How to Use Bitcoin

Why would anyone trust nerd money vs. central bank money? Nerds brought you the internet. Banks brought you the Great Depression.
Satoshi Nakamoto

Now that we have a better understanding of what bitcoin is and its purpose, it's time to learn how to use it in practice. In this module, we'll guide you through the process of acquiring bitcoin step-by-step, explore the various types of wallets available, help you set up your own Bitcoin wallet, and even practice sending and tracking a Bitcoin transaction on the network. It's time to apply your understanding in action!

There are many ways to acquire and exchange bitcoin. For example, you can:

• Get paid in bitcoin in exchange for your work and pay for other people’s products and services with bitcoin (more on that in Module 7)
• Mine bitcoin (more on that in Module 9)
• Exchange your fiat currency for bitcoin or exchange your bitcoin for fiat in person.
• Exchange your fiat currency for bitcoin or exchange your bitcoin for fiat online.

Below, we’ll explore exchanging fiat currency for bitcoin and vice versa, through both in-person and online methods, as they are the most common options.

Peer-to-Peer: In Person

Engaging in peer-to-peer (P2P) transactions to buy and sell bitcoin in person involves directly exchanging your fiat currency (or any other goods or services) for bitcoin with another individual, eliminating the need for a bank or other party to be involved.

Both parties agree on the amount and rate. The buyer provides cash, the seller sends the bitcoin, and the transaction is complete once confirmed on the blockchain. Exchanging bitcoin for fiat works the same way in reverse.

Peer-to-Peer: Online

While it's easier to do peer-to-peer exchanges in person by meeting with the other individual directly in the real world, this carries some risk — just like any other in-person trade for cash does. This is why some people choose to exchange bitcoin virtually, wherever they are thanks to the internet.

Enter peer-to-peer platforms, where Bitcoin buyers and sellers meet in cyberspace to conduct transactions without any intermediaries, directly on the internet.

On such platforms, you don’t have to trust anyone with your information or money; you connect with other peers and trade with them directly.

Centralized Exchanges

Centralized exchanges are companies that allow clients to buy and sell bitcoin directly through them. They are the easiest way to acquire and dispose of bitcoin, but this convenience comes with significant trade-offs.

Centralized Exchanges Trade-Offs

It’s important to note that when buying bitcoin through a centralized exchange, you are often required to provide personal information and verify your identity. This creates a risk of identity theft and exposes your personal information to potential threats. Additionally, centralized exchanges hold your bitcoin for you, which means you are not in control of your money until you withdraw your funds.

To add to these concerns, centralized exchanges can misappropriate user's funds or sell more bitcoin than they have in reserves until they collapse — Yes, just like banks! Except that, in the Bitcoin world, there is no central bank to bail out fraudulent banks by printing more currency, because you can't print more bitcoin!

Unlike physical money, bitcoin are not actually contained in a Bitcoin wallet. Instead, they live on the distributed ledger that the Bitcoin network constantly verifies and secures. So, how can you own bitcoin?

You have ownership of your bitcoin only if you control the private keys allowing you to sign transactions and transfer ownership of your bitcoin to someone else. This is the act of sending bitcoin.

Let’s take a look at two concepts we refer to when using the term wallet:

• A master private key, like a password, from which your public keys, like email addresses, are generated. You can share your public address with others to receive and send bitcoin, but you must never share your private key!
• The mobile or desktop interface used to interact with the Bitcoin network, check your bitcoin balance, send and receive transactions, and broadcast them to the network. Different types of wallets, along with their benefits and tradeoffs, will be described in the next sections.

Self-Custodial vs Custodial Wallets

Before detailing the different types of Bitcoin wallets and their characteristics, let’s make an important distinction between self-custodial and custodial wallets. Each type has its own benefits, risks, and level of control over the bitcoin. Self-custodial means the user holds the private keys and truly controls their bitcoin; with custodial wallets, a third party holds the bitcoin for the user.

In a self-custodial wallet (also called non-custodial wallet), you are the only one with the keys to the wallet and you have full control over what goes in and out. On the other hand, in a custodial wallet someone else holds the private key, giving them full access to move any bitcoin that provider controls on your behalf.

