WEBVTT - Bonus: The Crypto Story by Matt Levine - Part 5 0:00:03.640 --> 0:00:06.720 This is Bloomberg Crypto, a daily Bloomberg I Heard podcast, 0:00:07.120 --> 0:00:10.119 and I'm Stacy Marie Ishmael, Managing editor of Crypto for 0:00:10.160 --> 0:00:28.440 Bloomberg News. Let me cut to the chase. Matt Levine, 0:00:28.520 --> 0:00:30.560 my colleague on the Bloomberg Opinion side of the house, 0:00:31.160 --> 0:00:34.959 is perhaps the greatest finance blogger ever to do it, 0:00:35.560 --> 0:00:37.640 and in what is both a flex and a service, 0:00:37.960 --> 0:00:40.920 He's just written tens of thousands of words on the 0:00:40.960 --> 0:00:44.640 subject of crypto for a special issue of Bloomberg Business Week. 0:00:45.840 --> 0:00:49.200 Matt's gone deep into the blockchain to break down its origins, 0:00:49.400 --> 0:00:52.640 it's possible, futures, and the current state of a technology 0:00:52.680 --> 0:00:55.960 that's showing up everywhere in industries ranging from finance to 0:00:56.040 --> 0:00:59.600 shipping too, of course video games. And we're going to 0:00:59.680 --> 0:01:03.320 be bringing his exploration to you in audio form thanks 0:01:03.360 --> 0:01:06.120 to the talents of Bloomberg editor and professional voice actor 0:01:06.319 --> 0:01:10.080 Mark Ledoff. You'll get weekly chapters of the special Crypto 0:01:10.120 --> 0:01:13.279 issue of Bloomberg Business Week. Welcome to the fifth chapter 0:01:13.480 --> 0:01:15.800 of the special audio edition of the Bloomberg Business Week 0:01:15.800 --> 0:01:19.480 Crypto issue, written by Matt Levine and narrated by Mark Ledoff. 0:01:20.040 --> 0:01:22.760 Mr Chapter needs to catch up you can find previous 0:01:22.800 --> 0:01:40.720 episodes right here in the Bloomberg Crypto Podcast feed Part three. 0:01:41.280 --> 0:01:45.280 The crypto financial system. Let's step back a bit and 0:01:45.360 --> 0:01:49.800 abstract from what we've discussed so far. Crypto is one 0:01:50.440 --> 0:01:53.400 a set of tokens which are worth fluctuating amounts of money. 0:01:53.920 --> 0:01:56.640 We can say that these tokens are financial assets, like 0:01:56.760 --> 0:02:00.200 stocks and bonds. Two. A novel set of way is 0:02:00.240 --> 0:02:03.080 to create new tokens and distribute them and try to 0:02:03.120 --> 0:02:07.320 make them worth money. Three a novel way of holding 0:02:07.480 --> 0:02:10.920 financial assets. Instead of the databases that people use to 0:02:10.960 --> 0:02:13.720 hold stocks and bonds, you can own your own crypto 0:02:13.840 --> 0:02:18.359 on the blockchain. Four A novel way to write contracts 0:02:18.360 --> 0:02:23.400 and computer programs computer programs that are contracts and contracts 0:02:23.480 --> 0:02:27.840 that are computer programs. If you read only that description, 0:02:27.880 --> 0:02:31.160 you might object, Yes, fine, but what is crypto for? 0:02:31.960 --> 0:02:35.320 What do these tokens do? Why are they worth money? 0:02:35.639 --> 0:02:39.200 Nothing in that description answers those objections. I suppose the 0:02:39.280 --> 0:02:42.480 last one does in a sense. Crypto tokens are for 0:02:42.520 --> 0:02:46.520 building smart contracts, for trading crypto tokens. But it's not 0:02:46.560 --> 0:02:51.160 a very good answer because it's entirely self referential. Yes, fine, 0:02:51.280 --> 0:02:53.560 but why are you trading the tokens in the first place, 0:02:54.720 --> 0:02:58.360 and you might have another complaint. Classically, a financial asset 0:02:58.480 --> 0:03:01.200 means a contractual claim on the cash flows of some 0:03:01.320 --> 0:03:04.720 person or entity. A share of stock represents a claim 0:03:04.760 --> 0:03:07.440 on the profits of a company. A bond represents a 0:03:07.440 --> 0:03:11.040 claim on repayment from a company or government, etcetera. My 0:03:11.160 --> 0:03:15.600 financial asset represents a liability or equity issuance of somebody else. 0:03:16.120 --> 0:03:19.160 Each financial asset has both an owner and an obliger. 0:03:19.560 --> 0:03:22.079 Some crypto, I would argue, looks a lot like that. 0:03:22.600 --> 0:03:26.040 It's an equity claim on the value of some cryptoe business. 