Bitcoin for Beginners (2021)
– All right let’s talk about crypto. Now, you’ve probably heard the word Bitcoin floating around. You might have seen the price has been skyrocketing recently. You might’ve seen that Tesla has bought $1.5 billion worth of Bitcoin and is going to start accepting it as payment. And you might have heard of all these weird things called a Dogecoin which are apparently going to the moon. As such, this video is my personal guide to the world of Bitcoin and cryptocurrencies. It’s the introduction that I wish I would have had when I started investing in crypto about four years ago.
And it’s the video that I want to be able to send to my friends whenever they ask me, hey are you investing in Bitcoin? Why are you investing in Bitcoin? How does it work? Is it safe? Are you going to lose your money? Isn’t it illegal? All of this sort of stuff. So, this video, which is for informational purposes only and should absolutely not be construed as financial advice. In the slightest, we’re going to split it up into four parts. Firstly, I’ll talk about what Bitcoin for beginners, and how cryptocurrencies in general work and why they work and why they’re legit. Secondly, we’ll talk about why Bitcoin and crypto is so controversial and I’ll share my hot takes about that. Thirdly, we’ll talk about, why I personally do invest in Bitcoin and crypto and I will share my portfolio allocation and the reasons behind that. And fourthly, we’ll talk about how you can get started investing in crypto. If that’s the sort of thing you want to do with lots and lots of caveats and cautionary tales along the way.
As always timestamps in the video description, so you can jump around if you feel like it. And if you knew to the channel, hello, nice to meet you. My name is Ali, I’m a doctor based in Cambridge in the UK. And on the channel, we normally explore the tools and strategies that help us live healthier, happier more productive lives. But I have a personal pension for the topic of money, and I think more people should learn about money and investing and finance and how it works and be open about that sort of stuff. So here we are talking about this video. Anyway, let’s get into section number one. All right, so let’s take things back to basics to try and build up our understanding of Bitcoin from the ground up.
Now, Bitcoin is a cryptocurrency. There are hundreds of other cryptocurrencies out there, but Bitcoin is like the original, the OG. And it’s by far the biggest cryptocurrency around, which makes the question, what is a cryptocurrency? So, here’s my definition of a cryptocurrency based on four central concepts. A cryptocurrency is a virtual currency based on a ledger which is decentralized and secured by cryptography. All right, so firstly, Bitcoin is a virtual currency. Now what is a currency? A currency is just a medium of exchange. It’s what replaces the old school bartering system we used to have, when it would be like, I will give you this bushel of wheat in return for the shoe that you have kindly made me because you are a, I don’t know, leather worker. Obviously, that system of bartering is quite inefficient because you have to store a lot of stuff that other people want and that’s just a bit of a pain.
And so, we invented currency in the form of coins usually as a system that everyone recognized to be able to exchange stuff without having the physical goods. So, I could sell my bushel of wheat for two copper coins and then I could save up my copper coins and I could buy your shoes for 10 copper coins, for example. Back in the day currency itself was tied to metals like gold and silver and copper, which had like different values. And so, the actual metal of the coins was worth something because everyone agreed that these metals were somewhat precious but in modern times, most of our currency takes the form of paper notes and paper notes aren’t inherently worth anything because the paper is just worth paper, but currency is worth something because everyone agrees that it’s worth something.
If I take $100 dollars almost anywhere in the world most people, I mean most places in the world will recognize that $100 is worth $100 and I’d be able to buy $100 worth of stuff from it. If hypothetically the whole world were to tomorrow decide that the U S dollar is a meaningless currency and they’re not going to accept it for anything at all. Then the U S dollar would be worthless. So really when it comes to currency it doesn’t mean anything real.
Bitcoin for Beginners (2021)
Currency is kind of just an abstract way that we’ve all agreed to
value things in a certain way. So coming back to Bitcoin,
Bitcoin is virtual currency. It is a digital form of currency, i.e. a digital form of
paying for goods and services and exchanging money over the internet. Way back in 2009 when
Bitcoin was first invented, most people didn’t believe
that it would be a viable form of currency, but
over the last decade plus, as Bitcoin has become
more and more popular, people are starting to say that maybe Bitcoin could be
the currency of the future.
