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What is Cryptocurrency and How Does it Work #finance #finance #financetips
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00:00Hey there! You've probably heard about cryptocurrency before.
00:04If you haven't, you might know names like Bitcoin, Ethereum, Solana, or Dogecoin.
00:10Yep, those are cryptocurrencies. A lot of people buy them as investments,
00:15hoping their value will go up. Some also use them as a form of money to buy and sell things.
00:21You might have seen how the price of cryptocurrency started really low and then shot up.
00:26Some people made a lot of money, but others lost money too.
00:30That's why some people are still unsure or even afraid of cryptocurrencies.
00:34So, you might be wondering, what exactly is cryptocurrency?
00:39How does it work? And what do terms like blockchain and mining mean?
00:44In this video, we'll break down everything you need to know about cryptocurrency and how it works.
00:50Section 1. What is a cryptocurrency?
00:53The word cryptocurrency comes from the words crypto and currency.
00:57Crypto means hidden or secret, referring to cryptography, a way to hide information to keep it safe.
01:06Currency just means money.
01:08So, cryptocurrency is digital money that is secured by cryptography and exchanged through a computer network.
01:15Because it's digital, cryptocurrency has no physical form.
01:19You might have seen pictures of Bitcoin and thought this is what cryptocurrency looks like, but it's not.
01:26Cryptocurrency has no physical form as it's all online.
01:30You can send it, receive it, and use it to buy things, just like regular money.
01:35Now, you might ask, what's the difference between cryptocurrency and the money in my digital wallet, like U.S. dollars or euros in my mobile banking app?
01:46Well, traditional currencies like the U.S. dollar and euro are controlled by central banks.
01:53To send those currencies, you need a bank or payment service.
01:58But with cryptocurrency, you can send money directly to your friend without needing a middleman like a bank.
02:04But wait, why doesn't cryptocurrency need a bank?
02:08Here's a bit of history.
02:09Cryptocurrency's modern story began with Bitcoin, which was created in 2009 by an anonymous person known as Satoshi Nakamoto.
02:19He seems Japanese, and you will see this Japanese guy face that most people assuming is him because his name and background seems true, but actually nobody knows who he is.
02:30Unlike traditional currencies like U.S. dollar and euro that are printed and controlled by central banks or governments,
02:36cryptocurrency was created to be free from control.
02:40Some people didn't like the idea of governments controlling money,
02:44so they made cryptocurrency as a way for people to exchange money directly with each other without needing a bank or any central authority.
02:51So, cryptocurrency is actually money and not investment like stock?
02:57Well, yes, cryptocurrency was actually made to be used as money, like the U.S. dollar, for buying, selling, sending, and receiving money.
03:08Over time, however, cryptocurrency became more like an investment.
03:12In some countries, like El Salvador, people still use cryptocurrency to buy things in everyday life,
03:18but most people use it to try to grow their money.
03:21For example, you might buy Bitcoin when it's worth $10,000 and sell it when it's worth $60,000 to make a profit.
03:30Most people don't want to use cryptocurrency as currency due to its volatility,
03:34like buying a coffee for 0.001 Bitcoin today,
03:39but tomorrow, you might need to pay 0.002 Bitcoin for the same coffee because of its fast price changes,
03:47making it unpredictable.
03:48This made most people still prefer to use traditional currency as money and cryptocurrency as investment.
03:56Cryptocurrency started with Bitcoin,
03:58but now there are many other coins like Ethereum, Tether, and even meme coins.
04:03So, that's a simple definition and a bit of history about cryptocurrency.
04:08Let's move on to the next section.
04:11Section 2.
04:12How does a cryptocurrency work?
04:14Cryptocurrency works using a technology called blockchain.
04:19So, what is a blockchain?
04:21Imagine Bob has a notebook where every transaction is written down.
04:26Once a transaction is written, it's locked in and can't be erased or changed.
04:31Now, not only Bob has the notebook, but everyone in this blockchain network has a copy,
04:36so no one can cheat or mess with it.