0:03:26.680 --> 0:03:29.639 But a lot of crypto is consciously not like that. 0:03:30.440 --> 0:03:35.000 Bitcoin is digital gold. It's specifically not a financial asset. 0:03:35.360 --> 0:03:38.320 Owning a bitcoin doesn't represent a claim on anyone else. 0:03:38.840 --> 0:03:41.960 A bitcoin exists as an independent thing that you can own, 0:03:42.520 --> 0:03:46.320 not a contractual relationship between parties, like stock or a bond. 0:03:46.960 --> 0:03:50.360 In the text, I use financial asset in the extremely 0:03:50.400 --> 0:03:53.440 loose sense of like a thing with a fluctuating price 0:03:53.520 --> 0:03:55.640 that you can see on your computer screen, and that 0:03:55.720 --> 0:04:01.120 hedge funds can trade. But cryptocurrencies aren't technically financial assets, 0:04:01.800 --> 0:04:05.040 or not always anyway, But for now I want to 0:04:05.080 --> 0:04:08.120 set such objections to the side. If you're a certain 0:04:08.160 --> 0:04:12.200 sort of financial person, a financial engineer, an arbitragere, a 0:04:12.280 --> 0:04:16.680 market structure enthusiast, a builder of high frequency trading systems, 0:04:16.720 --> 0:04:21.560 this abstract set of facts is incredibly, incredibly beautiful. You 0:04:21.600 --> 0:04:24.000 wake up one day and there's just a whole other 0:04:24.080 --> 0:04:28.159 financial system. It's full of smart people building interesting things, 0:04:28.360 --> 0:04:31.800 and it's full of idiots making terrible mistakes. People have 0:04:31.880 --> 0:04:34.599 built brilliant new ways to make financial bets that you 0:04:34.640 --> 0:04:37.480 can use, and they've built insane new ways to make 0:04:37.520 --> 0:04:40.719 financial bets that you can exploit. How can you not 0:04:40.920 --> 0:04:45.080 want to join in? It's so interesting, so intellectually appealing, 0:04:45.440 --> 0:04:48.280 such a blank canvas for all of your aesthetic views 0:04:48.320 --> 0:04:52.360 about how markets should work. Also, so many idiots are 0:04:52.360 --> 0:04:56.680 getting rich. Why shouldn't you? There are other appealing properties 0:04:56.720 --> 0:05:00.720 when you compare this system to traditional finance. The cryptosystem 0:05:00.839 --> 0:05:05.240 is philosophically one of permissionless innovation. The workings of the 0:05:05.240 --> 0:05:08.599 major blockchains are public and open source. If you want 0:05:08.640 --> 0:05:12.000 to build a derivatives exchange, or margin lending protocol or 0:05:12.040 --> 0:05:15.400 whatever in ethereum, you just do it. You don't need 0:05:15.440 --> 0:05:17.760 to set up a meeting with vitallic Bouteran to get 0:05:17.760 --> 0:05:21.120 his approval. You don't need to negotiate access and fees 0:05:21.160 --> 0:05:25.159 with the Ethereum Corp. There is no Ethereum Corp. Anyone 0:05:25.360 --> 0:05:28.880 can try anything and see if it works. If you're 0:05:28.920 --> 0:05:33.039 a smart young person coming from traditional finance, this feels liberating. 0:05:33.680 --> 0:05:36.640 If you're used to spending months negotiating credit agreements with 0:05:36.720 --> 0:05:39.760 prime brokers and setting up direct access to trade on 0:05:39.760 --> 0:05:42.640 a stock exchange, the idea that you can just do 0:05:42.880 --> 0:05:47.760 stuff in crypto with no preliminaries is amazing. Obviously, it's 0:05:47.760 --> 0:05:50.800 a bit alarming as well. Some of those long, slow 0:05:50.920 --> 0:05:54.800 processes in traditional finance are there to prevent money laundering 0:05:54.960 --> 0:05:59.479 or fraud or ill considered risk taking, but empirically a 0:05:59.520 --> 0:06:02.279 lot of them aren't really preventing any of those things, 0:06:02.360 --> 0:06:05.200 and aren't doing so in an optimal way. A lot 0:06:05.240 --> 0:06:08.719 of them are just how it's always been done. Nothing 0:06:08.839 --> 0:06:12.440 in crypto is how it's always been done. It's all 0:06:12.520 --> 0:06:17.479 too new, and so people invented a financial system for crypto. 