Maybe in the future, maybe a few years, few decades from now,
we’ll be paying for goods and services using
Bitcoin over the internet, rather than by using these old school, old fashioned centralized banking and government institutions
to exchange U S dollars and our actual local currencies. Okay, so that was the currency part of it. We can think of Bitcoin or
crypto as like “Internet Money” or like “Virtual Money”
or “Virtual Currency”. Let’s now talk about the ledger system that holds it all together.
And the thing to understand here is that Bitcoin is effectively
one giant huge spreadsheet. This spreadsheet is called a
ledger and in the spreadsheet we’ve got a record of every
single Bitcoin transaction that has ever happened
since January, 2009, when Bitcoin was, was first invented. And the way that I think of it in my head, it’s like, let’s say
you’re going on holiday with a group of friends
and you don’t wanna kind of keep on splitting the bill and handing over cash because
that’s a total nightmare.
Therefore, someone makes a spreadsheet to keep track of who owes what. And so line one in the
spreadsheet might be Ali owes Sheen 12 pounds, line two might be Jake
owes Molly, 18 pounds. And the idea is that
as our holiday goes on, we would keep on adding stuff to our spreadsheet or a ledger. And at the end of the holiday,
we would all settle up and then actual money
would exchange hands.
Now, assuming you trust
your friends, to be honest this spreadsheet actually
works reasonably well. You can basically treat
this whole spreadsheet as virtual money. I am giving my friend virtual 10 pounds in exchange for them paying for dinner. Other friend is giving
me virtual 20 pounds in exchange for me
paying for the boat ride. Now that’s fine for a group
of a few people on holiday but imagine hypothetically,
if the whole world were to run on a similar spreadsheet, where instead of money ever exchanging
hands like physically it would just be a line
item in the spreadsheet. Now imagine a world in
which everyone trusted the spreadsheet and
everyone was being honest and good and nice and friendly, and only adding legitimate things to the spreadsheet that
everyone agreed on.
That’s basically what Bitcoin is. It’s this giant spreadsheet
that keeps track of absolutely every single transaction that’s ever happened regarding Bitcoin since the start of Bitcoin. And so that means that this spreadsheet has a record of everyone in the world who has ever bought and sold Bitcoin and it tells you how much Bitcoin they’ve bought and sold,
so you can work out how much Bitcoin each
person has in their account. Now let’s say I have two
Bitcoins in my account which is quite a lot of money these days. And I were to give one Bitcoin a friend we could add to this spreadsheet. Ali gives one Bitcoin to Jake. And because it’s all in one spreadsheet the spreadsheet knows
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 really is. It’s just a giant spreadsheet but it’s got some other fancy features that make it really really clever, and that make it a potential candidate for the currency of the future.
See, the problem with our ledger system is that if it’s on a spreadsheet usually it’s one person who’s
maintaining the spreadsheet. So let’s say I’m on holiday with friends and everyone trusts me to do
this, to be the spreadsheet guy because I’m a massive nerd. And therefore, anytime they
want to post a transaction they would say, Hey, Ali, Catherine has given Lucia 10 pounds and therefore I will add
it to the spreadsheet. This is fine because my friends trust me and I’m a massive nerd, but we don’t want a entire system of financial stuff based
on this centralized model because that’s kind of
what we have already. Like every bank financial institution, government in the world is some sort of centralized authority
that handles money. And so the us dollar is tied to the federal reserve
and the U S government, the UK pound is tied
to the bank of England and then it’s all somewhat related to like the international monetary fund.
And then like the government
has something to do with it. But essentially it’s a
small group of actors like governments and banks that
manage the financial system for basically every country in the world. And so the third part of our definition of a cryptocurrency is that it needs to be decentralized and
the way that Bitcoin and all these other cryptocurrencies work is that there is no central
person in charge of them. There is no one person or
one company saying, Hey, I have got the master spreadsheet. Instead, what happens is
that every single person in the world can have a copy of that master spreadsheet if they want. And so with Bitcoin, for example, there are millions of
people around the world on their computers who each have a copy of the master spreadsheet. And each of those computers
are running software that’s constantly checking to make sure that master spreadsheet is legit.
