Understanding How Cryptocurrencies Work

Greg Vanderford
A free video tutorial from Greg Vanderford
Teacher and Entrepreneur
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Cryptocurrency: Amazing Technology, Dangerous Investment

Understanding Cryptocurrency as an Investment

01:41:55 of on-demand video • Updated December 2017

  • Invest over the long term to build true wealth
  • Avoid major pitfalls of investing in cryptocurrency
  • How cryptocurrencies work
  • Avoid the inevitable cryptocurrency super-crash
English [Auto] So I briefly mentioned in the first lesson that coins are mine all mine is similar to how you would mind for gold or some other real world assets you are learning by having programmers using their computing power of their machines and their knowledge of programming to create this block. This block of transactions so the miner who writes the transactions into this ledger does general ledger which is where the source code of the block chain is. And it's my fault watch watching because each block is mine it produces encryption so that the information is safe and anonymous can be hacked. And then the miners are rewarded by getting a coin or a unit of the cryptocurrency. So the reason that people want to mine it is to get the money and then that incentivizes the system to keep working having people continue to add to the block change. So what miners do with the converter is information in a block in something called a hash and the hash is basically a confrontational puzzle. So you use your computer to solve this puzzle. It's very difficult to do. And so it takes skill and it makes it so it's not easy to do it just like mining for gold and other precious gems is not easy. There is a lot of effort involved in mining for bitcoins and other currencies. But when you see we saw this computational puzzle all the ash you are rewarded in the crypto currency that hash is encrypted. It confirms the data in the lauching so it makes it safe and trustworthy. When you create or complete this hash what it's doing is it's connecting the previous block to the new block with the data and it's confirming that it's legitimate and it's real. And that's what makes it safe. So the system is able to spot the information in the watching it's that it's able to spot anything that is not real or true. So big ones they can be strong or altered in any way. The only way they can be sold and all that is is with as has happened in the past. But one of the the wall of the places where the information of your where your big wins are if they're stored in a wallet. There was one wallet that was a company in Japan that got hacked and lots and lots of it was lost people lost in U.S. dollars. But it wasn't the blotching that was hacked. It was the wallet itself. So that's where if there's any issue with security it would be in the wallet. But they've since they've been a lot of them crewman's there. But the blockade itself is basically an hackable and it's all encrypted until non So government can't do anything to see who owns the big coins or whether story or anything like that which is why it's really popular is why people like it so why as they compete with each other to do the other activity. So this activity is also called sealing off blocks and you finish a block. It's added to the ledger and it's competition. So some minors my family doing it is very difficult and that's the thing that's good about it it creates a scarcity. We have a currency like any U.S. dollar for example it's scarce and it's only printed a certain amount by the central bank in the U.S. government decides how much they're going to print. So there's a scarcity it's hard to earn money to work to earn money etc. so when it comes to compete currencies is scarcity is involved and that's where the mind process comes into play. Also bitcoins in particular is only ever going to be 21 million Bitcoins ever so that the mining gets more and more difficult and slower as time goes on and eventually there will be no more bitcoins in circulation or that can be much more than 21 million Lucretia's limited amount which is built in scarcity so that's a good thing about it. And that's one of the reasons why we think that the values continue rising. However as we get to worse off of course it is fallacious to believe that an extremely dangerous. Put your money into these things. So anyway my is are rewarded 25 Bitcoins every time they successfully show off one block. So if you do it faster than the other competitors for they off the blocks so it's very difficult. And now the Bitcoin is worth ten or eleven thousand dollars as it is at the time of this course. Then you get a lot of money by mining the coins. So it's very very difficult and it takes a lot of work and computing power. But the more that it rises the more valuable it will be each month. And the more incentive programs will have to mine the coins. The Bitcoin protocol makes it very difficult to finish AHASVERUS is very different. I should say very difficult to finish the half. It takes a lot of computing power out of a really really good set of computers and you have to really know what you're doing. So it's very time consuming as well. And as we said before that's why other entries have been created like light coin. It's a little bit faster. And then you can apparently have something that's unique about it that makes it different from previous currencies. They're all basically their own platform. And so a big point is the most popular because it was a first. And it's got that first mover advantage. And most people have invested in it so it's the most well known as the most valuable right now let's use a currency you need a wallet as I mentioned and that's where in the past at least the security has been an issue it seems that that has mostly been resolved. But you need to store your coins somewhere. And so what you do is you basically store a digital copy that you save and access in your wallet. So all you're really saving in the wallet is information is key that says OK these are your bitcoins in this location. So it's all on the Internet it's all just data which is you know really issues nothing physical at all about it. And there are many types of wallets that you can store them on. And so you can store them on your desktop. So one example that's Crypta nature. You can look up if you saw it purely online. The most part they want to call Coinbase is just they store all your information on the Internet. So a desktop one means that you have a platform or a program on your computer and the information stored on your computer or on the internet but you have an actual software on your computer whereas one misses entirely. So when your mobile phone is something called watch chain similar to the desktop one it just means that you have an actual application on your phone that stores the information still. It's also on the Internet that you use software on your phone. And then you actually have a piece of paper that has it. You are code so you can store the data just as a number and you wouldn't want to lose that. But a lot of places around the world actually accept the point that if a currency is if you just bring in you Arfa and they and they should enable you buy things or trade cryptocurrency with you. Our code. And then finally hardware you can actually have an access key on the device and you will want to lose that if you have a lot of points but you can just put your data onto the USP device and then plug it in. And that would