Using your smartphone or tablet as a wallet isn’t all that new. I had wonderful wallet programs that held virtual versions of my cards, numbers, barcodes, and even pictures way back when I had my Newton and on my first Pocket PCs. The convenience of yesterday’s digital wallet wasn’t anywhere near that which it is today. Back then a digital wallet was nothing more that a convenient place for you to store your numbers so they were right there with you.
Now, however, your “digital wallet” is just that. Your phone can hold your credit cards, reward cards, even your plane ticket. I use Google Wallet almost every day. All of these are just hooks into where your actual currency or credit lives. What about storing actual currency on your smartphone? You can do that, too, but using your mobile device as your Bitcoin wallet is a bad idea!
What is Bitcoin?
Most currency isn’t “money”. Money is based on tangible things that hold intrinsic value like Gold, Silver, pork bellies, or coffee beans. “Currency” is the paper, coin, or digital representation of something that holds symbolic value.
For a person who makes $10/hour, one dollar is worth 6 minutes of their time. What happens when the Federal Reserve fires up the printing press and prints more dollars? As soon as they double the currency in circulation, they’ve cut the value of your dollars in half. That one dollar is still worth 6 minutes of their time, but now they have to work twice as long to buy what they could before the currency devaluation. In other words, the currency is worth half as much. (Since the U.S. Dollar is based on the “full faith and credit of the U.S. Government, I guess those are also reduced every time more fiat currency is created.)
Bitcoin tries to bring “value” to “currency”. When capitalized, “Bitcoin” refers to the technology and network; “bitcoins” in lowercase refers to the currency itself. Bitcoin is a peer-to-peer payment system and digital currency that was introduced in 2009 — a “cryptocurrency”, since it uses cryptography to control its creation and transfer. Users can send payments by sending digitally signed messages to the recipient. As with Gold, creating more bitcoins involves the process of “mining”, except here it’s mining in numbers and cryptography using computers and special software. Miners verify and timestamp transactions into a shared public database called the block chain. They do this to earn transaction fees and newly minted bitcoins.
You can earn bitcoins either by mining them yourself, by sharing the mining process and dividing the rewarded bitcoins among the individual miners, or when someone trades you for something of value (time, talent, goods, or services) in exchange for the cryptocurrency. In any case, just like physical or digital currency, you need to store your bitcoins in a wallet.
Different kinds of wallets
I’ve got a nice, leather wallet that I carry with me all the time. In it I keep my identification, debit card, and some cash. If I misplace my wallet, everything in it is inaccessible until I get it back. The ID can be replaced and the debit card is just an easy way to get currency out of my credit union, but the cash is cash. Once it’s gone (lost, stolen, etc.), it’s gone.
The same is true of bitcoins, but we’ll come back to that in just a minute.
My credit union or your bank act as a kind of digital wallet. Our currency is deposited into their institutions where it’s input into a computer and associated with our account number. When we withdraw the currency, it’s not the same currency that we originally deposited. It’s the same amount, but different bills. Our financial institution can be thought of as a sort of digital wallet. We put currency into it, and we get currency out of it.
Bitcoins can be stored in digital wallets, or “printed” on either coins or paper — though the latter two are rarely used. These wallets simply store the digital currency for you, so you can use them whenever you want. The advantage of bitcoins is the ability to send them to a recipient digitally, instead of by writing a check or handing over a wad of cash.
Just like a physical wallet with bills inside it, if you lose your wallet, you’ve lost your cash as well.
A bad idea
There are apps for almost every platform which let you “securely” store your bitcoins so they’re ready for you to spend or trade whenever you want. It’s a horrible, terrible, hideously bad idea.
Just like your bank, you can store bitcoins in an online wallet. If it goes out of business (or is raided by a government agency), your bitcoins will go with it — just like your currency would if stored in a bank. To counter that risk you might be tempted to put your life savings under your mattress. Though not a terrible idea, there are inherent risks to doing that. Similarly, storing your bitcoins on a hard drive, sdcard, or on your smartphone or tablet might, at first glance, be thought to be the equivalent of storing them under a digital mattress — only it’s not.
If your phone is lost or stolen, gets water damaged, is broken, has to be factory reset, or you decide to flash a new ROM on it, your bitcoins are probably gone.
I doubt my actual mattress is going to be lost or stolen. If it gets wet, I’ll dry it. If it gets broken I’ll buy a new one and put my currency under that one instead. If you “factory reset” your mattress, you just flip it over, and aside from cutting off the tag that says “do not remove under penalty of law”, I don’t think you can flash a new ROM on your bed.
Bitcoin is a very interesting concept, and one I haven’t fully adopted yet. If you’re already on-board, or just casually considering getting into the bitcoin ecosystem, I’m not going to hold you back — just make sure you don’t put your bitcoins on your smartphone or tablet!