The most common question I’m asked at the moment seems to be about taking Bitcoin investments off exchanges such as Coinbase and server-based wallets such as blockchain.info. How to do this is very simple, and this post will give you a step-by-step guide. Why you should do this is also simple, but can very quickly get you into a complex discussion and you’ve probably not got time to go into that much detail, so I’ll give you the why in terms of what you need to know.
So, first, how to do it.
Step 1: Get a wallet to move your Bitcoin to.
Choose one of these:
Breadwallet, Airbitz, Electrum, Mycelium.
Don’t worry about which is the best; they’re all more than good enough and you can always change your mind later.
Once you’ve installed it, go to its ‘Receive’ screen where you’ll find an address to send to.
Step 2: Send to your wallet.
You can do this by either scanning your chosen wallet’s QR code, or pasting it in Coinbase, as shown below. Yes, you’ll have to pay a transaction fee. Yes, this will be quite high at the moment. Yes, this sucks. The community is working on it, which is part of the reason for the turmoil at the moment.
Step 3: Wait.
Your transaction will be sent to the Bitcoin network and you should be notified almost immediately on your mobile wallet. The transaction will need to be verified by miners and added to the Bitcoin blockchain and before too long you will see confirmations for your transactions.
Step 4: Don’t be an idiot.
You’re now in charge of your Bitcoin and you’ll need a bit of common sense and vigilance to keep it safe.
The wallet will give you a mnemonic seed – a sequence of random words. You need to write this down and keep it, preferably in multiple places. If you lose your phone, you will have lost all your Bitcoin, but with the seed you can easily recreate your wallet on a new phone.
Now, the why.
Regardless of any potential split, fork or dispute in Bitcoin, if you hold your bitcoin on an exchange you are exposing yourself to unnecessary risk.
One of the attractions of cryptocurrencies like Bitcoin is that it removes the need to trust third parties. With the wallet you’ve just transferred to, you are in control of the coin. With something like Coinbase, they are.
If they go bust, get hacked, or make decisions in their own interests, you could lose everything. Any organisation’s security can be compromised; it just takes one disgruntled employee or one piece of carelessness. There are countless examples of Bitcoin exchanges being hacked, the most high-profile being Mt Gox.
So what’s the difference using the mobile wallets and why should you trust them over more well-known names like Coinbase?
Well, to compare a modern wallet app with an exchange is not comparing like with like.
The wallets are tools that sit on your mobile and connect directly to the Bitcoin network.
With Coinbase and Blockchain, the information needed to access your Bitcoin is on their servers. They keep the Bitcoin on your behalf.
If Breadwallet went bust or got hacked, it would be a bit like if you were a Ford driver and Ford got into trouble. There might be some hassle ahead for you in terms of spare parts or maintenance but your car would be just as safe as the day before.
The wallet app developers do not keep any information about you nor your Bitcoin. You never need to sign into their servers. You simply use the app to connect to other computers on the Bitcoin network.
At this point, it’s probably helpful to understand a little more about what your Bitcoin actually is.
Your Bitcoin is the sum of any unspent transactions made by other Bitcoin users to an address you own.
The Bitcoin blockchain is a file containing all the transactions ever made on the Bitcoin network, including the transaction between you and whoever you got your Bitcoin from.
At the moment there is no real dispute about the definitive version of the Bitcoin blockchain. There are countless other blockchains that aren’t the Bitcoin blockchain; each altcoin, for example Litecoin and Ether, is another separate blockchain, but the Bitcoin blockchain is the Bitcoin blockchain and you own Bitcoin because you have a private key that ‘unlocks’ a verified transaction on this file.
All very straightforward. Except that at the moment, the Bitcoin community is arguing about the best way to scale to handle higher volumes of transactions. Different stakeholders want to change the rules of Bitcoin to enable this to happen, but they are struggling to agree on exactly how.
If they can’t all agree, then Bitcoin could split into two, in other words there could now be two files, identical up to the point of the split, but with new, incompatible rules for the addition of new blocks of transactions.
We’ll then have two Bitcoins, which may then split further. From there, various scenarios are possible:
- Everyone very quickly agrees on which Bitcoin is Bitcoin and it’s as if nothing happened
- Bitcoin could split into two or more blockchains, each of which supported by a significant number of stakeholders and infrastructure.
It’s a complex argument, and it’s not new. Debates about how to improve the rules as the currency evolves have been raging for years and will continue beyond the various Bitcoin Improvement Proposals (BIPs) floating around at the moment.
I’m guessing that for now, you don’t want to delve any further into the pros and cons of removing the 1MB block size limit or the risk of a U-turn on Segregated Witness adoption by the mining consortia, so I’ll return to what you can do about it.
If you control your private key, should there be a split, you will have access to both versions of your Bitcoin. If Coinbase or any other third party control it for you, they can make decisions on which versions of the Bitcoin blockchain they support and this is exactly what has happened with Coinbase’s recent email to its users telling them that they won’t support the User Activated Hard Fork to Bitcoin Cash if it happens on August 1st.
So, in summary, if you think that there is any chance that a private company such as Coinbase or Blockchain.info could back the wrong horse, have their security compromised, or otherwise f*** it up for you – now or at any time in the future – you should move your Bitcoin asap.