likely to change that as well. By far the most likely is just to have something online like Coinbase is the simplest for most people and it's pretty safe. The downside right now is that governments are starting to ask for data from Joint Base and other wallet's in order to make sure that people who are trading in decoying and other two currencies are paying the taxes and that is something that one of the big benefits of going to currencies is we thought they're anonymous they can't be taxed but the government can force any entity to divulge information. And so far some of these wallets have been holding out. But it looks as if point is going to be forced to comply with that. So now the government will have names in a council of all people all the big points that they are on and they're starting to force them to pay taxes on it. So if you have this huge windfall from all of your investing and the DNC you're not going to have to pay taxes on it. Most likely hasn't happened yet. That's something that's a huge risk. They could be Guernsey's are simply a technology that allows you to paper things OK. They're just a currency right. So I think that their value you know the value one individual owning one unit or the currency in terms of bitcoin is worth ten or eleven thousand dollars. You think about that. It's kind of weird it's kind of like gold only gold is a physical thing that also you know is valuable because people believe in the value of that like a cryptic currency. However gold has real utility. Gold can be used for technology use in transistors and computers was even used in dentistry although not as much anymore is used for other types of tools and of course its use for jewelry jewelry is something that has utility because people find it to be beautiful and decorative. So currencies are a lot like gold or they lack for of the attributes that makes gold and other gems so valuable. It's also partially like a painting or other work of art because people find it valuable simply because the market for that particular thing of people says is vital and everyone believes it's valuable that it is. But that also means a very very wide range of fluctuation in prices. So if you go up with no limit you can also crash down to no limit. And we're going to analyze that more later in the class. So this currency is a gift from Guernsey's many governments because they have little or no transaction fees. So the mining process comes in the ownership it's only you can spend it nobody else can spend your currency so you can lose it. No one else's business has the key. This is the reason why people like it be totally anonymous so that identity protection with you or with your money basically and banks are not necessary at all. You don't need a central bank you don't the government. Pulling de-centralized this is one of the main reasons why so popular is decentralized out there on the internet and it can be hacked it can't be stolen and nobody knows who's using it. So it's very very useful in that sense. And it's also risk free for sellers because payments can be reversed once you pay for something with a big long run of the currency. Whoever is it you mean a payment you can get them back. It can't be reversed no matter what and it can't be tracked. So people that sell things and Except the point that a currency as payment they never have to worry about having to give refunds or anything like that because the transactions are permanent. So those are the things that make these currencies attractive and really useful in some ways they're a big improvement on the central bank produce money like the U.S. dollar and others. So but again we're talking about them as a currency as a usefulness as a currency. Even so a lot of this is going to be currency right. You can use to buy everything on the Internet. You can't use it at stores. Only the ones that say OK we accept one or whatever. So even though it's usually useful at least as of right now it's not accepted a lot of places that people are worried that the value of it fluctuates so much of the utility of using it actually is much lower because of that. So even though the currency and the technology is designed to be you know exchange they're being used as an investment but they don't have investment attributes. As we're going to learn so I accepted everywhere. Prices are very volatile and also there's lots of different currency so they compete with each other. So how can the value of them go up if they're all competing and they all have different attributes so they're going to use you because it was the first one it's the most well known and now of dozens and dozens of them with new ones being produced every single day. And so eventually they're going to have to be a downward pressure on the price is right that you've got a thousand currencies up and one of them be so valuable as an unlimited amount of them and basically in terms of economics they're going to be a commodity that currencies will become a lot of times because it'll all be essentially interchangeable if their primary use is a new unit of exchange as a currency. Is that economics traditional economics will say that the price will go down. And some people will say well this is different as a new technology. Well that's what we thought during the dot.com bubble and the Internet is nothing everything different but nothing can change the basic laws of economics. Nothing changes that economics is value it's about utility and the rules the laws of economics cannot be changed. So even though it's a new technology if you look at what it does what it does allow you to trade things on the Internet. And so it's really all these sovereigns huge bubble right now. And for many many reasons as it went up it is almost a certainty that it's going to collapse as every single Bible throughout history has done them over learn in the course is redefined what a bubble is when we look at some some past asset bubbles and we're going to identify exactly why it's very very very obvious that we are in a very dangerous asset bubble right now and nobody knows when it's going to pop. It can continue to up and you continue to let it ride with your money and it will it will either end in tears or if you're very very lucky and you say this is just the perfect moment. Maybe you can make a lot of money investing in these things that some already have done but you'd be no different than going to a casino and just playing against the house. I would actually say that would be more risky to the parents at this point. Finally there's a threat of government shutting down or regulating that could happen at any moment at any time. And if the U.S. government for example says we're going to crack down for the currency you can accept them and we're going against them. The price will plummet and people will lose all of their money. They will have very little value if government decide to start regulating them. So that's how you can use that to see that some of the attributes of them and they are interesting. The blocking technology is very interesting as. It's cryptography in terms of what it can do. However I predict that currencies will be used a lot in the future for the use by banks and use by tech companies will be a lot of things you can do with them. But in terms of being a very very valuable currency and having this asset value always go up and it just doesn't make any sense at all. And in the next lectures we're going to start to analyze cryptocurrency as an investment cost.