What is bitcoin for beginners
Why are you investing in Bitcoin? How does it work? Is it safe? Are you gonna lose your money? Isn’t it illegal? All of this kind of stuff. So this video, which is for informational functions solely and ought to without a doubt now not be construed as monetary advice. In the slightest, we’re gonna cut up it up into 4 parts. Firstly, I’ll discuss about what Bitcoin is
and how cryptocurrencies in widely wide-spread work and why they work and why they’re legit. Secondly, we are going to discuss about why Bitcoin and crypto is so controversial and I’ll share my warm takes about that. Thirdly, we are going to discuss about, why I in my opinion do make investments in Bitcoin and crypto and I will share my portfolio allocation and the motives at the back of that.
How to start investing in cryptocurrency
And fourthly, we are going to speak about how you can get started out investing in crypto. If it is the type of aspect you favor to do with a lot and a lot of caveats and cautionary stories alongside the way. As continually timestamps in the video description, so you can soar round if you experience like it. And if you new to the channel, hello, fantastic to meet you. My title is Ali, I’m a medical doctor based totally in Cambridge in the UK.
And on the channel, we usually discover the equipment and techniques that assist us stay healthier, happier extra productive lives. But I have a private pension for the subject matter of cash and I assume extra human beings have to analyze about cash and investing and finance and how it works and be open about that kind of stuff. So right here we are speakme about this video.
Anyway, let’s get into part range one. All right, so let’s take matters lower back to fundamentals to strive and construct up our grasp of Bitcoin from the floor up. Now, Bitcoin is a cryptocurrency. There are lots of different cryptocurrencies out there however Bitcoin is like the original, the OG. And it is by means of a long way the largest cryptocurrency around.
What is cryptocurrency?
which makes the question, what is a cryptocurrency? So this is my definition of a cryptocurrency based totally on 4 central concepts. A cryptocurrency is a digital forex primarily based on a ledger which is decentralized and secured with the aid of cryptography.
All right, so firstly, Bitcoin is a digital currency. Now what is a currency? A foreign money is simply a medium of exchange. It’s what replaces the historic college bartering gadget we used to have, when it would be like, I will supply you this bushel of wheat in return for the shoe that you have kindly made me due to the fact you are a, I do not know, leather-based worker.
Obviously, that machine of bartering is pretty inefficient due to the fact you have to keep a lot of stuff that different human beings desire and this is simply a bit of a pain. And so we invented foreign money in the structure of cash normally as a gadget that all and sundry diagnosed to be in a position to change stuff except having the bodily goods.
So I ought to promote my bushel of wheat for two copper cash and then I should shop up my copper cash and I may want to purchase your footwear for 10 copper coins, for example. Back in the day forex itself was once tied to metals like gold and silver and copper, which had like one of a kind values. And so the genuine steel of the cash used to be really worth some thing due to the fact anyone agreed
that these metals had been particularly valuable however in current times, most of our foreign money takes the structure of paper notes and paper notes are not inherently really worth something because the paper is simply well worth paper however foreign money is well worth some thing due to the fact absolutely everyone is of the same opinion that it is well worth something. If I take $100 bucks nearly somewhere in the world
most people, I imply most locations in the world will apprehend that $100 is really worth $100 and I’d be capable to purchase $100 really worth of stuff from it. If hypothetically the complete world had been to the following day determine that the U S greenback is a meaningless foreign money and they’re no longer gonna take delivery of it for something at all.
Then the U S greenback would be worthless. So genuinely when it comes to forex it does not suggest something real. Currency is type of simply an summary way that we’ve got all agreed to fee matters in a sure way. So coming again to Bitcoin, Bitcoin is digital currency. It is a digital shape of currency,
i.e. a digital structure of paying for items and offerings and changing cash over the internet. Way again in 2009 when Bitcoin used to be first invented, most humans did not agree with that it would be a manageable structure of currency, but over the ultimate decade plus,
as Bitcoin has end up greater and extra popular, humans are beginning to say that possibly Bitcoin ought to be the foreign money of the future. Maybe in the future, possibly a few years, few many years from now, we are going to be paying for items and offerings the usage of Bitcoin over the internet, alternatively than via the use of these ancient school,
old common centralized banking and authorities establishments to alternate U S greenbacks and our proper neighborhood currencies. Okay, so that used to be the foreign money section of it. We can suppose of Bitcoin or crypto as like “Internet Money” or like “Virtual Money” or “Virtual Currency”. Let’s now discuss about the ledger gadget that holds it all together. And the component to recognize here
is that Bitcoin is efficaciously one massive large spreadsheet. This spreadsheet is referred to as a ledger and in the spreadsheet we have bought a document of each single Bitcoin transaction that has ever took place on the grounds that January, 2009, when Bitcoin was, used to be first invented. And the way that I assume of it in my head, it is like, let’s say you are going on holiday
with a team of pals and you do not wanna form of maintain on splitting the invoice and handing over money due to the fact this is a whole nightmare. Therefore, any individual makes a spreadsheet to hold music of who owes what. And so line one in the spreadsheet would possibly be Ali owes Sheen 12 pounds,
line two may be Jake owes Molly, 18 pounds. And the thought is that as our excursion goes on, we would preserve on including stuff to our spreadsheet or a ledger. And at the give up of the holiday, we would all settle up and then genuine cash would trade hands. Now, assuming you have faith your friends, to be sincere this spreadsheet definitely works fairly well.