0:06:17.680 --> 0:06:21.040 It runs alongside the traditional financial system, though they touch 0:06:21.120 --> 0:06:23.960 at many points. In some ways, it looks a lot 0:06:24.040 --> 0:06:27.239 like a copy of the traditional financial system. In other ways, 0:06:27.279 --> 0:06:30.920 it looks totally different. In some ways, it's a streamlined 0:06:30.960 --> 0:06:35.000 and modernized and innovative evolution of the traditional system. In 0:06:35.000 --> 0:06:38.320 other ways, it's a chaotic and stupid devolution of the 0:06:38.320 --> 0:06:42.280 traditional system, a version of traditional finance traad FI, as 0:06:42.320 --> 0:06:46.440 crypto people call it, that unlearned important historic lessons about 0:06:46.440 --> 0:06:50.560 fraud and leverage and risk and regulation. It's so fun. 0:06:51.080 --> 0:06:58.440 Let's talk about it. A your keys, your coins, your 0:06:58.520 --> 0:07:04.640 hard drive in a garbage one holding crypto. Maybe the 0:07:04.640 --> 0:07:07.599 first thing to say about the crypto financial system is 0:07:07.640 --> 0:07:11.840 that the traditional financial system is deeply intermediated, and the 0:07:11.920 --> 0:07:15.320 crypto system is not. If you have money, your bank 0:07:15.360 --> 0:07:18.120 tracks your money for you. If you have stock, your 0:07:18.200 --> 0:07:22.360 broker tracks your stock for you, et cetera. One dumb, 0:07:22.440 --> 0:07:25.240 simple thing that this means, if you have money in 0:07:25.240 --> 0:07:27.240 the bank, your bank has to give it to you. 0:07:27.880 --> 0:07:30.080 If you forget the pin code for your A T 0:07:30.280 --> 0:07:33.240 M card, or if you forget the password for your 0:07:33.280 --> 0:07:36.400 online banking, you'll have a hard time taking out money, 0:07:36.760 --> 0:07:39.840 and that will be inconvenient for you. But the bank 0:07:39.920 --> 0:07:42.600 owes you the money. They can't just be like, ah ha, 0:07:42.840 --> 0:07:46.720 got you the money. Is ours. Now there's some process 0:07:46.760 --> 0:07:48.679 by which you can go into the bank and prove 0:07:48.760 --> 0:07:51.680 that you are who you say you are, and they're like, fine, 0:07:51.760 --> 0:07:54.520 will reset your password. It's test one, two, three, four, 0:07:54.640 --> 0:07:58.960 don't forget this time. Crypto doesn't necessarily work like that. 0:07:59.560 --> 0:08:03.240 Owning bitcoin means one having a public bitcoin address with 0:08:03.320 --> 0:08:06.960 some bitcoin in it, and to possessing the private key 0:08:07.000 --> 0:08:10.160 to that address. If you have the public address private 0:08:10.240 --> 0:08:13.520 key pair, then you own the bitcoin. You can transfer 0:08:13.560 --> 0:08:16.240 them to someone else on the blockchain. If you don't 0:08:16.240 --> 0:08:19.240 have that pair, then you can't. If you lose your 0:08:19.280 --> 0:08:22.360 private key or lose track of your public address, there's 0:08:22.400 --> 0:08:24.840 no one to recover your password for you or give 0:08:24.880 --> 0:08:29.360 you back your bitcoin. They're just gone. There are ways to, 0:08:30.000 --> 0:08:35.000 you know, not lose your keys. Mainly, people use software wallets, 0:08:35.240 --> 0:08:38.079 which generate and keep track of their addresses and private 0:08:38.160 --> 0:08:40.920 keys and allow them to sign transactions and send and 0:08:41.000 --> 0:08:45.679 receive crypto online. The wallets maybe desktop or phone apps, 0:08:45.960 --> 0:08:49.640 or extensions on a browser. Most modern wallets require you 0:08:49.679 --> 0:08:52.400 to keep track not of private keys, but rather a 0:08:52.480 --> 0:08:57.839 seed phase of typically twelve random looking words maybe army, 0:08:57.880 --> 0:09:01.560 truth speak, average and so on. The phrase can be 0:09:01.679 --> 0:09:04.160 used as a seed to generate lots of public private 0:09:04.240 --> 0:09:07.120 key pairs, so the wallet can create lots of different 0:09:07.160 --> 0:09:10.440 addresses that can all be recovered from a single seed phrase. 0:09:11.240 --> 0:09:14.800 People often speak of wallets holding crypto, but really what 0:09:14.880 --> 0:09:18.160 they have are these keys for various addresses. The crypto 0:09:18.320 --> 0:09:21.480 is only ever on the blockchain. Then you write the 0:09:21.520 --> 0:09:23.800 seed phrase down on a piece of paper, which is 0:09:23.840 --> 0:09:27.240 easier to write than a long random number. But this 0:09:27.320 --> 0:09:30.320 is a developing technology, and there's a long history of 0:09:30.360 --> 0:09:33.960 people losing forgetting or throwing away their private keys or 0:09:34.040 --> 0:09:38.760 seed phrases. A guy in Wales named James Howell's periodically 0:09:38.800 --> 0:09:41.200 pops up in the news because he threw away a 0:09:41.240 --> 0:09:44.240 hard drive with the private key for eight thousand bitcoin. 