Bitcoin For Dummies. Prypto

as we type. But using such services involves a few risks, and if your coins are lost in the process, there is no way to get them back. Don’t worry too much about losing your coins though – we explain more on how to manage them and your wallet in Chapter 5.

      

Always do your own research before using any external service and ask yourself whether or not anonymizing your BTC balance is really that important to you or not.

      

One of the biggest issues concerning external services is the fact you are relying on a third-party to anonymize your coins. Bitcoin and digital currency were created to remove any middleman from the equation and put the users in control of their funds at all times. Trusting a third party with your money essentially goes against bitcoin’s core values. Plus, using an anonymity service for bitcoin raises suspicion of money laundering. Considering that you are already semi-anonymous by only exposing your public bitcoin address, taking things one step further could raise suspicions around your possible intentions. Chapter 5 covers more on how to manage your funds and the most appropriate ways to do this.

       Protecting privacy

      When it comes to protecting your privacy, the story is similar.

      

There are ways to protect your privacy when using bitcoin to move funds around, but these require some effort and planning:

      ✔ You can generate a new address for every individual transaction.

      ✔ You can avoid posting your public bitcoin wallet address in a public place.

       Generating a new wallet

      When receiving funds from another user, you can opt to give them a brand new, freshly generated wallet address, which cannot be directly linked to any existing addresses you already own. This type of throwaway address lets users isolate transactions from one another, which is the primary precaution you can take to protect your privacy.

      However, depending on how you store your funds – which type of bitcoin client you are using and which operating system you’re using it on – you may also be able to generate change addresses. For example, if you install the Bitcoin Core client on your computer or laptop, you can create a new change address every time you send funds to someone else.

      

A change address occurs whenever you have a certain amount of bitcoin in your wallet balance and are sending less than that total amount to another user. Let’s say you have 3 bitcoin and need to spend 0.25 bitcoin. You need to receive the “change” – 2.75 bitcoin in this case – in your wallet. The Bitcoin Core client (as well as a few other desktop clients) allows you to have this “change” sent to a newly generated address. In doing so, there is no direct link between your original address and the new address, even though you can trace back the steps by looking at the blockchain itself.

       Keeping your wallet address secret

      Another way to protect your privacy – to a certain extent – is by not posting your public bitcoin wallet address in a public place. Using the address on your website, blog, social media, or on a forum is not a good idea if you want privacy. Once someone stumbles across your wallet address and can somehow tie it to you personally, there is no way to restore privacy other than by using one of the aforementioned methods.

       Demonstrating fungibility

      The main problem with bitcoin is its fungibility, or more correctly, lack thereof. Fungibility has nothing to do with mushrooms, by the way. It’s just a fancy term for goods being interchangeable or capable of being substituted … and that suits bitcoin.

      Most governments in the world will stick to their own, controllable system of issuing fiat currency. Local currencies are centralized and issued by a central bank. If they need more money, the central bank can simply issue more money by turning on the printing presses or engaging in quantitative easing as it’s been termed. Thus, either by order of the government or by acting as an independent authority – a central bank may boost liquidity in the economy by carrying out quantitative easing. With bitcoin, this is not the case, as there is a fixed liquidity cap of 21 million coins. Thus, the cap of 21 million coins essentially means that bitcoin is not fungible as other fiat currencies are.

Trusting the Idea of Bitcoin

      One of the biggest hurdles to overcome whenever a new technology comes knocking on your door is whether or not you should put your trust in it. In the case of bitcoin, that trust has to work on both sides. Even though you as the user are always in control of your own finances, you still have to trust the rest of the bitcoin network to not drop off the face of the earth tomorrow.

      

The chances of bitcoin disappearing are so slim that it isn’t something you should worry about. However, if there is one thing that life has taught most of us, it is that there are no certainties in life. Luckily for everyone involved, the bitcoin network consists of many individual users, as well as bitcoin nodes, which are put in place to keep the network running at all times. We explain more about nodes and their role in Chapter 6.

      This brings us to the concept about bitcoin that people have the most difficulty with in terms of trust: decentralization. As mentioned, bitcoin is a decentralized digital currency, which means there is no central point of failure that would cause the bitcoin network to not recover. Every individual user is an integral part of the bitcoin ecosystem, so it would take a nearly impossible amount of collaboration in order to shut down everyone at the same time.