dollars (which can be taken from a reputable online exchange)
      c. what the transaction was for, and
      d. who the other party was (even if it’s just their Bitcoin address).
    • Using Bitcoin to pay for personal transactions
      Generally, there will be no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using Bitcoin). Where you use bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is $10,000 or less.
  • Is Bitcoin Legal? [coindesk.com]
  • List of Legality of bitcoin by country [wikipedia.org]

Do your research. Pay your taxes where necessary – it keeps our public systems running. And seek professional advice if required.


But Bitcoin Is Only Used To Buy Drugs And Guns

Bitcoin has and will be used for illegal transactions on sites such as the now defunct Silk Road [wikipedia.org], Silk Road 2.0 and Silk Road Reloaded [motherboard.vice.com]. And Bitcoin has and will be used for terrorism, money laundering and drug trafficking [newsbtc.com], but this is similar to cash.

But according to the UK Treasury in their October 2015 policy paper UK national risk assessment of money laundering and terrorist financing [gov.uk], digital currencies still seem to pose the lowest risk with regard to money laundering. UKNationalRiskAssessmentOnMoneyLaundering

Section 9 of the report covers the risk in digital currencies.

Remember that all Bitcoin transactions are held on a distributed and public blockchain. And there are services that try to de-anonymise this system. Bitcoin is not an anonymous. There are ways to keep your bitcoins anonymous, but it cannot be guaranteed.

Some more-anonymous cryptocurrencies include Dash [dash.org], Monero [getmonero.org] and Anoncoin [anoncoin.net].


Further Information


Featured – My Personal Supercomputer

Rasterbator - My 11 Teraflops Personal Super Computer, And Wilma

Rasterbator, my 11 Teraflops personal super computer powering the Ethereum World Computer and my personal super breed of dog

Pictured is my personal supercomputer, capable of 11.828 Teraflops (TFLOPS) or 11,828,000,000,000 single-precision floating operations per second (compared to the top performing USD 110 million 106 tons 3MW consuming + 3MW cooling 7.22 TFLOPS IBM ASCI White supercomputer in 2000 [wikipedia.org]). The main computation units are 2 x AMD Radeon R9 390X Graphic Processing Units (GPU’s).

Each GPU consists of 2,816 stream processors for parallel computation, 6.2 billion transistors, capable of 5.914 TFLOPS [wikipedia.org] with 384 GB/second memory bandwidth and consumes about 275 watts of power (~8 of these approximate the heat of a 2,400 watt electric kettle).

I am using this computer to power the Ethereum World Computer [youtube.com].

In addition to the CPU and power supply fans, cooling consist of 1 x 230mm fan, 3 x 200mm fans and 1 x 140mm fan. The 200mm fans each should move about 100 cubic feet of air per minute. I get free heating in winter, and will have to shut down the computer on hot days, or use the reverse-cycle air-conditioner to cool down my data centre house. The size of the case is 230 mm (W) x 599 mm (H) x 550 (D) mm.


Leave a reply below if you want to contact me.

Enjoy. Bok 2015.

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