04:39If Bob hacks and changes the notebook, it will be obvious as it's different from others' notebook,
04:45and that notebook will be invalid.
04:47Each page in the notebook is a block in blockchain,
04:50and when one block is full, a new one is added to the chain.
04:54That's why it's called blockchain, which is a chain of blocks.
04:57So, how does cryptocurrency use blockchain technology?
05:02When a new transaction is made,
05:04the transaction details are sent to a network of computers around the world
05:08that are using the blockchain.
05:11These computers then check if the transaction is valid
05:14by solving a very hard puzzle or equation.
05:16Once they solve the puzzle and confirm that the transaction is correct,
05:21the information is added to several blocks.
05:24These blocks are linked together,
05:26making the data permanent and unchangeable.
05:29Once that's done, the transaction is successful.
05:33In regular transactions, like sending U.S. dollars or euros,
05:36a bank validates and processes the transaction.
05:40But with cryptocurrency,
05:41it's these computers around the world that validate it
05:44by solving hard puzzles and equations.
05:47Now, you might wonder,
05:48who are these computers solving the puzzles?
05:51Well, people who solve puzzles and validate the transaction are called miners.
05:57Why they do that?
05:58When they solve the puzzles or equations,
06:01the cryptocurrency system rewards them with new coins.
06:05This is called mining,
06:06and based from the system called proof of work.
06:09That's why you may have heard about bitcoin miners using powerful computers,
06:13because they want to solve as many puzzles as they can.
06:16The more puzzles they solve,
06:18the more cryptocurrency they earn.
06:21Not all cryptocurrencies are mined this way.
06:24Some, like Ethereum now,
06:26use a different method called proof of stake,
06:29which I will explain in another video.
06:32Section 3.
06:33Cryptocurrency as an Investment
06:35Now, here's the juiciest part.
06:38Is cryptocurrency a good investment?
06:41Well, the answer depends.
06:43Some people have made a lot of money by buying crypto when the price was low
06:47and selling it when the price went up.
06:50For example,
06:51if you bought bitcoin in 2016 when it was around $500 per coin
06:55and sold it in 2024 when it hit $60,000,
06:59you would have made a 13,000% return.
07:04That kind of return sounds like a dream to many professional investors.
07:08But, like any investment,
07:10big return also means big risk.
07:14Cryptocurrency is very volatile,
07:16meaning its price can go up and down very quickly.
07:19For example,
07:21if you bought bitcoin at $45,000 in May 2022,
07:25then saw it drop to $16,000 by December 2022,
07:29if you sold it,
07:31you would have lost 65% of your money.
07:34Then it rose again to $70,000 in 2024.
07:38This doesn't just happen with bitcoin.
07:41It happens with most cryptocurrencies
07:42because their prices are so unstable.
07:46So, you might ask,
07:47Why is cryptocurrency so volatile?
07:50Crypto volatility comes from several factors,
07:53including supply and demand,
07:55market sentiment,
07:56regulation changes,
07:58technological development,
07:59market manipulation,
08:01and even more.
08:02However,
08:03the biggest drivers are speculation and media hype.
08:07Many investors buy cryptocurrencies
08:09hoping to make quick profits.
08:11They often chase trends and popular narratives
08:13without fully understanding the asset.
08:15For example,
08:17when the media announced
08:18that ProShares released the first bitcoin ETF,
08:22and the price of bitcoin soared to $65,000
08:25as excitement grew among investors.
08:28However,
08:29if investors start to doubt a cryptocurrency's future,
08:32they may panic and sell off their holdings,
08:35leading to sharp price drops.
08:37For instance,
08:39when China announced a ban on cryptocurrency,
08:41the price of bitcoin dropped to $29,000
08:44as uncertainty about its future spread.
08:48And that's why cryptocurrency market is hard to predict.
08:52Section 4.
08:53Another terms in cryptocurrency.
08:56We have talked about blockchain and mining.
08:59Now, let's go over some other common terms
09:01that you may see a lot in cryptocurrency.
09:02First is bitcoin.