• Self-custody is like being your own bank. Transactions are not subject to the scrutiny and control
• Self-custody ensures that third parties cannot confiscate your bitcoin.
• Self-custody gives peace of mind in times of uncertainty, because you know your bitcoin is secure.

It’s important to choose the right type of wallet for each individual’s needs. Sometimes, people find it hard to distinguish whether they are installing a self-custodial or a custodial wallet. This table shows the differences in the installation process.

“Not your keys, not your coins” is a popular saying among bitcoin holders. It refers to the idea that if you don’t have direct control over the private keys associated with your Bitcoin wallet, you don’t have true ownership of the coins.

Whoever accesses your private keys has ownership of your bitcoin. This is why it is of the utmost importance to protect them by keeping them away from prying eyes! We’ll see a few ways you can do that later in the book.

For what follows, we’ll be talking about self-custodial wallets only, where the user owns their keys and has complete control over their bitcoin.

Don’t worry if it seems complicated or you don’t understand everything — this is a journey, and you will understand better the more you start using Bitcoin!

Different Types of Bitcoin Wallets

Where your private key is created and stored determines how we describe Bitcoin wallets. If keys are on your smartphone, it’s a mobile wallet. If they’re stored securely on a dedicated device, it’s a hardware wallet.

Because keys can be moved from one device to another, the “status” of your Bitcoin wallet is not fixed. For example, if I create my wallet keys on a computer and later move them to my phone, the “desktop wallet” becomes a “mobile wallet.”

When it comes to storing your bitcoin, it’s not just about who has control over the keys — there are many other risks to consider. That’s why it’s important to find a storage solution that is both secure and convenient. When you analyze the trade-offs of the various types of wallets, you will learn that there is no ideal wallet to satisfy all needs.

What to consider when choosing a wallet

• Security: Make sure the wallet has strong security measures in place.
• Privacy: Consider whether the wallet requires personal information.
• Ease of use: Choose a wallet that is easy to use and navigate.
• Compatibility: Make sure the wallet is compatible with your device.
• Fees: Compare the fees charged by different wallets.
• Reputation: Check the developers’ reputation to ensure they are trustworthy.
• Control: Some wallets give you more control over your private keys.

Open Source vs Closed Source

Another important factor to keep in mind when choosing a Bitcoin wallet is knowing if the application or software is open-source. This is important because open-source projects let the community review the code and continue the project if the team stops working on it. Just as Bitcoin’s code is completely open for everyone to review, use, and modify, so should the code of the wallet you use to manage your bitcoin be.

Activity: Discussion and evaluation of Bitcoin wallets

Go to the following website: https://bitcoin.org/en/choose-your-wallet

Use your new knowledge of Bitcoin wallets to select the one best suited to your needs based on the criteria we discussed today.

Activity: Setting Up & Recovering a Wallet

Now that we have a better understanding of Bitcoin wallets and the differences between them, we’ll see how to use one in practice. For this example, we’ll create a mobile wallet directly on our smartphone. If students do not have smartphones, the educator will provide one for students to borrow. There are two options for this activity.

Option 1: Download a New Wallet

How to create and use a Bitcoin wallet:

1. Search for the app in the App Store (iOS) or Google Play Store (Android)
2. Open the app and select "Create a new wallet". Your private key is automatically created by your app.
3. You will be prompted to write down a list of 12 to 24 words and keep it in a safe place. This is your recovery phrase (also called a seed phrase): it allows you to recover full access to your funds if needed. Remember that if you lose or forget this sequence of words, you will not be able to access your bitcoin if you lose access to your wallet. Also, if anyone else finds your recovery phrase they will gain access to your bitcoin!
4. You must then confirm that you have saved your recovery phrase. To do this, you must enter, in the same order, the words of your seed phrase.
5. As an additional measure of security, some wallets allow you to choose a secure password.
6. Once you have backed up your recovery phrase, enter the wallet. Look for the "Receive" option: your wallet will generate a public key to receive bitcoin.
7. Transfer bitcoin to your wallet. With a self-custodial wallet, you cannot always buy bitcoin directly with fiat, so you might need to purchase and transfer them from an exchange first.