And it’s the same as every other copy of the master spreadsheet on the network. And that means that if
you wanna hack a Bitcoin it’s quite hard to do
because there’s like millions of people all around the world who are helping to maintain it. And it means that if you want
to unduly influence stuff like if you’re a bank or a government or some other evil person,
it’s quite hard to do because again, it’s decentralized. It means that it’s being
maintained and managed by millions of people all around the
world, from their computers. And now we get to the final
part of our definition which is that this whole system is built and secured using cryptography. So cryptography is a branch
of maths and computer science that’s associated whether
with like code making and code breaking and cryptography is how all of our
communications are encrypted.
So for example, when you
send a WhatsApp message there is no way that WhatsApp or Facebook can read the message because it’s encrypted by
cryptography on either end. And so only the sender and the recipient can see what the message is. No one in the middle can
see what the messages is, it’s become encrypted,
it’s just like a bunch of numbers that no one can interpret. And the really clever thing about Bitcoin and these other cryptocurrencies is that they use cryptography
to solve the problem of trust and to solve the
problem of centralization. The problem of trust is
that, you know, when I’m on holiday with my friends,
we all trust each other and we know that no one’s
gonna screw anyone over but in real life, that
doesn’t necessarily happen. So your system needs to be secure enough so as not to rely on trusting individuals. And secondly, the problem
of centralization, i.e. it can’t just be
Google owning a Google sheet that everyone gets a copy of because Google controls it.
It can’t just be Amazon, it
can’t be the U S government, it can’t be the bank of England. It needs to be truly decentralized in a way that everyone maintains
and manages the system. All right, now it’s time for
a little basic introduction to the world of cryptography. This is a little bit complicated. If you don’t want to hear it you can skip to this timestamp down below and that will take you to the next section but essentially it cryptography
is really, really cool. And I am just now kind of dabbling in the world of cryptography
and trying to understand it. So here are a few concepts and
how I’ve kind of explained it to myself in my head. Essentially, a cryptography
is based around the use of one way functions
called hash functions.
And the idea behind there is
that you can put any message or anything through a hash function and it will spit out a
totally random combination of letters and numbers on the other end in such a way that you can
then reverse the function. And so if we were to
take my name and put it through a hash function called SHA-256 which is the one that Bitcoin uses but explaining it is a bit too hard. We’ll come out with this random string of letters and numbers.
And now, if you were to just look at that random string
of letters and numbers there is no way you can
reverse the chain to go back to what the original message was. Now, Bitcoin uses these hash functions to solve both those problems. It solves the problem of trust by using digital signatures based around, secret keys and public keys in this thing called
“Public Key Cryptography”. And essentially it means
that you as an individual can have a secret key, a password that no one else knows, but then you have a public key which is sort of related to your password which other people do
know, but that’s fine because they can never find
out your true password. And as long as you use your true password to sign your messages, it’s 100%, basically 100% guaranteed
that those messages are legit. So that kind of solves the trust problem. And we solved the decentralization problem by using this concept
called “Proof of Work” where all of the different
people on the network, on the Bitcoin network who are maintaining the system, are called “Bitcoin Miners” and what these guys try and do is they essentially try and solve a “Hash Puzzle”, which just requires lots and lots and lots of computing power effectively involves
guessing multiple numbers, multiple, multiple times.
And this is a sort of
lottery between everyone on the network, so that if
you are the lucky person, who’s plucked the random
number out of thin air that solves the “Hash Puzzle” then your spreadsheet kind of gets saved and then that saved state is permanent, and then you get rewarded
with some Bitcoin for giving up your computing power to help kind of maintain the whole thing. And I’m using a lot of jargon and this is actually very hard to break down in like an easy way. There are two sources I’d recommend and I would recommend these,
if you are actually interested in learning how cryptography works.
Firstly, it’s a video from one of my favorite YouTube
channels, 3Blue1Brown called “But How Does Bitcoin Work?”, where he explains the basics of hash functions and cryptography and like SHA-256 and this sort of stuff. And secondly, is actually an online course from Brilliant who are very
kindly sponsoring this video. Now bear with me here. So Brilliant is an online
platform for courses in math, science and computer science and their most recent course is all about cryptocurrencies
And it’s got like tons
of different bits in it that really help you understand
crypto from the ground up. And I’ve been working through this course on Brilliant for last few weeks, and it’s really helped
improve my own understanding of crypto and in fact, when
preparing for this video, I was just like redoing that course, cause it’s just so good. And it like really nails it down from first principles to
explain how Bitcoin works and the way they do it is
they sort of create a Bitcoin from the ground up and kind of explain all of the maths behind it in a way that’s interactive and engaging and fun. So if this stuff seems interesting to you, if you want to understand how
public key cryptography works secret keys, private
keys, decentralization, hash functions, Merkel nodes,
this sort of cool stuff. You should definitely check out that course over at Brilliant. If you’re one of the first 200 people to hit the link in the video description or head over to brilliant.org/Ali then you will get 20% of the
annual premium subscription.
