Value of Bitcoins - Blockchain Tutorial

- All right, let's talk about decentralized currency. With Bitcoins and other decentralized markets, there's no central governing body, no central government, no central bank. That means it's completely peer-to-peer network. That's a good thing for Bitcoins, because that's what people value in Bitcoins quite a bit. There is a public ledger in Bitcoins. That means anyone can go to a public ledger and look up any transaction. So, anytime you spend money from a wallet address, from a Bitcoin address, anytime you receive money, that's all public that anyone can look at. So, all transactions are verified through mining. We're going to talk about mining throughout this course a little later, but that's how we make sure that transactions are valid. There's no things like double spending or other things going on. Miners are essentially trying to solve a proof of work, which is the power behind Bitcoin that we're going to talk about. But all transactions are verified from mining and once they're verified, they go on a public ledger. Now, miners, because they're doing extra work, they're basically making the network continue and grow and function by using their computing power to solve mathematical problems, they're rewarded. Each block that they mine, they have the reward on that block and they get that reward. That's how new Bitcoins are created, or new cryptocurrencies, created on decentralized currencies. Now, there have been attacks against Bitcoins, but most of the attacks against Bitcoins are not against the Bitcoin protocol. What that means is we know the math behind Bitcoins is pretty solid. We know that the concept behind Bitcoins is pretty solid. Now, it's had a lot of years to mature. It's had some very smart people behind that. But we feel pretty confident that the protocol itself is very solid. Most of the attacks that you see against Bitcoins are against exchanges, against web wallets, against mobile applications. So, the applications may be social engineering where someone's tricking you into sending the money, something like that. But the protocol itself had successful attacks, at least nothing recently. Now, that's not true for all cryptocurrencies that are out there. Bitcoins have definitely stood the test of time, especially when it comes to cybersecurity. Now, as we already discussed, and we'll discuss plenty of times more, is that the value of Bitcoins is basically determined by the free market. Why people put value on something is because they think it's worth a certain amount. Now, Bitcoin has this idea or this concept of being an anonymous currency. I want you to take that a little bit out of your head. There are basically anonymous features in Bitcoins, but if you want to be truly anonymous, you're going to use cash. The reason Bitcoin is not anonymous is we call it pseudo-anonymous, because I've already said it has a public ledger. Every transaction is recorded on that public ledger. So, although you may not have your name, you may not have an email address, you may not have any identifiable information on that public ledger, there is still things that are recorded on that public ledger, including a wallet address. A lot of times when criminals actually get caught using Bitcoins, it's because they're using a wallet address and that wallet address is tied to their own personal identity through an email address or through an exchange where they've actually given their identity to actually change out for currency or some other method as well. So, because of that, we call Bitcoin's pseudo-anonymous not anonymous. Transactions, like I said, from any Bitcoin address can be tracked. That's public and it's completely transparent. In fact, Bitcoin was designed to be completely transparent where all transactions can be queried. So many places actually require you to, and this is from their own policies, but many places, many government agencies, and entities actually require you to have your own identity verified when you are joining a Bitcoin exchange. So, if I join one of the popular exchanges, I purchase Bitcoins, or I want to change Bitcoins to what we call fiat money or regular currency, traditional currency, US dollar for Bitcoins, I'll need to register on an exchange. And part of that registration process is basically verifying my identity. A lot of US banks, a lot of banks in other international countries have what they call know your customer laws or know your customer processes, where basically they verify your identity, your tax number, your national ID number, such as social security number. Once that's tied to an exchange, that means money that you transfer into them, into that exchange, even if it's Bitcoins, can be potentially tied into your real identity. Because of that, when that happens, absolutely your Bitcoins are traceable to your real identity and that can be used to tie you together, from governments, from tax purposes, from criminals, from other identities as well. Basically, it's not anonymous. You can get it very close to being anonymous, but you have to take a lot of