You can essentially deal with this total spreadsheet as digital money. I am giving my buddy digital 10 kilos in alternate for them paying for dinner. Other pal is giving me digital 20 kilos in alternate for me paying for the boat ride. Now that is quality for a crew of a few humans on vacation however think about hypothetically, if the entire world have been to run
on a comparable spreadsheet, the place alternatively of cash ever changing arms like bodily it would simply be a line object in the spreadsheet. Now think about a world in which anyone depended on the spreadsheet and all and sundry was once being truthful and top and great and friendly, and solely including reputable things
to the spreadsheet that every person agreed on. That’s essentially what Bitcoin is. It’s this massive spreadsheet that maintains music of virtually each and every single transaction it truly is ever took place concerning Bitcoin on the grounds that the begin of Bitcoin. And so that capacity that this spreadsheet has a file of everybody in the world
who has ever sold and bought Bitcoin and it tells you how a good deal Bitcoin they’ve sold and sold, so you can work out how a lot Bitcoin every man or woman has in their account. Now let’s say I have two Bitcoins in my account which is pretty a lot of cash these days. And I had been to provide one Bitcoin a pal we ought to add to this spreadsheet.
Ali offers one Bitcoin to Jake. And due to the fact it is all in one spreadsheet the spreadsheet is aware of that my Bitcoin account has now one Bitcoin and Jake’s Bitcoin account now has one Bitcoin in it as well. Now, fundamentally, this is all Bitcoin sincerely is. It’s simply a large spreadsheet however it is received some different fancy features
that make it truly actually clever, and that make it a doable candidate for the forex of the future. See, the trouble with our ledger gadget is that if it is on a spreadsheet generally it is one character who’s keeping the spreadsheet. So let’s say I’m on vacation with buddies and each person trusts me to do this, to be the spreadsheet guy
because I’m a huge nerd. And therefore, each time they desire to put up a transaction they would say, Hey, Ali, Catherine has given Lucia 10 kilos and consequently I will add it to the spreadsheet. This is first-class due to the fact my buddies believe me and I’m a large nerd, however we do not desire a whole system
of monetary stuff based totally on this centralized mannequin due to the fact it really is sort of what we have already. Like each and every financial institution monetary institution, authorities in the world is some type of centralized authority that handles money. And so the us greenback is tied to the federal reserve and the U S government, the UK pound is tied to the financial institution of England and then it is all rather related
to like the global economic fund. And then like the authorities has some thing to do with it. But truly it is a small team of actors like governments and banks that control the economic device for essentially each and every usa in the world. And so the 0.33 section of our definition of a cryptocurrency is that it needs
to be decentralized and the way that Bitcoin and all these different cryptocurrencies work is that there is no central man or woman in charge of them. There is no one man or woman or one agency saying, Hey, I have acquired the grasp spreadsheet. Instead, what takes place is that each and every single individual in the world can have a replica of that grasp spreadsheet if they want.
And so with Bitcoin, for example, there are tens of millions of human beings round the world on their computer systems who every have a replica of the grasp spreadsheet. And every of these computer systems are walking software program it’s continuously checking to make positive that grasp spreadsheet is legit. And it is the identical as each different copy
of the grasp spreadsheet on the network. And that capacity that if you wanna hack a Bitcoin it is pretty tough to do due to the fact there is like tens of millions of human beings all round the world who are supporting to keep it. And it potential that if you choose to unduly impact stuff like if you are a financial institution or a authorities or some different evil person, it is pretty difficult to do because again, it is decentralized.
It ability that it is being maintained and managed by means of hundreds of thousands of humans all round the world, from their computers. And now we get to the last section of our definition which is that this entire gadget is constructed and secured the use of cryptography. So cryptography is a department of maths and pc science it truly is related whether or not with like code making
and code breaking and cryptography is how all of our communications are encrypted. So for example, when you ship a WhatsApp message there is no way that WhatsApp or Facebook can examine the message due to the fact it is encrypted with the aid of cryptography on both end. And so solely the sender and the recipient can see what the message is.
