Bitcoin, the most widely used virtual currency, continues to increase in popularity and in value in spite of several losses caused by scams and hacking. Bitcoin’s value and mode of exchange are not subject to the laws and regulations of any particular country. Hence, this makes it a very attractive investment. But buying and selling bitcoins have a lot of risks attached since there are no chargebacks and transactions cannot be reversed. However, by understanding how bitcoin works and taking certain precautions, you can prevent your precious bitcoins from being lost to scammers and hackers.
How Bitcoin Works
New users of Bitcoin can get started without knowing all the intricacies about how this virtual currency works. But there are a few technical details that will help you to understand Bitcoins better.
Who issues Bitcoins?
Bitcoin was created without any central issuing agency or authority. The total supply of bitcoins has been fixed at about 21 million and no other bitcoins can be added. Hence, in theory, a bitcoin cannot be devalued. As time goes on, the supply of the currency will continue to decrease so the value can continue to rise. As a new user, you can buy bitcoins from an online exchange or from any other user who has a bitcoin wallet.
How Bitcoins are Distributed
Computers that are connected in a peer to peer network are used to mathematically generate bitcoins. This network relies on a shared public electronic ledger known as a block chain. The block chain contains all confirmed transactions. Each owner of bitcoins possesses a bitcoin wallet and transactions involve the transfer of value from one bitcoin wallet to another. Once a transaction is confirmed by the network, it is added to the block chain in chronological order. Transactions are irreversible and the integrity of the block chain is maintained by cryptography.
All transactions are usually confirmed with 10 minutes by the network through a process known as mining. Mining is the consensus system that confirms waiting transactions and adds them to the block chain. The strict rules and cryptography that govern the addition of new transactions to the block chain prevent individuals from replacing any parts of it or rolling back their transactions.
How to Prevent Scams and Hacking
The following tips will help you to invest in this virtual currency with minimal risk.
- Save Your Wallet on Your Computer – Invest in very durable hard drives. Use them to store your virtual bitcoin wallet on your laptop or on a portable hard drive. Cloud services are the other alternative for storing your bitcoins. But they can be hacked. A recent case is the popular Mt. Gox exchange. Over 400 million bitcoins were lost in this exchange due to hacking. Hackers will find it more difficult to steal your coins if you don’t save them in a cloud service.
- Avoid Selling Bitcoins Without Cash Payment – You can easily get scammed if you decide to sell bitcoins using PayPal or a credit card. If the buyers report that you didn’t send the virtual currency to them, they can claim that the transaction was fraudulent. Then the company will issue a chargeback on your credit card. Hence, you will lose your bitcoins as well as your payment. That is why online exchanges don’t allow you to buy bitcoins using a credit card. Ensure that you have cash in your hand before you transfer the bitcoins.
- Use Escrow Accounts – Due to lack of chargebacks on bitcoin exchanges and transactions, you should use escrow accounts. Escrow services help to overcome the weakness created by the irreversible nature of bitcoin transactions. They will provide a guarantee on a specific amount in each transaction. For instance, some service providers will help you secure $500 per transaction. If you need to secure a larger amount, you will need to pay a percentage of the transaction.
- Avoid Using Unreliable Exchanges – Do adequate research to ascertain the reputation and reliability of any exchange before your purchase bitcoins from them. Stay away from shady websites. Any exchange that engages in shady or illegal activities can easily be shut down. And if such an exchange is shut, you could lose your bitcoins if you were using an online wallet for quicker transactions. If you have to use an exchange, make sure they have a strong reputation for security, with strong authentication procedures. And avoid storing the bulk of your bitcoins in cloud services.
Finally, invest wisely in bitcoins and be conscious of their volatile nature. Keep the bulk of your bitcoins on your personal computer. Avoid any deals that are too good to be true and protect each transaction using escrow accounts.