How Cryptocurrency ACTUALLY works.
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00:00Alright, Bitcoin, Blockchain, Dogecoin, Ethereum, NFTs, everyone is talking about cryptocurrencies
00:05right now.
00:06But good lord, what does all of it mean?
00:09So welcome to the one video that will take you from crypto noob to crypto genius.
00:13I'm going to tell you what it is, why it keeps becoming more important, what I've actually
00:16invested in myself, and the dark side of it.
00:20Okay, so when society was in its early stages, there was no such thing as money.
00:24We'll call this stage one.
00:26The only way to buy something off someone was to go up to them and be like, oh, I really
00:30like your horse, I'll trade you my cat for it.
00:33Sorry, Milo, I'd never trade you.
00:37But the issue with a system like that is that even though you might be perfectly happy to
00:40give up your horse, you just might not want a cat.
00:44So that trade will never happen.
00:45But that's where currency came in.
00:47Stage two, coins, which because they were made of precious materials like gold and silver,
00:52everyone just accepted that they were worth something.
00:55You've heard of the British pound, right?
00:57Well, the reason they're called pounds is because one pound literally just used to be
01:01one pound of silver.
01:03And so all of a sudden in a trade, it doesn't matter if you don't want my cat, as long as
01:06I have coins, we can still trade for your horse.
01:09Even if you have no use at all for the silver, because it's a precious material, you have
01:13that reassurance that you can take that coin, give it to someone else and trade for something
01:18that you do want.
01:19Convenient, right?
01:20But then this evolved to stage three.
01:22As banks became established and governments had control, we realized that as long as there
01:25was trust in the system, we could move away from needing to carry blocks of precious metal
01:30towards something even more convenient, paper money.
01:33It does the same thing, but now the money doesn't have value because it's made of pure
01:37silver.
01:38It just has value because the government says it has value.
01:41Like this 10 pound note here in the UK, the note itself is just made of, well it's actually
01:45made of plastic.
01:46They changed it recently because it's more durable.
01:48But if you look closer, you can see that all this actually is, is the Bank of England promising
01:51that they will pay the bearer of this note 10 pounds.
01:55Really this is just a receipt, a kind of proof that you own a certain amount of money.
01:59But as technologies improved even further, we found even more convenient ways of storing
02:04and trading our stuff.
02:06We're now in what I would call stage four, where more people than ever are buying things
02:10online and using credit cards.
02:11And really when you're at that stage, we don't see our money anymore.
02:15It's not about coins or notes or cats.
02:18It's just entries on a spreadsheet.
02:20Like when I buy a music album from Amazon, all that's happening is that my bank adds
02:24an entry in my spreadsheet that says Aaron now has $10 less.
02:27And then Amazon's bank adds an entry that says they have $10 more.
02:30So the reason I've given you this entire intro is to give you context on where cryptocurrency
02:35sits.
02:36It's seen by many people as the most convenient era of exchange ever.
02:41Stage five.
02:42The way to think about a cryptocurrency is that it's 100% virtual.
02:46I know the logo for Bitcoin kind of looks like a physical coin.
02:50It really is a bit coin now.
02:53But with crypto, there is no gold, there is no silver, there is no paper.
02:56It really is just the transfer of digital assets.
02:59The core concept is exactly the same.
03:02Think of them as literally just running spreadsheets of who's paid what to who.
03:05But instead of multiple banks keeping their own separate records, with crypto, there is
03:09just one enormous spreadsheet of every transaction made using that currency.
03:13And this is called a ledger.
03:15Okay, we all love a good spreadsheet, but what's all the fuss about?
03:19Why is everyone going crypto crazy?
03:20Well, there are some distinct advantages to a currency system like this.
03:25One, it's decentralized, which means that while every transaction of a given cryptocurrency
03:29is all recorded on the same ledger, there are many, many copies of that ledger.
03:34And anyone who is a part of the network has one.
03:36You might have heard of cryptocurrency mining or Bitcoin mining.
03:40Well, all that is, is someone who set up a computer to crunch through transactions on
03:45their copy of this ledger or spreadsheet.
03:48There are already about a million Bitcoin miners around the world.
03:51And Bitcoin is just one type of cryptocurrency.
03:54The reason they're doing it?
03:55Well, if you dedicate your computer's power to mining, say Bitcoin, then you will earn
03:59some Bitcoin as compensation.
04:02So the result of this is that if I go into a store and spend 5 Bitcoins on something,
04:06then instead of just checking with one bank's records, the shop instead checks with every
04:10single computer on this network if I have enough.
04:12And assuming I do, each computer will give the go-ahead, and then every single one will
04:17update their records independently.
04:19So because you end up having this many copies of exactly the same ledger, it becomes very
04:23easy to tell if anyone's trying anything fishy.
04:26Did you... who bought this?