No one in the center can see what the messages is, it is grow to be encrypted, it is simply like a bunch of numbers that no one can interpret. And the in reality smart component about Bitcoin and these different cryptocurrencies is that they use cryptography to clear up the hassle of have faith and to resolve the trouble of centralization. The trouble of have confidence is that, you know, when I’m
on excursion with my friends, we all have faith every different and we be aware of that no one’s gonna screw everybody over however in actual life, that would not always happen. So your machine desires to be tightly closed adequate so as now not to matter on trusting individuals. And secondly, the trouble of centralization, i.e. it cannot simply be Google proudly owning a Google sheet
that all people receives a replica of due to the fact Google controls it. It can not simply be Amazon, it cannot be the U S government, it can not be the financial institution of England. It wishes to be truely decentralized in a way that anybody continues and manages the system. All right, now it is time for a little simple introduction to the world of cryptography. This is a little bit complicated. If you do not favor to hear it
you can ignore to this timestamp down under and that will take you to the subsequent part however in actuality it cryptography is really, actually cool. And I am simply now form of dabbling in the world of cryptography and attempting to apprehend it. So right here are a few standards and how I’ve sort of defined it to myself in my head.
encryption
Essentially, a cryptography is based totally round the use of one way features known as hash functions. And the concept in the back of there is that you can put any message or some thing thru a hash feature and it will spit out a definitely random mixture of letters and numbers on the different end
in such a way that you can then reverse the function. And so if we had been to take my identify and put it via a hash characteristic known as SHA-256 which is the one that Bitcoin makes use of however explaining it is a bit too hard. We’ll come out with this random string of letters and numbers. And now, if you have been to simply appear at that random string of letters and numbers
there is no way you can reverse the chain to go lower back to what the authentic message was. Now, Bitcoin makes use of these hash features to remedy each these problems. It solves the hassle of have confidence by using the use of digital signatures primarily based around, secret keys and public keys in this factor referred to as “Public Key Cryptography”.
And truly it skill that you as an person can have a secret key, a password that no one else knows, however then you have a public key which is kind of associated to your password which different people do know, however it truly is best due to the fact they can by no means locate out your actual password. And as lengthy as you use your real password
to signal your messages, it is 100%, essentially one hundred percent assured that these messages are legit. So that form of solves the have confidence problem. And we solved the decentralization trouble with the aid of the use of this thought referred to as “Proof of Work” the place all of the one-of-a-kind humans on the network, on the Bitcoin community who are preserving the system,
are known as “Bitcoin Miners” and what these guys attempt and do is they truly strive and remedy a “Hash Puzzle”, which simply requires plenty and plenty and loads of computing strength efficaciously entails guessing a couple of numbers, multiple, more than one times. And this is a type of lottery between absolutely everyone on the network, so that if you are the fortunate person,
who’s plucked the random variety out of skinny air that solves the “Hash Puzzle” then your spreadsheet variety of receives saved and then that saved kingdom is permanent, and then you get rewarded with some Bitcoin for giving up your computing electricity to assist sort of keep the entire thing.
And I’m the usage of a lot of jargon and this is really very tough to smash down in like an convenient way. There are two sources I’d advise and I would endorse these, if you are simply fascinated in getting to know how cryptography works. Firstly, it is a video from one of my favourite YouTube channels, 3Blue1Brown known as “But How Does Bitcoin Work?”,
where he explains the fundamentals of hash features and cryptography and like SHA-256 and this kind of stuff. And secondly, is genuinely an on line route from Brilliant who are very kindly sponsoring this video. Now endure with me here. So Brilliant is an on line platform for publications in math, science and pc science
and their most current direction is all about cryptocurrencies and cryptography. And it is obtained like lots of unique bits in it that in reality assist you apprehend crypto from the floor up. And I’ve been working thru this direction on Brilliant for remaining few weeks, and it is surely helped enhance my very own appreciation of crypto and in fact, when getting ready for this video,
I was once simply like redoing that course, purpose it is simply so good. And it like clearly nails it down from first standards to provide an explanation for how Bitcoin works and the way they do it is they type of create a Bitcoin from the floor up and form of give an explanation for all of the maths in the back of it in a way that is interactive and enticing and fun.
