What Is Cryptocurrency Trading and How Does It Work?

 

Introduction

Bitcoin, blockchain, Dogecoin, Ethereum, NFTs – everyone is talking about cryptocurrencies right now. But good lord, what does all of it mean? So welcome to the one video that will take you from crypto noob to cryptogenius. I'm going to tell you what it is, why it keeps becoming more important, what I've actually invested in myself, and the dark side of it.

Bartering – The Early Days

When society was in its early stages, there was no such thing as money. We'll call this stage one. The only way to buy something off someone was to go up to them and be like, "Oh, I really like your horse. I'll trade you my cat for it." Sorry, Milo, I'd never trade you. But the issue with a system like that is that even though you might be perfectly happy to give up your horse, you just might not want a cat. So that trade will never happen.

The Introduction of Coins

But that's where currency came in. Stage two: coins, which because they were made of precious materials like gold and silver, everyone just accepted that they were worth something. You've heard of the British pound, right? Well, the reason they're called pounds is because one pound literally just used to be one pound of silver. And so all of a sudden, in a trade, it doesn't matter if you don't want my cat. As long as I have coins, we can still trade for your horse. Even if you have no use at all for the silver, because it's a precious material, you have that reassurance that you can take that coin, give it to someone else, and trade for something that you do want. Convenient, right?

Paper Money and Trust

But then this evolved to stage three. As banks became established and governments had control, we realized that as long as there was trust in the system, we could move away from needing to carry blocks of precious metal towards something even more convenient: paper money. It does the same thing, but now the money doesn't have value because it's made of pure silver. It just has value because the government says it has value. Like this £10 note here in the UK. The note itself is just made of… well, it's actually made of plastic. They changed it recently because it's more durable. But if you look closely, you can see that all this actually is is the Bank of England promising that they will pay the bearer of this note £10. Really, this is just a receipt, a kind of proof that you own a certain amount of money.

Digital Transactions

But as technologies improved even further, we found even more convenient ways of storing and trading our stuff. We're now in what I would call stage four, where more people than ever are buying things online and using credit cards. And really, when you're at that stage, we don't see our money anymore. It's not about coins or notes or cats. It's just entries on a spreadsheet. Like when I buy a music album from Amazon, all that's happening is that my bank adds an entry in my spreadsheet that says, "Aaron now has ten dollars less," and then Amazon's bank adds an entry that says they have ten dollars more.

The Era of Cryptocurrencies

So the reason I've given you this entire intro is to give you context on where cryptocurrency sits. It's seen by many people as the most convenient era of exchange ever: stage five. The way to think about a cryptocurrency is that it's 100% virtual. I know the logo for Bitcoin kind of looks like a physical coin. It really is a "bit" coin now. But with crypto, there is no gold, there is no silver, there is no paper. It really is just the transfer of digital assets. The core concept is exactly the same. Think of them as literally just running spreadsheets of who's paid what to who. But instead of multiple banks keeping their own separate records, with crypto, there is just one enormous spreadsheet of every transaction made using that currency. And this is called a ledger.

The Mechanics of Cryptocurrency

Okay, we all love a good spreadsheet. But what's all the fuss about? Why is everyone going crypto crazy? Well, there are some distinct advantages to a currency system like this. One: it's decentralized, which means that while every transaction of a given cryptocurrency is all recorded on the same ledger, there are many, many copies of that ledger, and anyone who is a part of the network has one. You might have heard of cryptocurrency mining or Bitcoin mining. Well, all that is is someone who set up a computer to crunch through transactions on their copy of this ledger or spreadsheet. There are already about a million Bitcoin miners around the world. And Bitcoin is just one type of cryptocurrency. The reason they're doing it? Well, if you dedicate your computer's power to mining, say, Bitcoin, then you will earn some Bitcoin as compensation.

The Security of Decentralized Systems

So the result of this is that if I go into a store and spend five Bitcoins on something, then instead of just checking with one bank's records, the shop instead checks with every single computer on this network if I have enough. And assuming I do, each computer will give the go-ahead, and then every single one will update their records independently. So because you end up having this many copies of exactly the same ledger, it becomes very easy to tell if anyone's trying anything fishy. Did you… who bought this? Like, if I try to hack into someone's computer that's on the network and give myself more money by adjusting figures on their copy of the ledger, it's not going to get through. The system will realize that 99.9% of the copies on the ledger are saying one thing, but one of them is saying something else, so it must have been tampered with.

The Accessibility of Cryptocurrency

There's very clear organization to the system. And I think people believe in it because they see the future as open, traceable transactions – much more so than having like some bits of the record over here and other bits over there. And I know it seems complex at this point, but as we go through this, I think you'll realize that for a lot of people, in a way, it's simpler. There are plenty of areas in the world that have internet access, which is all you'd need for crypto, but don't have access to traditional banks, which require a lot of paperwork and documentation.

Advantages of Crypto

Well, two, and I've kind of implied this already, but the main perk of crypto is that you don't need banks anymore. Because everything is stored by the people on this ledger, you can make international payments almost instantly instead of it taking half a day, with no spending limits. Plus, you don't need to worry about exchange rates, you don't need to worry about interest rates, and even transaction fees are close to zero for some cryptocurrencies, that is. But this is where the real fun begins.