And along with that, you’ll get access to all the other courses on math, science and computer science as well. I particularly like the
course on Python fundamentals and advanced Python. Python is the world’s most
popular programming language. So that’s what I’m gonna say
about the cryptography part of like what are cryptocurrencies. Definitely check out
the course on Brilliant, if you want to learn more about it let’s now move on to topic number two. Why is Bitcoin and
crypto so controversial? So there’s broadly four reasons as to why Bitcoin is controversial. Number one, the speculation
bubble, number two, the environmental impact,
number three security issues and number four, the
threat of illegal activity. Firstly, a lot of people say that Bitcoin is a speculative bubble. The price of Bitcoin is not based.
People say on any intrinsic
value behind Bitcoin. It is in fact based on people like you and me thinking, Oh
my God, Bitcoin’s a big deal. Therefore we buy it and therefore supply and demand means that the price goes up. People have been saying
this since like 2011 when the price of Bitcoin was
absolutely nothing compared to the like the $50,000 that it is now.
And yes there is an
extent to which Bitcoin is a speculative bubble. And in fact, when I invest in Bitcoin I don’t really think of it as investing, I do in fact, think of it as gambling which I’m gonna talk a
little bit more about later. And people would say that, for example, when Elon Musk tweets that
he’s about to buy a Bitcoin suddenly the price sores
really, really, really high that is not the sign of
how a market would respond to an underlying value increase.
It is in fact how the market
would respond to speculation. Elon Musk is buying Bitcoin therefore, every one of the world is like, Oh my God Elon Musk is buying Bitcoin therefore they buy Bitcoin, therefore the price goes up. It’s not like Bitcoin
has fundamentally changed because of Elon Musk’s tweet. It’s just that people
are speculating at it which is why it’s this
sort of speculative bubble. Secondly, Bitcoin is controversial because of the energy consumption and alleged environmental
impact of the technology.
So because it is kind of
decentralized and run by zillions of computers, zillions of
nodes, all around the world people would say that those
nodes use lots and lots of energy use lots of
computing power, therefore lots of electricity in order
to solve the hash puzzles that the whole Bitcoin
system is based around. Now, the anti Bitcoin people
would say that this use of energy is not very
good because it’s bad for the environment
and it’s causing carbon to go into the atmosphere,
et cetera, et cetera just to maintain a system. Whereas the pro Bitcoin people would say, yeah, that’s true but like we need to use energy to maintain any system and the actual banking
industry uses far more energy than Bitcoin does or
will in the near future.
And they would say that these kinds of Bitcoin mining farms are in countries like Iceland and Greenland,
where it’s very cold and where there’s very
like lots of cold air. And therefore the cooling of
it becomes more efficient. And they would say that China does a lot of Bitcoin mining and
energy is cheap in China. And then the anti
Bitcoin people would say, yeah, but China still produces a load of environmentally bad stuff
because of their excessive use of energy in maintaining
the Bitcoin network. Ultimately, I don’t
know what the answer is, there are pros and cons.
Everything kind of uses energy. People say Bitcoin is bad because it uses more
energy than it should. I don’t know, I’m just, you
know, don’t shoot the messenger. That is just one of the reasons as to why people think Bitcoin
is a bit controversial. Thirdly, Bitcoin is controversial because people are sometimes worried about security issues. Now, theoretically, the whole system is sort of decentralized
and trustless and like, you know, maintained by these millions of nodes all around the world. In practice, there are these things called “Crypto Exchanges”, now
these are big companies sort of like the London stock exchange and the New York stock exchange. They’re an exchange that
connects buyers to sellers. And because a lot of
people who have accounts on these exchanges also use the exchange to store their Bitcoin.