So if this stuff appears fascinating to you, if you prefer to recognize how public key cryptography works secret keys, non-public keys, decentralization, hash functions, Merkel nodes, this type of cool stuff. You have to virtually test out that direction over at Brilliant. If you are one of the first 200 human beings to hit the hyperlink in the video description
or head over to brilliant.org/Ali then you will get 20% of the annual top rate subscription. And alongside with that, you may get get admission to to all the different guides on math, science and laptop science as well. I specially like the route on Python fundamentals and superior Python. Python is the world’s most famous programming language. So it truly is what I’m gonna say about the cryptography part
of like what are cryptocurrencies. Definitely test out the direction on Brilliant, if you favor to examine extra about it let’s now go on to subject matter quantity two. Why is Bitcoin and crypto so controversial? So there may be greatly 4 motives as to why Bitcoin is controversial. Number one, the hypothesis bubble, quantity two,
the environmental impact, quantity three protection problems and range four, the danger of unlawful activity. Firstly, a lot of humans say that Bitcoin is a speculative bubble. The rate of Bitcoin is now not based. People say on any intrinsic price at the back of Bitcoin. It is in truth primarily based on people
like you and me thinking, Oh my God, Bitcoin’s a huge deal. Therefore we purchase it and consequently furnish and demand capability that the rate goes up. People have been announcing this due to the fact like 2011 when the charge of Bitcoin used to be truly nothing in contrast to the like the $50,000 that it is now. And sure there is an extent to which Bitcoin is a speculative bubble.
Investments in Bitcoin
And in fact, when I make investments in Bitcoin I do not sincerely suppose of it as investing, I do in fact, assume of it as playing which I’m gonna speak a little bit extra about later. And human beings would say that, for example, when Elon Musk tweets that he is about to purchase a Bitcoin all at once the charge sores really, really, clearly high
that is no longer the signal of how a market would reply to an underlying cost increase. It is in reality how the market would reply to speculation. Elon Musk is shopping for Bitcoin therefore, each and every one of the world is like, Oh my God Elon Musk is shopping for Bitcoin consequently they purchase Bitcoin, consequently the fee goes up. It’s now not like Bitcoin has basically changed
because of Elon Musk’s tweet. It’s simply that human beings are speculating at it which is why it is this type of speculative bubble. Secondly, Bitcoin is controversial due to the fact of the power consumption and alleged environmental affect of the technology. So due to the fact it is type of decentralized and run via zillions
of computers, zillions of nodes, all round the world humans would say that these nodes use a lot and a lot of power use a lot of computing power, consequently loads of electrical energy in order to clear up the hash puzzles that the total Bitcoin device is primarily based around. Now, the anti Bitcoin human beings would say that this use
of strength is now not very properly due to the fact it is horrific for the surroundings and it is inflicting carbon to go into the atmosphere, et cetera, et cetera simply to keep a system. Whereas the seasoned Bitcoin humans would say, yeah, that is proper however like we want to use strength to preserve any device and the true banking enterprise makes use of a long way extra power than Bitcoin does or will in the close to future.
And they would say that these sorts of Bitcoin mining farms are in international locations like Iceland and Greenland, the place it is very bloodless and the place there may be very like plenty of bloodless air. And consequently the cooling of it will become greater efficient. And they would say that China does a lot of Bitcoin mining and strength is lower priced in China. And then the anti Bitcoin humans would say, yeah, however China nonetheless produces a load
of environmentally terrible stuff due to the fact of their immoderate use of electricity in keeping the Bitcoin network. Ultimately, I do not recognize what the reply is, there are execs and cons. Everything form of makes use of energy. People say Bitcoin is awful due to the fact it makes use of greater strength than it should. I do not know, I’m just, you know, do not shoot the messenger.
That is simply one of the motives as to why humans suppose Bitcoin is a bit controversial. Thirdly, Bitcoin is controversial due to the fact humans are every so often concerned about protection issues. Now, theoretically, the entire machine is kind of decentralized and trustless and like, you know, maintained via these thousands and thousands of nodes all round the world.
In practice, there are these matters referred to as “Crypto Exchanges”, now these are huge groups type of like the London inventory change and the New York inventory exchange. They’re an alternate that connects customers to sellers. And due to the fact a lot of humans who have bills on these exchanges additionally use the change to keep their Bitcoin.
Like the alternate additionally shops Bitcoin for you. Like I have all my Bitcoin and Coinbase. If Coinbase have been to get hacked for some thing motive then I would possibly lose my Bitcoin. And in the previous form of decade there’ve been pretty a few excessive profile hacking instances
where the alternate has been centered and customers have misplaced their crypto. In practice, this is no longer some thing that I am individually especially concerned about. If you are involved about it, you can do a lot and loads of different matters to impenetrable your Bitcoin like use a hardware wallet. There’s masses of YouTube movies explaining that type of backyard the scope of this one.
