The world has officially gone insane over Bitcoin and millions are rushing to buy it. There are a couple of things that need to be said, now more than ever. Let’s get straight to the point.
1. Take ownership of your Bitcoins
That is the name of the Bitcoin game. Bitcoin works because when it comes to keeping track of who has how many coins or who sent how many coins where, neither you or I have to trust each other, or trust a central entity.
It also works because we don’t have to trust a central entity, like a bank, to hold our coins. Your coins are yours alone, provided you hold the private key to your Bitcoins.
Time and time again, even the most tenured Bitcoin hodlers have ignored this adage and suffered the consequences.
Unsurprisingly, the use of centralized exchanges that facilitate the sales of Bitcoin has coincided with Bitcoin’s growth and gone parabolic. With this rise in exchange usage, this message needs stressed upon now more than ever.
There’s no measuring just how many people using exchanges to buy Bitcoin are keeping their coins on these exchanges for extended periods of time, short of asking exchanges for the numbers themselves. But as long as that number keeps rising, a larger and larger target is painted on these services’ backs. The potential damage (or payday, depending on how you want to look at it) from a successful attack on any of the countless crypto exchanges also rises accordingly.
For those who don’t know, leaving your coins on an exchange does not mean those coins are yours. You are simply trusting the exchange to release them to you at some point if you so request it. You have no idea of what level of security these exchanges deploy, nor should you trust any security they report to have. Your coins are stored in a trust-maximized and centralized entity, almost entirely defeating the purpose of using Bitcoin.
If you’re not convinced that keeping your coins on an exchange is a massive problem, here are just a couple of horror stories to help you along.
The timeline starts with Mt. Gox, the world’s most popular exchange at the time. In 2014, it was the target of one of the first major cryptocurrency heists — 850,000 Bitcoins (over 4% of all Bitcoins that will ever exist) were stolen from Mt. Gox. Bitcoin’s price then proceeded to plummet in the following year as a result.
This event first brought to attention the importance of holding your own private keys. However, there have been several hacks on centralized exchanges resulting in the loss of hundreds of millions of dollars since. It seems lessons aren’t being learnt.
The latest heist to come out was just two weeks ago. NiceHash, a mining marketplace service, was robbed of over 4,700 BTC (worth $89 million at the time of writing) on December 6, 2017. Although not an exchange, NiceHash is a centralized entity all the same that users entrusted to hold their coins. This hack was on the smaller end of the spectrum, but as the latest in a string of countless hacks, it proves that there will be no end to attacks of this nature. If you’re a crypto trader that needs to keep coins in exchanges, know that this is a risk you must bare.
Luckily, there’s a very easy fix to all of these problems:
Move your bitcoins to a wallet that you control the private keys to. In particular, ensure that the wallet you use generates a 12–24 word mnemonic seed that easily lets you back up and restore your wallet.
Short of you compromising your private key/seed by exposing it to malware or revealing it to a malicious actor, you can sleep well knowing your coins are safe.
But there’s a caveat. It’s 2017 and Bitcoin has evolved, so you shouldn’t use just any wallet.
2. Use a SegWit wallet (and exchanges)
If you didn’t know, Bitcoin’s growing. Its growing fast. Faster than almost anything we’ve seen. As a result, its network effect has hit a wall due to the existing transaction limit of approximately 7 transactions per second, or approximately 2,000 transactions per 10 minute block. Transaction fees have risen at a similarly insane amount, as more and more people are competing for their transactions to confirm.
A preliminary fix to this problem was deployed six months ago called SegWit. SegWit is a fundamental protocol upgrade that decreases the virtual size of transactions and allows four times as many transactions to fit into a block.
The full explanation of Bitcoin’s transaction throughput problem and SegWit’s technical functionality can be found in an in-depth article I’ve written about it here.
Because transaction fees are measured on a per-byte basis and SegWit transactions have a lower virtual byte-size, if you send a SegWit transaction using a SegWit wallet right now, you save 30%–40% on transaction fees instantly.
Still not convinced about the advantages of SegWit?
If every transaction in the Bitcoin network was a SegWit transaction today, blocks would contain up to 8,000 transactions, and the 138,000 unconfirmed transaction backlog would disappear instantly. Transaction fees would be almost non-existent once again.
Lower fees for you and more transactions in blocks can happen right now. The code is sitting there on every upgraded Bitcoin node, waiting to be used.
The problem is that SegWit is not being adopted by wallets, services, and ultimately users.
SegWit is an optional protocol upgrade that Bitcoin wallets and services are not obliged to implement, despite the benefit it provides to the network. It was deployed in such a way to prevent a hard fork (i.e. a section of the community potentially branching off). As long as there is no demand from their customers, these services see no incentive to spend the time and money to upgrade to SegWit.
It is in your absolute best interest, that you, Bitcoin hodler, use a SegWit wallet.
Because SegWit is a relatively low-level change and there is some confusion surrounding it, it needs to be said that there are absolutely no disadvantages to using SegWit wallets, only significant network upside and lots of savings on transaction fees.
If your favourite wallet has not yet implemented SegWit, kindly ask them to do so. Then, start using a wallet that has already implemented SegWit until favourite wallet does so.
A great list of SegWit wallets can be found here. I will quickly list a few of the most prominent ones for your convenience. If you know of any that aren’t mentioned, please comment below so I can add them to the list!
If your preferred wallet isn’t on this list, make sure it uses SegWit. An easy way to identify a SegWit wallet (but not the only way) is to ensure receiving addresses start with a “bc1”.
If your preferred wallet doesn’t use SegWit, it would be in your best interest to use one that does. Remember, you’re saving up to 40% on fees right away.
By extension, you should also make an effort to use exchanges that incorporate SegWit. This means they use SegWit transactions to handle transaction volume on the exchange. Because exchanges conduct a lot of transactions, any exchange that uses SegWit greatly benefits the network health of Bitcoin.
Thankfully, there are several exchanges that have incorporated SegWit, listed here. It should be noted Coinbase, one of the largest Bitcoin exchanges, still has not yet implemented SegWit. If your favourite exchange isn’t using SegWit, do your part and contact them asking them to implement it.
By taking control of your Bitcoins, you mitigate the attack surface for any malicious actors in the cryptocurrency space. By using SegWit, you not only reduce the transaction fees you pay greatly, but you also help reduce network congestion.
Bitcoin is what you make of it. This is your opportunity to truly drive positive change on the Bitcoin network.
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Be sure to 👏 if you learned something! Spread the word about SegWit wallets so we can all benefit from a healthier network ☺️