0:09:45.000 --> 0:09:47.480 He's pretty sure he knows the garbage dump that has 0:09:47.520 --> 0:09:50.240 his hard drive, and for years he's been waging a 0:09:50.280 --> 0:09:53.520 campaign to dig up the dump and sift through the garbage. 0:09:53.920 --> 0:09:56.320 If he finds the hard drive, and if it still works, 0:09:56.480 --> 0:09:58.760 then he'll have bitcoin worth about a hundred and fifty 0:09:58.760 --> 0:10:01.400 million dollars which he can use to pay all the 0:10:01.440 --> 0:10:04.960 garbage diggers. In one sense, it would be much much 0:10:05.000 --> 0:10:07.320 better to have a financial system in which the bank 0:10:07.360 --> 0:10:10.040 could reset his password and give him back the eight 0:10:10.040 --> 0:10:14.040 thousand bitcoin instead of digging up a garbage dump. In 0:10:14.040 --> 0:10:18.560 another sense, this is an extremely funny financial system, and 0:10:18.600 --> 0:10:25.280 there's a charm to that two not holding crypto. If 0:10:25.320 --> 0:10:28.760 you're a portfolio manager at an institutional investor and you 0:10:28.800 --> 0:10:30.920 want to buy a bitcoin, and you go to your 0:10:30.960 --> 0:10:33.760 compliance and operations people and say, I want to buy 0:10:33.760 --> 0:10:36.280 a bitcoin, and I will write our private keys down 0:10:36.280 --> 0:10:38.360 on a post it that I will keep next to 0:10:38.400 --> 0:10:42.360 my computer, they will say no. If you propose better 0:10:42.360 --> 0:10:45.960 security measures, they might still say no, this stuff is 0:10:46.000 --> 0:10:50.120 too new, too scary. If you say, Mega Bank Custody 0:10:50.160 --> 0:10:52.840 Services will hold our bitcoin for us, and we'll just 0:10:52.920 --> 0:10:55.640 have a book entry on their ledger saying we have bitcoin, 0:10:56.320 --> 0:10:59.200 then compliance might be a bit more comfortable. But that 0:10:59.280 --> 0:11:03.079 requires a bank to offer that service. But what if 0:11:03.080 --> 0:11:05.560 you go to your compliance and say, I'm just going 0:11:05.600 --> 0:11:07.840 to enter into a bet with a hedge fund on 0:11:07.880 --> 0:11:11.320 the price of bitcoin. For every dollar the bitcoin goes up, 0:11:11.520 --> 0:11:14.320 the hedge fund will pay us five dollars. For every 0:11:14.320 --> 0:11:17.400 dollar that it goes down, we'll pay them five dollars. 0:11:18.200 --> 0:11:21.680 Then you don't have to own crypto at all all 0:11:21.760 --> 0:11:24.200 you have is an over the counter derivative with a 0:11:24.240 --> 0:11:28.760 hedge fund. Compliance knows what that is. That's an understandable thing. 0:11:29.280 --> 0:11:32.520 There are no weird custody issues there because there's nothing 0:11:32.559 --> 0:11:36.080 to keep custody of. There are no weird coins to 0:11:36.120 --> 0:11:39.040 worry about, just a contract with a hedge fund to 0:11:39.080 --> 0:11:42.280 pay you money. You can write contracts on the price 0:11:42.320 --> 0:11:46.160 of corn, on interest rates, and on hurricane damage. So 0:11:46.200 --> 0:11:50.280 why not bitcoin. You do due diligence on the hedge fund, 0:11:50.600 --> 0:11:53.600 You get comfortable with the credit and collateral terms, and 0:11:53.600 --> 0:11:57.760 then you sign the contract and then economically you own 0:11:57.880 --> 0:12:01.480 some bitcoin. Your investment is up when bitcoin goes up 0:12:01.640 --> 0:12:04.840 and down when bitcoin goes down, without the worries of 0:12:05.000 --> 0:12:09.760 really owning bitcoin, no keys to lose. And so in 0:12:09.840 --> 0:12:14.400 traditional finance there's a big business offering those instruments. CME 0:12:14.559 --> 0:12:18.320 Group Inc. Offers Bitcoin futures, which are basically the bet 0:12:18.360 --> 0:12:21.280 that I outlined above. You pay me five dollars for 0:12:21.320 --> 0:12:23.840 every dollar the bitcoin goes up, and I pay