precautions. So, how are Bitcoins used, especially how are they used today? Well, today, you can use Bitcoins for a variety of different things and with multiple retailers. You can actually buy gift cards from some of these retailers, that e-Gifter or Gyft. You can buy gift cards pretty much for anything you can think of and you can purchase them with Bitcoins as value. You can buy travel, so you can buy airline tickets, you can buy hotels, car rentals, anything with travel, from multiple sites, including Expedia, which is a very, very popular site in worldwide. But some other sites as well. Some other popular retailers include like Microsoft, where you can go to the Xbox store and actually use Bitcoins as well and other cryptocurrencies to buy movies, games online, subscriptions, other things as well. Department stores like overstock.com, maybe you want to, which is essentially like an Amazon, you can buy things off there. A lot of good things for furniture. My office furniture at home, I'm usually, I actually bought from overstock.com. Did not buy it using Bitcoins, but bought it just using cash. But I could have used Bitcoins if I wanted to. In the US, we have the DISH network. You can pay your cable bill using Bitcoins, as well as other cryptocurrencies as well. Other popular retailers include like the Dallas Mavericks, the best NBA basketball team. If you couldn't tell, I'm from Dallas, Texas, and the Mavericks are my team, so I could purchase season tickets using Bitcoins as well as other cryptocurrencies. Plastic surgery, you can do. The Central Texas Gun Works is known to take Bitcoins and other cryptocurrencies. Now, I do want to make it clear that this doesn't mean they're bypassing any laws or not taking the proper background checks, just like you would buy a legal firearm with a credit card or cash, you can buy it through Bitcoins as well. The exact same type of background checks and same requirements exist. You can buy things like Rolex and other luxury goods. The Golden Gate Hotel in Las Vegas, you can pretty much do a lot of transactions, almost to all transactions through Bitcoins except casino gambling. There's probably a Nevada law or a gaming licensing law where you can't do that. But things such as paying for your hotel room, food at the restaurant, things you buy at the gift store, you can all do that through cryptocurrency. You can buy real estate through cryptocurrency as well and all that through realtors that take that, as well as other places as well. And we've already talked about Overstock, where you can buy a lot of different things for them. Now, most people that use cryptocurrency will use it as an investment vehicle. That means that they're not really looking to buy cryptocurrency to buy and trade things. They're actually looking at it to add to their portfolio. They're looking at the value of Bitcoins and hoping to add to the value of their portfolio and maybe stabilize or diversify their portfolio. So many investors will buy things like gold and besides stocks, they'll buy bonds, gold, other types of real estate. Crypto can be used as an investment in the exact same way. Now, very few people today are using it as currency compared to how many people are using it as a investment vehicle. And that's good too. I think for Bitcoin to really take over, you kind of need to use it as both. You need to use it as a currency as well as an investment vehicle. But there is value and some background, some proof that just holding onto Bitcoins will actually increase the value of it as well. So, when we talk about it as an investment, where do you actually keep your Bitcoins? Well, you have to have a Bitcoin wallet. A Bitcoin wallet actually allows you to store your Bitcoins. A Bitcoin wallet can be like on a mobile device, which is the most popular type of ways to keeping Bitcoins. You can do it online for a web wallet. You can do it on an offline wallet or hardware wallets as well. Eventually, when you put things on a wallet and you change things around, it doesn't need to sync up to the Bitcoin network. It does need to basically sync up to that public ledger as well. So, we know where the ownership belongs to. So, that means even if you have an offline wallet, at one point, you may need to bring it online for any updates. So, wallets actually contain what we call a mathematical key, which is a private key. This is like your password for your wallet. Once you have this password, it doesn't really matter what wallet you use, as long as you're using a wallet that syncs directly to the Bitcoin blockchain, you can change wallets, you can do something else with a... You can change providers. But you own your Bitcoins as long as you own your private key. Now, if you don't own your private keys, you don't own your Bitcoins. A lot of web wallets, popular web exchanges that you go online, you don't have a private key, which means you don't own your Bitcoins. And that's really important to people to remember, because when most people start off buying Bitcoins or cryptocurrency, they will go to an online, popular online exchange, and