But safety troubles is cause range three, why Bitcoin is controversial. And purpose variety four, is the truth that Bitcoin is every now and then used as a shape of charge for unlawful activities. Like let’s say you wanna purchase capsules or you wanna purchase awful matters on the darkish net or some thing that means. You can pay in Bitcoin and you can acquire Bitcoin
and theoretically, your Bitcoin username is like a random string of letters and numbers that is no longer without delay tied to you as an individual. And consequently Bitcoin is a way that unscrupulous human beings throughout the web can facilitate repayments except wanting to affirm their identification with anyone.
In fairness, human beings can additionally do unlawful matters with us bucks and each and every different shape of forex in the world. But humans would say like the anti Bitcoin humans would say, Bitcoin is terrible due to the fact it is basically anonymous. And therefore, you in no way recognize who the true character is on the different end, until you sort of have confidence them initially.
And therefore, due to the fact this even greater allows the use of unlawful activities, this is consequently bad. I do not purchase that argument personally. I suggest the net itself can be a properly or awful factor relying on the context in which it is used. I for my part assume Bitcoin may want to be the future and it is extensively a exact thing, however of direction it may want to be a terrible aspect relying on how it is used.
And so that brings us onto area three, having stated all of that about the doable troubles with Bitcoin. Why do I in my opinion make investments in it? And again, let’s destroy this down into 4 parts. Number one is FOMO, variety two, gambling, quantity three, exciting and wide variety four, diversification. So firstly, I’ve acquired to be honest. The principal purpose I make investments in crypto
is due to the fact I have a worry of lacking out. Like I first heard about Bitcoin in 2011 like anybody else did. And then I’m questioning damn, if solely had offered Bitcoin in 2011 I’d be a magnate by using now. And I’d by no means have to work a day in my life. And then for me, like each and every few years I’d hear about Bitcoin and be like, Oh, it’s, you know, Bitcoin’s now $100, however you know
if solely I had invested two years ago, Oh, however I cannot perchance get it now due to the fact it is $100 and it’s way too expensive. If I’d gotten at $100, Bitcoin is now well worth $50,000 consequently I’d make a lot of money. But like, you know, it is the experience of worry of lacking out which is why I in my view do make investments in crypto.
Secondly, crypto feels like a socially suitable structure of gambling. I do not truly reflect onconsideration on it an funding anyway, I reflect onconsideration on it gambling. And I’m no longer a fan of playing normally, however it is like, it is variety of enjoyable to gamble on Bitcoin.
And in fact, in 2017, the remaining time Bitcoin had like a actual heyday, I’d put in about 60,000 kilos of my very own cash into Bitcoin and I was once plus 40K at one point. Like my portfolio was once well worth one hundred grand and I’d solely put in 60 grand. So I’d made 40,000 in the area of a few weeks.
And that was once like a very addictive feeling due to the fact it used to be like inside the house of a few weeks, I’ve made extra cash than I would have made in a total 12 months as working as a doctor. Then I due to this fact misplaced loads of cash in the December, 2017 crash, and I ended up with like bad 35,000 or some thing like that. And so it’s a bit of a cautionary tale
but in the end I do reflect onconsideration on it a shape of playing that I’m joyful to interact in with some quantity of my money. Thirdly, it is simply type of fun. It’s exciting to be a section of the future, it is exciting to preserve up to the information like with the information about Bitcoin, it is exciting to appear at the portfolio from time to time and be like, Oh, are we up? Are we down?
How are matters going? And it is exciting to sense as if yeah, to sense like section of this like revolution. And I in reality do suppose that Bitcoin should be the future of cash and I favor to be a phase of that and that simply feels form of fun. And fourthly, if I do suppose of it as an investment,
it’s like I’ve received some proportion of my portfolio in crypto and that theoretically helps me diversify my portfolio which is in any other case generally in shares and shares. And the way I suppose of it is that like this is now not commonly true, however like assuming crypto is now not correlated with the broader U S inventory market.
that I’m joyful with to be 20% of my portfolios in crypto. The different 80% of my portfolio is in shares and shares. And it really is kind of pretty standard, however 20% crypto, 80% shares and shares and shares. This is likely a bit too high. If I had been speakme to a friend, again, no longer economic recommendation and you are no longer my friend.
So I’m no longer giving you monetary recommendation in basic terms for amusement and informational functions only. But if I have been speakme to a buddy and they had been like, Hey I wanna put some cash in crypto, I’d probable say that 20% is likely a bit high. Like you possibly do not prefer to run the chance of dropping 20% of your cash overnight.