you 0:12:24.000 --> 0:12:28.120 five dollars for every dollar it goes down. It's a trusted, centralized, 0:12:28.160 --> 0:12:33.120 traditional finance way to bet on the price movements of bitcoin. Still, 0:12:33.400 --> 0:12:36.360 not everyone can buy futures, which require a lot of 0:12:36.400 --> 0:12:40.080 money and aren't offered by some retail brokerages. In the 0:12:40.200 --> 0:12:43.400 US financial system, pretty much the easiest thing to invest 0:12:43.440 --> 0:12:47.320 in is stocks, so wrapping bitcoin in a stock would 0:12:47.400 --> 0:12:50.800 increase its appeal. The easiest way to do this would 0:12:50.800 --> 0:12:54.280 be a cash bitcoin exchange traded fund, a pot of 0:12:54.320 --> 0:12:56.839 money that trades like a stock on a stock exchange 0:12:57.080 --> 0:13:00.800 and invests the money in bitcoin. People keep trying to 0:13:00.840 --> 0:13:04.280 do this, but the US Securities and Exchange Commission remained 0:13:04.320 --> 0:13:09.160 skeptical and hasn't approved cash bitcoin ETFs, though they exist 0:13:09.240 --> 0:13:13.320 in some other countries. The US has however, approved bitcoin 0:13:13.559 --> 0:13:16.880 futures e t f s, which invest in bitcoin through 0:13:17.000 --> 0:13:22.040 futures contracts. Two layers of abstraction. A bitcoin wrapped in 0:13:22.080 --> 0:13:25.480 a futures contract, wrapped in a stock, and delivered to 0:13:25.559 --> 0:13:36.640 your brokerage account b C five one fiat on ramps. Okay, 0:13:37.160 --> 0:13:39.079 I said, one way to own a bitcoin is to 0:13:39.120 --> 0:13:41.760 write your private key on a post it note. But 0:13:41.880 --> 0:13:45.200 where did you get that bitcoin? In the early days 0:13:45.240 --> 0:13:48.520 of bitcoin, a reasonably plausible answer would be I mind it. 0:13:49.320 --> 0:13:52.640 Every bitcoin ever created has come from mining, and early 0:13:52.720 --> 0:13:57.440 bitcoin was in part a hobbyist mining operation. In modern crypto, 0:13:57.559 --> 0:13:59.640 you're not going to get very far just by mining 0:13:59.679 --> 0:14:02.800 crypt to on your home computer. The main way people 0:14:02.880 --> 0:14:04.920 in most of the world get into crypto is that 0:14:05.040 --> 0:14:09.160 they exchange dollars or euros, pounds, you on, etcetera. What 0:14:09.320 --> 0:14:13.400 crypto people call fiat for crypto and how they do 0:14:13.559 --> 0:14:17.199 that is a tricky question. One simple way is for 0:14:17.320 --> 0:14:20.040 you to find someone with crypto and say, hey, can 0:14:20.120 --> 0:14:23.080 I buy some of your crypto? They say sure, and 0:14:23.160 --> 0:14:26.600 you arrange a deal. In researching this article, I set 0:14:26.680 --> 0:14:29.400 up an ethereum wallet and texted a friend to ask 0:14:29.480 --> 0:14:32.600 if he had any Ether I could buy. He replied sure, 0:14:32.800 --> 0:14:35.320 and I said send me twenty dollars worth and gave 0:14:35.400 --> 0:14:38.600 him my public address. He sent me twenty dollars of ether, 0:14:39.000 --> 0:14:41.520 and then he texted me to say done. Then mom 0:14:41.680 --> 0:14:45.160 me twenty dollars. I did, and our transaction was complete. 0:14:45.680 --> 0:14:48.000 He sent me the ether before I sent him the dollars, 0:14:48.320 --> 0:14:50.840 so he took some credit risk, and in fact I 0:14:51.000 --> 0:14:53.000 was away from my phone when he sent it, so 0:14:53.160 --> 0:14:56.000 he ended up taking my credit risk for several hours. 0:14:56.880 --> 0:14:59.600 When I did get his text, I briefly considered that 0:14:59.600 --> 0:15:01.760 it would be very funny if as part of my 0:15:01.880 --> 0:15:05.000 research for this article, I stole twenty dollars of either 0:15:05.120 --> 0:15:09.160 from him, but that seemed mean. Just so you know, 0:15:09.720 --> 0:15:13.960 Bloomberg's Code of Journalistic Ethics forbids journalists who write about crypto, 0:15:14.120 --> 0:15:17.400 including me, from owning more than a nominal amount of 0:15:17.480 --> 0:15:22.720 crypto for research purposes. This rule itself is arguably biasing. 