they'll buy things from there, but they never get their private key. Now, a lot of these large exchanges, they're really popular, they're backed up, they're large corporations, so probably pretty safe, but at the same time, you don't own your money. You're actually having someone be a custodian of your money. Essentially, you're using these online exchanges as a bank. That's one of the main reasons people were trying to get away using Bitcoins is because they were trying to get away from centralized authority and centralized banks. So, you have to be careful and you have to understand what the risks are on each side. There have been a lot of exchanges, some very famous exchanges that have just gone out of business or not had their wallets or have lost their own personal private keys, which means their customers don't have access to their Bitcoins anymore, which is a problem. If you own your private key, you always own your Bitcoins no matter what. So, most of the time, your private key is protected by a username or password, maybe username and PIN, but you have to have your private keys. Some wallets do offer things like two-factor authentication or multi-factor authentication, which is a good thing as well. Now, some popular web wallets, like I said, allow you to send and receive Bitcoins through web browsers. You remember in most web wallets, you do not control your private keys, which means you do not own your Bitcoins. That means the web provider owns the Bitcoins or the cryptocurrency. They basically are your wallets or your exchange. They're your bank at that point. Many times, like I said, those web wallets, those web exchanges are acting as clearing houses or banks. Sometimes they even have extra precautions like, they'll let you store currency like US currency or other types of currency besides cryptocurrency in that web wallet. Sometimes that currency, if it's traditional currency like US currency, it may be even backed up or insured like FDIC, Federal Reserve Insurance, to make sure that if it is lost, you basically have insurance from the government saying that they'll back up that. That's usually on just the traditional money part, not on the cryptocurrency part. So, if they do offer insurances, make sure you understand what they're actually offering insurances on. Now, I like to do a strategy of, me personally, I'll use web wallets, my own personal desktop and mobile wallets, as well as offline wallets as well. So, I use a strategy of all three. Really quick transactions, maybe web wallets. More long-term investments, my offline hardware wallets that are what I would call Kohl storage, because I don't have 'em online, I only bring 'em online when I need to make a change on them. And then, my semi-permanent storage, my warm storage as I would say, on my desktop apps. So, desktop and mobile wallets, like I said, you control the private key and data, which is really important. At least you want to make sure you're picking a desktop and mobile wallet where you do control the private key and data. If you lose that private key, you're out of luck. Your cryptocurrency is gone. You can't probably get it back. You may not be able to get it back. There are a lot of stories of people losing a lot of cryptocurrency or maybe in the early days, they were mining cryptocurrency, not really worth anything, but they mine a significant amount of it or had a significant amount of it. They lost their web wallet and basically, or a significant amount of money. We've heard of stories where people are searching garbage sites and dumps and things like that to try and get their USB keys back or hard drives back and trying to recover some of their money. It becomes very, very difficult. But if you own your private key, it doesn't really matter if you've lost your hard drive or not, as long as you have your private key and it was a full node wallet, if it has syncing capabilities directly to the Bitcoin blockchain, you can always recover your money and your assets back. You don't actually need that application. So, a full node wallet is basically a wallet that will sync directly to the Bitcoin blockchain. That means it's directly to the blockchain protocols. It's not relying on the manufacturer or the creator of the application. So, light wallets are the opposite. Light wallets are essentially they're syncing to the application provider, and then the application provider is acting as a man in the middle and syncing directly to the blockchain OS or blockchain protocols. Now, the reason an application provider may want to do this and the reason why some people would like to have light wallets is because it's usually much, much faster. It's usually just a quick transaction, because syncing to the blockchain itself is a little more timely. Your process requires a little more computing power. These days, I wouldn't recommend anyone actually looking at a light wallet. If you're going to do any type of wallet, make sure you have your private key and make sure it's a full node wallet to sync directly to the blockchain. Most wallets are, I would say, these days.