04:31Like if I try to hack into someone's computer that's on the network and give myself more
04:34money by adjusting figures on their copy of the ledger, it's not going to get through.
04:39The system will realise that 99.9% of the copies on the ledger are saying one thing,
04:43but one of them is saying something else, so it must have been tampered with.
04:46There's very clear organisation to the system, and I think people believe in it because they
04:51see the future as open, traceable transactions.
04:55Much more so than having some bits of the record over here, and other bits over there.
04:59And I know it seems complex at this point, but as we go through this, I think you'll
05:03realise that for a lot of people, in a way, it's simpler.
05:06There are plenty of areas in the world that have internet access, which is all you'd need
05:09for crypto, but don't have access to traditional banks, which require a lot of paperwork and
05:14documentation.
05:15Two, and I've kind of implied this already, but the main perk of crypto is that you don't
05:21need banks anymore.
05:22Because everything is stored by the people on this ledger, you can make international
05:26payments almost instantly instead of it taking half a day, with no spending limits.
05:30Plus, you don't need to worry about exchange rates, you don't need to worry about interest
05:33rates, and even transaction fees are close to zero.
05:37For some cryptocurrencies, that is.
05:39But this is where the real fun begins.
05:41I'm fun at parties, I promise.
05:43The reason that cryptocurrencies are called cryptocurrencies is because they're secured
05:48by cryptography.
05:50And one example of this, which a lot of the major cryptocurrencies like Bitcoin use, is
05:53blockchain.
05:54Now, people often get confused by this.
05:56Blockchain is not Bitcoin.
05:58Blockchain is not a currency itself.
06:00Blockchain is just a secure type of ledger.
06:02So you know that big spreadsheet that everyone has that's recording transactions?
06:06Blockchain is just a way of organising it, funnily enough, into blocks.
06:10So every time I pay for something with Bitcoin, that transaction is recorded as a block.
06:15Each block contains transaction data, like who was paid and how much, a hash, which is
06:19a unique identifier, and the hash of the previous block in the sequence, or the last transaction
06:24that was recorded.
06:25And the pivot on which this system rests is that if something in a block is changed, then
06:29that block's hash will change.
06:31You might be starting to see where this is going.
06:33Because each block also contains the data of the previous block, if the hash of the
06:37block here changes, then the next block will no longer have a matching hash with it, and
06:41so every subsequent block after that one becomes invalid.
06:45So if you combine this with what we talked about earlier, this whole idea of a million
06:48different users all having their own copy of the blockchain ledger, then if I wanted
06:52to fraudulently create a transaction that, say, paid me money, I'd have to not just
06:57tamper with a block and every single block after it, but I'd also have to do this on
07:01at least half a million computers around the world, so that the majority of computers in
07:05the system are also consistent with the one I've tampered with.
07:09Probably not going to happen, whereas just hacking into someone's dollar account and
07:12sending myself money, that does happen, and it's sometimes as simple as just literally
07:16guessing someone's six digit PIN.
07:19But there's a massive jump between that and trying to hack into 500,000 uncorrelated computers
07:24at once.
07:25Okay, so, cryptocurrencies have their issues, I'm literally going to get to them in a minute,
07:29but hopefully you can see why some people are excited about them.
07:33That brings me on to investments.
07:35You've probably heard of people putting money into cryptocurrencies, and all that means
07:38is that they're exchanging normal currencies, like dollars, for cryptos, like Bitcoin.
07:43They're hoping that those cryptocurrencies become the next big thing, and therefore suddenly
07:46shoot up in value, at which point they can then either spend them, or just exchange them
07:51back for more dollars than they bought them for.
07:53There's actually a term for cryptocurrencies that skyrocket like this, going to the moon,
07:59or mooning, but that can mean something very different depending on who you talk to.
08:03But the one decision that someone would have to make at this point is, which cryptocurrency?
08:08Because we've talked about Bitcoin, but Bitcoin is just one of over 4,000 different cryptos
08:12already, and each of them have different properties.
08:15For example, Ethereum, which is the second most invested in, can process transactions
08:20even faster than Bitcoin.
08:21There's one called Cardano, which is considered to be technologically superior.
08:25There's one called Litecoin, which has a newer algorithm.
08:28And if you are enjoying this video, then a sub to the channel would be...
08:32delightful.
08:33So, let me show you what I've done, and disclaimer, this is not in any way at all financial advice.
08:40I'm not recommending this, I've literally only put in a small amount of money that I'm
08:43comfortable losing, and to be honest the way I'm seeing it is more as an optimistic gamble
08:48as opposed to a strategic investment.
08:50The only thing that you absolutely should buy is one of these hats.
08:55Best purchase I've ever made.
08:57That is financial advice.
08:58So, I've put 40% in Ethereum, 20% in Polygon, 20% in Cardano, 10% in Cartesi, and 10% in Litecoin.