0:15:23.280 --> 0:15:27.920 It forbids crypto enthusiasts from writing about crypto, but never mind. 0:15:28.840 --> 0:15:31.440 In researching this article, I bought twenty dollars of ether 0:15:31.640 --> 0:15:34.200 from a friend by Venmo and a hundred dollars of 0:15:34.280 --> 0:15:37.600 ether from coin Base. This also led to coin Base 0:15:37.680 --> 0:15:40.480 giving me like five dollars of free bitcoin as a 0:15:40.520 --> 0:15:44.240 new account bonus. In seeking permission to do this, I 0:15:44.400 --> 0:15:47.400 told my boss is that one I planned to lose 0:15:47.520 --> 0:15:51.120 all my money, but two, if I accidentally made any profit, 0:15:51.360 --> 0:15:55.040 I would donate it. I did spend like eight dollars 0:15:55.120 --> 0:15:58.160 of ether on the Matthew Levine dot et h domain. 0:15:59.600 --> 0:16:02.080 I'm not coin to lie. This was fun to do 0:16:02.320 --> 0:16:05.120 and fun to write about. It felt sillier and more 0:16:05.200 --> 0:16:09.440 exciting than my automatic monthly Vanguard investments, but it's not 0:16:09.560 --> 0:16:12.760 a good way to run a financial system. Incidentally, the 0:16:12.840 --> 0:16:15.240 day after I did that trade, I met with the 0:16:15.320 --> 0:16:19.120 team behind a decentralized finance protocol and was like, well, 0:16:19.400 --> 0:16:22.280 how would you quickly turn dollars into ether in New York? 0:16:22.840 --> 0:16:25.320 And they had no great answers and we're like, we're 0:16:25.360 --> 0:16:28.480 working on it, and I was like, well, I texted 0:16:28.480 --> 0:16:30.640 a friend for ether and then then mode him the money, 0:16:31.040 --> 0:16:33.840 and they were like, yeah, that's probably what we would do. 0:16:35.040 --> 0:16:37.440 In general, if you get a text asking you to 0:16:37.560 --> 0:16:40.120 send crypto to a string of letters and numbers, you 0:16:40.160 --> 0:16:44.560 should throw your phone into the ocean instead. The main 0:16:44.680 --> 0:16:48.240 way that normal people by crypto is through crypto exchanges, 0:16:48.760 --> 0:16:54.240 specifically centralized crypto exchanges. Crypto exchanges are companies coin based. 0:16:54.320 --> 0:16:58.040 Gemini Finance, f t X, Kraken and bitfin X are 0:16:58.120 --> 0:17:02.200 some big ones that accept regular money for crypto. You 0:17:02.320 --> 0:17:04.879 wire an exchange a hundred dollars and it gives you 0:17:04.920 --> 0:17:08.119 one hundred dollars worth of bitcoin, perhaps minus a fee. 0:17:09.160 --> 0:17:11.840 In the olden days, the stereotype was that a lot 0:17:11.920 --> 0:17:15.840 of crypto exchanges were run by criminals or incompetent teenagers 0:17:16.480 --> 0:17:21.359 or incompetent teenage criminals. The standard crypto exchange transaction was 0:17:21.600 --> 0:17:24.840 one you exchange your dollars for bitcoin to buy heroin, 0:17:25.320 --> 0:17:28.320 and then to the exchange got hacked and lost your 0:17:28.359 --> 0:17:32.280 bitcoin before you could even buy the heroin. Modern crypto 0:17:32.320 --> 0:17:35.520 exchanges are less like that. For one thing, they're more 0:17:35.640 --> 0:17:39.040 careful and technically adept, so they're less likely to lose 0:17:39.119 --> 0:17:43.919 your bitcoin. For another thing, though they're big companies, regulators 0:17:43.960 --> 0:17:46.040 are aware of them, and they try to be good 0:17:46.119 --> 0:17:49.880 corporate citizens In their role as on ramps and off 0:17:50.040 --> 0:17:53.280 ramps between traditional currencies and crypto. They do the same 0:17:53.320 --> 0:17:56.359 sorts of anti money laundering and know your customer checks 0:17:56.440 --> 0:17:59.840 that traditional banks and brokerages do. If you show up 0:17:59.840 --> 0:18:03.240 at coin base, a US public company, with a sack 0:18:03.359 --> 0:18:06.159 of dollar bills that you got from dealing heroin and 0:18:06.240 --> 0:18:09.160 try to convert them into bitcoin, coin Base will turn 0:18:09.240 --> 0:18:12.440 you away and probably report you to the police. The 0:18:12.560 --> 0:18:15.960 centralized exchanges are very much part of the regulated financial 0:18:16.000 --> 0:18:19.560 system these days. The days of crypto being a zone 0:18:19.640 --> 0:18:24.119 of utter lawlessness are mostly gone. This is a series 0:18:24.160 --> 0:18:27.440 of trade offs. Roughly speaking, the crypto exchanges of the 0:18:27.520 --> 0:18:30.639 olden days