Like the exchange also
stores Bitcoin for you. Like I have all my Bitcoin and Coinbase. If Coinbase were to get
hacked for whatever reason then I might lose my Bitcoin. And in the past kind of decade there’ve been quite a few
high profile hacking instances where the exchange has been targeted and users have lost their crypto. In practice, this is not something that I am personally
particularly worried about. If you’re worried about
it, you can do lots and lots of other things
to secure your Bitcoin like use a hardware wallet. There’s loads of YouTube
videos explaining that kind of outside the scope of this one. But security issues is
reason number three, why Bitcoin is controversial. And reason number four,
is the fact that Bitcoin is sometimes used as a form of payment for illegal activities. Like let’s say you wanna buy drugs or you wanna buy bad
things on the dark web or whatever that means. You can pay in Bitcoin and
you can receive Bitcoin and theoretically, your Bitcoin username is like a random string
of letters and numbers that is not directly tied
to you as an individual.
And therefore Bitcoin is a
way that unscrupulous people across the internet
can facilitate payments without needing to verify
their identity with anyone. In fairness, people can
also do illegal things with us dollars and every other form of currency in the world. But people would say like the
anti Bitcoin people would say, Bitcoin is bad because it’s
fundamentally anonymous. And therefore, you never
know who the actual person is on the other end, unless you
kind of trust them initially. And therefore, because
this even more facilitates the use of illegal activities,
this is therefore bad. I don’t buy that argument personally. I mean the internet itself
can be a good or bad thing depending on the context
in which it’s used. I personally think Bitcoin
could be the future and it is broadly a good thing, but of course it could
be a bad thing depending on how it’s used.
And so that brings us onto section three, having said all of that about the potential issues with Bitcoin. Why do I personally invest in it? And again, let’s break
this down into four parts. Number one is FOMO, number two, gambling, number three, fun and number
four, diversification. So firstly, I’ve got to be honest. The primary reason I invest in crypto is because I have a fear of missing out. Like I first heard about Bitcoin in 2011 like everyone else did. And then I’m thinking damn, if only had bought Bitcoin in 2011 I’d be a multi-millionaire by now. And I’d never have to
work a day in my life. And then for me, like every few years I’d hear about Bitcoin and
be like, Oh, it’s, you know, Bitcoin’s now $100, but you know if only I had invested two years ago, Oh, but I can’t possibly get it now because it’s $100 and
that’s way too expensive.
If I’d gotten at $100,
Bitcoin is now worth $50,000 therefore I’d make a lot of money. But like, you know, it’s the
sense of fear of missing out which is why I personally
do invest in crypto. Secondly, crypto feels like
a socially acceptable form of gambling. I don’t really consider it an investment anyway, I consider it gambling. And I’m not a fan of gambling
normally, but it’s like, it’s kind of fun to gamble on Bitcoin. And in fact, in 2017,
the last time Bitcoin had like a real heyday, I’d
put in about 60,000 pounds of my own money into Bitcoin and I was plus 40K at one point. Like my portfolio was worth 100 grand and I’d only put in 60 grand. So I’d made 40,000 in
the space of a few weeks. And that was like a very addictive feeling because it was like within
the space of a few weeks, I’ve made more money
than I would have made in a whole year as working as a doctor.
Then I subsequently lost lots of money in the December, 2017 crash, and I ended up with like negative 35,000 or something like that. And so that’s a bit of a cautionary tale but ultimately I do consider it a form of gambling that I’m happy to engage in with some amount of my money. Thirdly, it’s just kind of fun. It’s fun to be a part of the future, it’s fun to keep up to the news like with the news about Bitcoin, it’s fun to look at the
portfolio occasionally and be like, Oh, are we up? Are we down? How are things going? And it’s fun to feel as if yeah, to feel like part of this like revolution. And I genuinely do think that
Bitcoin could be the future of money and I want to be a part of that and that just feels kind of fun.
And fourthly, if I do think
of it as an investment, it’s like I’ve got some percentage
of my portfolio in crypto and that theoretically helps
me diversify my portfolio which is otherwise mostly
in stocks and shares. And the way I think of it is that like this is not generally true,
but like assuming crypto is not correlated with the
broader U S stock market. It means that if I invest in crypto, if I gamble my money on
crypto, cryptocurrencies, it means that I hedge (chuckles) kind of the risk of
stock market going down and losing money in that kind of way.