Think of your public key as your email address: you share this with others so that they can send you bitcoin (or, in the case of an email address, an email).

Think of your private key as the password to your email: you wouldn’t share this with anyone, as it would give them access to your email.

Option 2: Restore a Wallet

Download a Bitcoin wallet and add some sats for each student.

Give each student a sheet with a recovery phrase to retrieve a wallet.

Guide students step-by-step:

1. When you first start your wallet, you will see three methods of wallet creation, tap [Import an existing wallet]. You will see an introduction screen, tap [Restore with recovery phrase].
2. Enter your recovery phrase one by one, in the correct order.
3. You will see a confirmation message once your wallet has been successfully imported. Your recovered funds are ready to use!

A Bitcoin transaction is a transfer of ownership of bitcoin to a new owner. Note that it is not the actual coins that are transferred, but ownership of them: in other words, the right to spend them. Every time a transaction is accepted into a block, all the nodes in the network update their local copy of the public ledger to reflect the change ownership. In this respect, a Bitcoin transaction is more akin to a real estate (or other property) transaction than to a cash transaction.

To "send" bitcoin, the sender signs a message with their private key, signaling to the network that the rightful owner of the bitcoin has transferred its ownership to the recipient.

The bitcoin will now be tied to the recipient's address, giving them ownership of the bitcoin, so that only the new owner can spend them by using their private key.

New Bitcoin transactions are initiated from wallets around the world, but there is no central payment processor. Instead, miners compete to record transactions in the ledger.

Let’s say Jim owes Eliana 0.5 BTC and is ready to pay her back. Both have digital wallets.

1. Eliana shares her address with Jim.
2. Jim uses his wallet software to create the transaction, which includes Eliana’s address, the amount to be transferred (0.5 BTC), and a fee for the miner. Higher fees make it more likely that a miner will include the transaction in the next block.
3. After signing the transaction, it is broadcast to the network, where it is verified by nodes. They check whether Jim has enough funds and is the rightful owner of the coins he means to spend. If he does not, they reject the transaction immediately.
4. Once the transaction is verified, miners choose whether to add the transaction to the next block, usually based on the selected fee. Once the transaction makes it into a block, it is added to the blockchain and the funds are transferred to Eliana's address.
5. Ownership has been transferred to Eliana. She can now use her private key to spend the funds.

It’s important to note that once the transaction is complete, it cannot be reversed.

How a Bitcoin Transaction Works

1. The transaction is broadcast to the network
2. Miners gather transactions into a block
3. The block is added to the blockchain
4. The transaction is confirmed

Once the sender has your address, they can send you bitcoin by entering your address and the amount they want to send. The bitcoin is then sent from their wallet to your wallet.

The transaction is confirmed by the Bitcoin Network and usually takes about 10 minutes. For greater security, it is recommended to wait for two confirmations, which takes about 20 minutes.

Activity: Transactions In Action

This is a cooperative exercise simplifying the basic roles of people involved in a Bitcoin transaction.

Key Points

1. There are four types of participants in every bitcoin transaction: the sender, the recipient, miners, and node operators.
2. The sender must approve (cryptographically sign) the amount of bitcoin to send AND the specific address to send to.
3. The recipient must provide a valid address to the sender AND verify the transaction was successfully confirmed on the blockchain.
4. Miners ensure all criteria are valid before adding transactions to future blocks.
5. Node operators verify mined blocks are valid before updating their version of the blockchain (the ledger).

Student Tip

Rotate through all four roles to experience what each participant does.

Whatever you do in Bitcoin, remember this: “Don’t Trust, Verify.” There are no rulers in Bitcoin. You should never blindly follow someone’s claims; rather, you should always question what you’re being told and verify it for yourself. By following this mantra, you’ll protect yourself from losing your bitcoin. This goes for claims such as “the next Bitcoin” just like it does for “investment opportunities” or promises of “quick and easy profits.” This is why open-source projects should be favored. If you can't verify the code yourself, you will have to trust the community who will do it for you; but it's better to trust a decentralized and independent group of verifiers than the leader or group behind the project.