let you trade dollars for bitcoin without asking 0:18:30.720 --> 0:18:34.440 any questions, but they might steal your bitcoin. When the 0:18:34.520 --> 0:18:38.159 exchanges were unregulated and crime positive, the odds of them 0:18:38.359 --> 0:18:41.320 doing crime to you or having crime done to them 0:18:41.600 --> 0:18:45.199 were pretty high. The modern crypto exchanges ask a lot 0:18:45.280 --> 0:18:47.560 of questions that make it difficult for you to move 0:18:47.720 --> 0:18:51.200 tons of money in secret, but they probably won't steal 0:18:51.320 --> 0:18:58.879 your bitcoin. Two custodians. So you've opened an account at 0:18:58.920 --> 0:19:01.680 an exchange and sent the exchange one hundred dollars to 0:19:01.720 --> 0:19:04.480 buy one hundred dollars worth of bitcoin. What does the 0:19:04.560 --> 0:19:08.359 exchange give you for your hundred dollars? One possibility. It 0:19:08.440 --> 0:19:11.520 gives you point zero zero five to one five bitcoin. 0:19:12.280 --> 0:19:14.399 It sends you some instructions on how to set up 0:19:14.440 --> 0:19:17.960 a bitcoin wallet. It asks you for a public bitcoin address. 0:19:18.400 --> 0:19:20.800 It converts one hundred dollars to bitcoin at the current 0:19:20.880 --> 0:19:23.680 market price, and it sends you that number of bitcoin 0:19:23.800 --> 0:19:27.120 at your public address, and then you access those bitcoin 0:19:27.240 --> 0:19:31.680 using your private key for that address. This is suboptimal 0:19:31.840 --> 0:19:35.520 for the exchange for one thing. Dollar and bitcoin transactions 0:19:35.600 --> 0:19:38.720 have different time frames and finality. If you fund your 0:19:38.720 --> 0:19:41.359 account with a bank transfer or a credit card, and 0:19:41.480 --> 0:19:43.960 then you buy one hundred dollars of bitcoin, and then 0:19:44.040 --> 0:19:46.399 you call your bank and say I've been defrauded. I 0:19:46.480 --> 0:19:49.720 don't recognize that charge. There's a decent chance the bank 0:19:49.800 --> 0:19:51.960 will take the one hundred dollars from the exchange and 0:19:52.040 --> 0:19:55.080 give it back to you. Meanwhile, the bitcoin transfer to 0:19:55.160 --> 0:19:59.639 your wallet is fast and irreversible. For another thing, you know, 0:19:59.760 --> 0:20:02.360 the exchange will get some customers who don't write down 0:20:02.440 --> 0:20:05.440 their wallets seed phrase, or lose it or forget it 0:20:05.800 --> 0:20:08.800 and then can't access the bitcoin, and they'll call the 0:20:08.840 --> 0:20:12.040 exchanges customer service number and say I lost the password 0:20:12.119 --> 0:20:14.520 to my bitcoin account. Can you reset it? And the 0:20:14.600 --> 0:20:18.240 exchange will say, no, it doesn't work that way. Also, 0:20:18.520 --> 0:20:21.640 we don't have a customer service number, and the customers 0:20:21.680 --> 0:20:24.600 won't like it. I paid you one dollars for bitcoin 0:20:24.680 --> 0:20:27.000 and I don't have the bitcoin, they'll say and blame 0:20:27.080 --> 0:20:29.960 the exchange and complain to regulators and law enforcement and 0:20:30.080 --> 0:20:34.960 the press, and especially to their bank or credit card company. Now, 0:20:35.359 --> 0:20:39.480 these problems are annoying but solvable, and modern crypto exchanges 0:20:39.560 --> 0:20:44.120 do some amount of this, acquiring crypto for self custodying customers. 0:20:44.720 --> 0:20:47.600 But there's a simpler possibility that is also quite popular. 0:20:48.240 --> 0:20:51.720 The exchange could hang onto your bitcoin for you, instead 0:20:51.760 --> 0:20:54.240 of sending you point zero zero five to one five 0:20:54.280 --> 0:20:57.240 bitcoin on the bitcoin blockchain, it could go out and 0:20:57.400 --> 0:21:00.080 buy point zero zero five to one five bitcoin and 0:21:00.400 --> 0:21:03.640 put them into its own bitcoin wallet. Being a professional 0:21:03.720 --> 0:21:06.520 bitcoin exchange, it could put in the effort to keep 0:21:06.560 --> 0:21:09.919 these bitcoins safe and not lose the keys, And then 0:21:10.000 --> 0:21:12.520 instead of sending you point zero zero five to one 0:21:12.640 --> 0:21:15.800 five bitcoin, the exchange just keeps a database of its 0:21:15.880 --> 0:21:19.119 