09:05Bitcoin is the first and most well-known cryptocurrency.
09:09It's often called digital gold
09:11because it was the original
09:12and is still the most valuable.
09:15Bitcoin's supply is limited,
09:17which can make it more valuable over time.
09:20Second is altcoin.
09:22An altcoin, short for alternative coin,
09:26refers to any cryptocurrency that's not bitcoin.
09:29Examples include ethereum, solana, and more.
09:33There's also a type of altcoin called meme coins,
09:36like dogecoin or shiba inu.
09:39So altcoins are all cryptocurrencies other than bitcoin.
09:43Third is a wallet.
09:45A cryptocurrency wallet is different
09:47from a regular wallet that holds your cash.
09:50A crypto wallet doesn't actually store your cryptocurrency.
09:54Why?
09:55Because cryptocurrency is always on the blockchain.
09:57What a crypto wallet does
10:00is store your public and private keys.
10:03There are two types of wallets,
10:05hot wallets and cold wallets.
10:08Hot wallets store keys online,
10:10making them easily accessible,
10:13but they are also more vulnerable to hacking.
10:16On the other hand,
10:17cold wallets store keys offline,
10:20like on a hard drive.
10:21This type is safer but less convenient.
10:23Also, if you lose your hard drive,
10:26you could lose your crypto too.
10:29For example,
10:30a guy named James Howells
10:31had his ex accidentally throw away his hard drive
10:35that contained private key to 8,000 bitcoins.
10:38He's still trying to find it in the landfill to this day.
10:42What a poor guy.
10:44Fourth is keys.
10:45As I mentioned before,
10:47a cryptocurrency wallet contains two types of keys,
10:50the private key and the public key.
10:53The public key is like your wallet's address.
10:56People can use it to send you cryptocurrency.
10:58While the private key is more like a password,
11:01it proves that you own the cryptocurrency in your wallet.
11:05You can share your public key to anyone,
11:08but you must keep your private key secret.
11:11Fifth is fork.
11:13A fork happens when a cryptocurrency splits into two versions.
11:18This happens when the community disagrees
11:20on how the cryptocurrency should be run or improved.
11:23For example,
11:25Bitcoin forked to create Bitcoin Cash
11:28because some wanted to make transactions faster
11:31by increasing the Bitcoin's block size,
11:34while others disagreed.
11:36Those who agreed with the changes moved to Bitcoin Cash,
11:39while those who preferred the original approach
11:41stayed with Bitcoin.
11:44Section 5.
11:45Pros and Cons of Cryptocurrency
11:47Of course, as you know,
11:50cryptocurrency has its pros and cons.
11:52Let's talk about the advantages of cryptocurrency.
11:56The first advantage is decentralization.
11:59This means no single authority,
12:01like a central bank,
12:02can control cryptocurrency.
12:04Unlike traditional currency,
12:06the government can't control
12:07or set the value of cryptocurrency.
12:11The second advantage is accessibility.
12:14Cryptocurrencies can give financial access
12:16to people without a bank.
12:18If you need to go to the bank
12:20to register your account,
12:21wait a long line,
12:22and do lots of paperwork,
12:24cryptocurrency make it much simpler.
12:27Anyone with an internet connection
12:28can participate
12:29without any complicated application process.
12:33The third advantage
12:34is that cryptocurrency is flexible.
12:36You can send money to anyone,
12:38anywhere,
12:39anytime.
12:40Crypto operates 24-7
12:42without any breaks.
12:43You can transfer money quickly
12:45across the world
12:46without needing a bank
12:47and with much lower fees.
12:49The fourth advantage is privacy.
12:51Most cryptocurrencies offer more privacy
12:54than traditional banks
12:55because your transaction data
12:57is encrypted and harder to trace.
12:59However,
13:00this data is still stored
13:01on a public blockchain,
13:03meaning it's not completely secret
13:05as some believe.
13:06Others,
13:07especially governments and IRS,
13:09can still track your transactions
13:11if they investigate deeply enough,
13:13although it's more difficult.
