Getting the Most from Your First Bitcoin Purchase

By Rich Apodaca | Updated

Learning Bitcoin poses many challenges. New ideas and jargon fly in from every direction. Books, blog posts, and forum discussions assume either too much background knowledge or too little. Even finding reliable information sources seems harder than it should be. Then, just when it all makes sense, you realize you didn’t understand it at all.

To cut through the confusion and information overload, you’ll need more than a good book, blog post or video. You’ll need an advantage.

Learn by Doing

Imagine learning a sophisticated piece of software, for example Photoshop. Now imagine having to do so without access to the program. No matter how smart or talented you might be, you’d struggle to keep everything straight. Filters, layers, menus, file formats, and icons would all blur together into a cloudy haze. It would be hard to retain enough information to perform even basic tasks.

In contrast, learning Photoshop becomes much easier given a working copy of the software to follow along and experiment with.

Although few would attempt to learn Photoshop without a copy of the software, many beginners try to learn Bitcoin without owning any of the currency. Bitcoin involves many abstract concepts. Access to spendable bitcoin will make these concepts less nebulous. Using real bitcoin to model everyday transactions will help you pose and answer questions that matter most to you. Without this focus, you’re more likely to become lost in minutia.

Before setting out on your journey to understand Bitcoin, consider buying a very small amount.

You may be tempted to make a large up-front purchase of bitcoin. If so, now is a good time to rethink that plan.

A Cautionary Tale

In March 2011, the organization known as weusecoins released the well-known video What is Bitcoin?. Needing money to pay for production, the organization collected donations through a support drive that netted over 9,000 bitcoins. The video was finished and released, to much acclaim, for a total of 2,000 bitcoins. A surplus of 7,000 bitcoins remained, raising the question of how to store it.

Mindful of thefts resulting from improper storage, the weusecoins team developed a high-security plan. A virtual machine would be used to isolate the Bitcoin wallet from the rest of a computer system. Encrypted backups would be uploaded to cloud servers for safekeeping.

As often happens with computers, things went wrong and the entire sum of 7,000 bitcoins was lost. Foul play was not involved. Rather, the funds simply became inaccessible. Private keys controlling two critical donation addresses were lost. The high-security plan had backfired, locking the team out of its own wallet.

Since 2011, the original weusecoins donation funds haven’t moved, nor are they likely to do so. For as long as the Bitcoin network continues to operate, a sum currently worth about $4.5 million will remain frozen. If you’d like to see for yourself, these are the addresses:

It may seem surprising that large sums of money can be irrecoverably lost simply because a computer file can’t be read. Welcome to Bitcoin.

A Lesson Learned

The moral of the weusecoins story is not that the organization was negligent. Those involved appear to have used the best security practices available at the time. It just so happened that these practices were still in their infancy. Similar losses could have - and did - happen regularly to experienced users.

The very qualities that make Bitcoin resistant to manipulation also make it coldly unforgiving of mistakes. A payment sent to the wrong address becomes lost forever to both the sender and intended receiver. One careless cloud backup can lead to theft, even if your home computer is never compromised. A misplaced private key can lead to the instant loss of your money - as in the case of weusecoins.

Although usability is improving, Bitcoin is still far from offering a beginner-proof system to securely store funds. The same mistakes that cost weusecoins in 2011 can spell financial disaster for you today.

Why Less is More

Assume that your initial bitcoin purchase will evaporate without a trace, most likely through your own inexperience as you work though examples and make mistakes along the way.

A $5 initial purchase will enable you to experience firsthand most of the services Bitcoin has to offer. This sum of money is just enough that a loss will be annoying. But it’s not large enough to cause worry over the thought of attempting something new or risky. It’s also not large enough to cause panic when things go wrong. Residents of the U.S. can even pay for this purchase with cash at a bank branch.

Consider your $5 initial bitcoin purchase not as an investment in some high-tech asset, but as an investment in your own education. There’s plenty of time to move onto larger amounts after you’ve put a few mistakes under your belt.