customers and their account balances, and your entry in the 0:21:19.200 --> 0:21:23.040 database includes your name, your driver's license number, your account number, 0:21:23.280 --> 0:21:26.840 your email address, your phone number, your password just kidding, 0:21:26.960 --> 0:21:29.760 a hash of your password, your mother's maiden name, and 0:21:29.840 --> 0:21:32.880 your account balance, and the exchange rights point zero zero 0:21:33.000 --> 0:21:36.040 five to one five in the balance field. And then 0:21:36.160 --> 0:21:39.400 when you log into your account, it displays point zero 0:21:39.480 --> 0:21:42.159 zero five to one five bitcoin as your account balance. 0:21:42.480 --> 0:21:44.760 And you think you own point zero zero five to 0:21:44.880 --> 0:21:48.480 one five bitcoin, and you're not exactly wrong, but really 0:21:48.560 --> 0:21:50.960 what you own is a claim on the exchange for 0:21:51.119 --> 0:21:54.200 point zero zero five to one five bitcoin. You don't 0:21:54.200 --> 0:21:56.760 own them directly, and you don't control the private key. 0:21:57.320 --> 0:21:59.600 You just have an entry on the ledger of the exchange, 0:22:00.320 --> 0:22:03.600 you know, like a bank If you have a bank account, 0:22:03.720 --> 0:22:06.040 the bank owes you money and you trust it to 0:22:06.160 --> 0:22:08.280 keep a record of that. If you have a crypto 0:22:08.359 --> 0:22:11.720 exchange account, it's the same, but the exchange owes you bitcoin. 0:22:12.320 --> 0:22:14.560 One thing this means is that if you lose your password, 0:22:14.880 --> 0:22:17.000 you can call the exchange and it can reset it 0:22:17.080 --> 0:22:19.880 for you. The customer service can be a bit better. 0:22:20.680 --> 0:22:24.840 There are some obvious downsides. One big one it's like 0:22:25.000 --> 0:22:27.880 a bank. If you got into bitcoin because you don't 0:22:27.920 --> 0:22:29.639 trust banks and you want to be in control of 0:22:29.720 --> 0:22:32.879 your own money. It's somewhat weird philosophically to just go 0:22:33.080 --> 0:22:35.480 and trust a crypto exchange to keep your money for you. 0:22:36.480 --> 0:22:39.280 These days, the big crypto exchanges seem to be mostly 0:22:39.400 --> 0:22:42.200 law abiding, and you can get rich enough running a 0:22:42.280 --> 0:22:45.280 legitimate crypto exchange that it seems silly to steal the 0:22:45.359 --> 0:22:49.960 money instead. But another downside is hackers. A crypto exchange 0:22:50.000 --> 0:22:52.159 has a giant pot of money, and it has to 0:22:52.240 --> 0:22:55.520 move that money around a lot to deal with customer transactions. 0:22:56.080 --> 0:23:00.440 It's an appealing target for hackers looking to steal private keys. Again, 0:23:00.840 --> 0:23:04.440 modern crypto exchanges spend a lot of money on information security, 0:23:04.840 --> 0:23:07.480 but that wasn't always the case, and there's a long 0:23:07.640 --> 0:23:12.040 history of bitcoin exchanges being hacked or quote unquote hacked. 0:23:12.800 --> 0:23:15.440 When all the bitcoin in it exchanges while it gets stolen, 0:23:15.760 --> 0:23:17.879 it can be hard to tell sometimes whether they were 0:23:17.920 --> 0:23:22.720 stolen by outside hackers or by the exchanges ceo. Also, 0:23:23.119 --> 0:23:25.520 while I suppose an exchange is less likely to lose 0:23:25.560 --> 0:23:29.119 its private keys than the average customer is, it can happen. 0:23:29.760 --> 0:23:34.399 In The CEO of Quadriga Fintech Solutions Corps. Died in 0:23:34.560 --> 0:23:39.120 somewhat mysterious circumstances while on vacation in India. At the time, 0:23:39.240 --> 0:23:43.120 the company's Quadriga c X was Canada's largest crypto exchange, 0:23:43.400 --> 0:23:46.879 and it was apparently run entirely off of its CEO's laptop. 0:23:47.440 --> 0:23:50.040 When he died, he took all of Quadriga's private keys 0:23:50.080 --> 0:23:53.920 with him, meaning its customers bitcoin were lost forever, or 0:23:54.040 --> 0:23:56.359 that's what it would have meant, except that before he 0:23:56.480 --> 0:23:59.520 died he also stole all the customers bitcoin, so the 0:23:59.600 --> 0:24:03.240 wall whose keys disappeared with him were empty. Anyway, when 0:24:03.280 --> 0:24:06.440