13:15While extra privacy is good,
13:17it can also cause problems,
13:19which we'll discuss soon.
13:20The fifth advantage is,
13:22of course,
13:22the potential for high returns.
13:24Many people invest in crypto
13:26for the chance of making big profits.
13:28Coins like Bitcoin and Ethereum
13:30have increased in value
13:32by hundreds of percent per year.
13:34Imagine buying Dogecoin
13:36and getting a 600% return
13:37in just three months.
13:39Not even Warren Buffett can beat that.
13:42But of course,
13:42this isn't all good,
13:43because now we'll move on
13:45to the next part,
13:46which is
13:46the disadvantages of cryptocurrency.
13:48The first and biggest disadvantage
13:51is volatility,
13:52as crypto prices
13:53can swing wildly.
13:55If you think stocks
13:56are like a roller coaster,
13:58then crypto is like that
13:59but much more intense.
14:01For example,
14:02Dogecoin shot up in value
14:04and then dropped
14:05just as quickly
14:05in just one year.
14:07So you could be rich
14:08and poor in the same year.
14:10The second disadvantage
14:11is illegal transaction.
14:13As I mentioned earlier,
14:14cryptocurrency offers
14:15a lot of privacy,
14:17but this same privacy
14:18makes it a hotspot
14:19for criminals
14:20who want to do
14:20illegal transactions
14:21or launder their money.
14:23Because cryptocurrency transactions
14:25are harder to trace,
14:27criminals use crypto
14:28to move money
14:29and avoid detection
14:30by authorities.
14:31The third disadvantage
14:32is regulation uncertainty.
14:35Since governments
14:36can't control cryptocurrency,
14:38the government
14:38are not so happy with that,
14:40and they will not just
14:41stand silent about that.
14:43The government
14:44are still trying
14:45to figure out
14:45how to regulate cryptocurrency.
14:47This could change
14:48how crypto is used
14:49in the future.
14:50In fact,
14:51cryptocurrency regulation
14:53has become a hot topic
14:54in the 2024
14:55U.S. presidential election.
14:58The fourth disadvantage
14:59is scams.
15:01One of the schemes is
15:02the scammer
15:03will show you
15:03a fake crypto website.
15:05Then they lure you
15:06to buy and invest
15:07in that cryptocurrency
15:08with fake promise return.
15:11In the end,
15:12you can't withdraw
15:13your money,
15:14leaving you stuck.
15:16The other scheme
15:16is scammer might ask
15:18you transfer some coins
15:19like the classic scam scheme.
15:21Once you transferred
15:22any cryptocurrency
15:23to the scammer,
15:24the crypto can't be reversed.
15:26Why?
15:27We will talk about it
15:28in the next section.
15:30The fifth disadvantage
15:31is lack of consumer protection.
15:34As I mentioned before,
15:35cryptocurrency isn't managed
15:37by any one person
15:38or institution.
15:40This can be a good thing,
15:41but it also means
15:42that when something
15:43goes wrong,
15:44there's no one to help.
15:46If you have a problem
15:47with a normal USD transaction,
15:49the bank can help you
15:50get your money back.
15:52But,
15:53as no one can control
15:54cryptocurrency,
15:55so once you transferred
15:56your cryptocurrency
15:57to other,
15:58the transaction
15:59is irreversible.
16:00So,
16:02in conclusion,
16:03cryptocurrency offers
16:04exciting opportunities
16:06for those willing
16:06to learn about its potential.
16:09And then your next question,
16:10should you use cryptocurrency?
16:12The answer depends on you.
16:15Remember,
16:16don't rely solely
16:17on this video
16:18to decide.
16:19If you want to use
16:20cryptocurrency,
16:21it's important
16:22to do your research first.
16:23And don't fall into FOMO
16:25by jumping in
16:26without knowing
16:26what you're doing.
16:27It's important
16:28to understand
16:29the risks
16:30before diving in.
16:32If you want me
16:32to make other videos
16:33explaining these topics,
16:35please like and subscribe.
16:37Thanks for watching.