Not really legit because
I do consider it gambling and just like a bit of fun but I’m throwing that in there
to make this a list of four. So what is my strategy for investing slash gambling in crypto? Well, these days I have about 20% of my overall investment portfolio in crypto in a combination
of Bitcoin and Ethereum. Mostly Ethereum because
I actually bought loads of Ethereum like four years
ago and just held onto it.
So I think my allocation is
about 80% Ethereum, 20% Bitcoin. 20% of my overall portfolio in crypto is quite a high number. Someone like Graham
Stephan, who is far more pro at personal finance than I am,
and also has far more money than I do has like one to 2%
of his portfolio in crypto as he talks about on his YouTube channel. I have 20% of mine in crypto and that’s quite a high allocation. Like the main thing with crypto is that you only want to put in money that you can 100% afford to lose because it’s quite a high
risk speculative investment. I don’t think of it as an investment. I think of it as gambling. So it’s like I’m gambling with 20% of my overall
investment portfolio. That for me is a number
that I’m happy with. Like, I am happy with, like
if tomorrow I lost that 20%. I wouldn’t care in the slightest. I like to think it wouldn’t affect my mental wellbeing at all.
And I know this because when
I lost 35,000 pounds in 2017, which at the time was like
half my net worth (chuckles) it didn’t affect me at all. So I’ve kind of been through
that losing large amounts of money and realizing,
okay, this is not too bad. Therefore I’ve sort of put
my arbitrary risk profile that I’m happy with to be 20%
of my portfolios in crypto. The other 80% of my portfolio
is in stocks and shares. And that’s sort of fairly
standard, but 20% crypto, 80% stocks and stocks and shares. This is probably a bit too high. If I were talking to a friend, again, not financial advice
and you’re not my friend. So I’m not giving you
financial advice purely for entertainment and
informational purposes only. But if I were talking to a
friend and they were like, Hey I wanna put some money in crypto, I’d probably say that 20%
is probably a bit high.
Like you probably don’t
want to run the risk of losing 20% of your money overnight. If Bitcoin goes to zero, you might want it to start with maybe 2% or 3% or 5%. You know, something that
you’re a little bit more comfortable with than a 20%. So if you do want to get started, firstly, you wanna understand
the underlying technology. So do that because over
at Brilliant, you know who are sponsoring this video, that cryptography course
that helps you understand the underlying technology and helps you understand why this works and why I personally think it’s legit.
Secondly, there are two things you need you need a wallet to
store your cryptocurrency and you need an exchange where you can buy and sell cryptocurrencies. Now most big exchanges will
also let you store currency on the platform. So I use Coinbase for everything. Please don’t try and
hack my Coinbase account but I use Coinbase for everything. And so I have my Bitcoin and Ethereum stored in Coinbase itself. And I also use Coinbase as
the exchange to buy and sell. Coinbase is one of the
biggest ones in the world. There are a few others,
you can always Google like best crypto exchange USA or best crypto exchange Pakistan
or best crypto exchange UK. I personally use Coinbase
it’s available in the UK. It’s very nice and easy,
no affiliation with them no affiliate links or anything like that. But Coinbase, if you’re
watching this reach out if you want to sponsor a video (mumbles). In practice, you do wanna
secure your account. So obviously on my Coinbase account I have two factor authentication enabled. And if you really care about
security, you can invest in something like a
physical wallets (chuckles), which is like a hardware wallet that stores your Bitcoin offline, again, beyond the scope of this video, to explain how that works.
But that is like a much more secure way of storing your Bitcoin
rather than having it stored on the internet in an
exchange like Coinbase. So that was my beginner’s
introduction to crypto. This has been a far longer video
than I thought it would be. If you’re serious about investing I recommend you don’t start with crypto. I recommend instead you start with stocks and shares and that video over there is my half an hour long introduction to how to invest in stocks
and shares for beginners.
I still have 80% plus of my portfolio in stocks and shares and
only 20% of it in crypto that’s a really high number. For most friends, if I was talking to and not giving financial advice, I would recommend 95% stocks
and shares and like 5% crypto. So definitely check that video out. Thanks for watching. Hope you found it useful and
I’ll see you in the next video. Bye-bye..