09:06And this portfolio has basically gone up, and then down, and then up, and then down,
09:09and then...
09:10Honestly, you probably get more consistency from Wish.com.
09:13So, crypto is in a pretty weird place right now, and this brings me onto its problems.
09:18The dark side.
09:19One of the main ones is exactly this.
09:21The reason I think a lot of people don't take crypto seriously is its volatility.
09:26Because these currencies are so new, and they're completely digital, unlike say the
09:30market for gold, no one really knows what they should be worth.
09:33And so you find that crypto prices are quite heavily speculative.
09:36They're tied to the news cycle.
09:38Like when a glowing article comes out about them, prices spiral upwards, but then when
09:42Elon Musk posts a tweet that puts them down, they go way down.
09:46Two is the fact that they're not really accepted as a form of payment in, well, most places.
09:51Like yes, I can now book holidays with crypto, I can donate to Wikipedia with crypto, but
09:56there's been a lot of companies who are pretty back and forth with it.
09:59Microsoft, Tesla, even Burger King are examples of companies who said they were going to accept
10:04Bitcoin, and then they said they weren't going to accept Bitcoin.
10:07Three, there can be an environmental concern.
10:10See, the whole reason why a lot of these cryptos are so secure is because of this concept of
10:15transactions being verified many, many times by many, many computers.
10:19So I think it's a fair criticism that that in itself creates a fundamental inefficiency.
10:24That much computing power requires a lot of electricity.
10:27But at the same time, you could counter this by saying that traditional banking uses more
10:31electricity, that there are newer coins with better technology that are more efficient,
10:35and that one day we'll be able to get that electricity from renewable sources.
10:40Depends who you ask.
10:41And four, there's also a pretty strong sentiment that because there's no real policing or
10:45regulation on crypto right now, it's like the perfect currency for criminals.
10:49But to be honest, I think the data speaks for itself on that one.
10:52According to Chainalysis, 0.34% of crypto transactions are criminal.
10:57Up to 5% of normal cash transactions are criminal.
11:00And I think that's because it's a bit of a misconception that currencies like Bitcoin
11:04are anonymous.
11:05They're actually pseudonymous.
11:06Which means that even though your actual details aren't visible to everyone, your public key,
11:10your unique identifier, will be permanently baked into the blockchain upon making transactions
11:15with it.
11:16So cash is just a better currency for most types of criminal activity.
11:20Because by its very nature, it's untraceable.
11:24Don't ask me how I know that.
11:26But as well as the negatives, there are also just some straight-up odd things that have
11:30come about because of crypto.
11:32For example, you might have heard of an NFT, a non-fungible token.
11:37If you haven't, you might want to take a seat for this one.
11:39I don't want to call it stupid, but this one's a head-scratcher.
11:45So you know how now you can go into an art gallery and you can pay to own a painting?
11:50Well, now, thanks to the blockchain, you can pay just to have digital ownership over something.
11:55So it doesn't stop anyone from using or sharing that thing, but all it means is that you'd
12:00effectively be the owner of the original, and they'd all be sharing copies of it.
12:04Even if, for most intents and purposes, they look and behave identically.
12:07Like a lot of these NFTs are literally just JPEG images.
12:11I think the reason some people find this stupid and kind of funny is that there's a distinct
12:15difference between buying an NFT and buying the rights over something.
12:19So if you buy the rights over something, that's a very legitimate purchase because
12:22you can create merch or sell licenses.
12:24With an NFT, you can't.
12:26The original owner still has all the reproduction rights over that piece.
12:30All it is, is that you're using the blockchain to prove that you have some ownership over
12:36that asset.
12:37But clearly, just being able to say that has some value because an NFT of this Gucci ghost
12:43sold for $3,600.
12:45As a CEO of Twitter, Jack Dorsey, he sold the first tweet he ever made as an NFT for
12:50$2.9 million.
12:53Five words!
12:54I could do that.
12:55Any takers?
12:56And this one just blows my mind.
12:58This photo, which is basically an overview of one guy's pieces of art, sold for $69 million.
13:05Very nice.
13:07To clarify, this literally just gives the buyer some digital ownership over a JPEG image.
13:15And finally, you might have heard of Dogecoin.
13:17Dogecoin is based on the same tech as Litecoin, but it was created as a joke.
13:22People started sharing it and putting a bit of money into it because they thought it was
13:25funny, but that propelled its value to the point where now we have people who have actually
13:29become millionaires just because they bought Dogecoin when it was cheap.
13:33It's an interesting world out there.
13:35If you did find this useful, then do consider sharing it with a friend or family member
13:38who could benefit.
13:39I would really appreciate it.
13:41And for my best phones of 2021, click here.
13:44For an Instagram story that crashes your phone, click here.
13:47My name is Aaron, this is MrWho'sTheBoss, and I'll catch you in the next one.