Blockchain Basics: Cryptocurrencies & NFTs

About the Episode

According to a Pew Research Study, 27 million Americans have bought, traded or used cryptocurrency. Yet for every person who understands cryptocurrency and blockchain, there are plenty of people who are a bit perplexed by it. In this episode of Making it Count, Cristina and Will welcome Lou Grilli from PSCU to explain how the blockchain works, the different kinds of cryptocurrencies, the dos and don'ts of investing and more!

4:10

Cristina asks Question 1: “I want to start with the most basic of basics because I think at least some of our listeners will need definitions before we dig deeper. What is cryptocurrency?”

Lou responds: “And that's a perfect place to start. So it's a form of money, a form of currency. It's kind of like the dollar, but it's digital. There's no paper version – there's no physical Bitcoin. And since it's digital, it's also encrypted, hence the name cryptocurrency.”

“There's a huge difference, though, between the value of the dollar, which is controlled by our government and the value of Bitcoin, the most popular of all the cryptocurrencies. It is not controlled by any central organization. It's based on whatever the next person is willing to pay for it.”

“As an example, two years ago, one Bitcoin was worth $5,000. One year later, it was worth $50,000 – 10 times the amount. But what goes up, sometimes comes down. Near the end of last year, it reached $64,000. Two months later, it was worth less than half of that at $31,000.”

“But then came the Super Bowl – four commercials for four different cryptocurrency exchanges. I don't know if you remember there was the ‘Don't Be Like Larry’ starring Larry David, and then there was the famous ‘Bouncing QR Code,’ which broke the internet and got a whole bunch of more people interested in cryptocurrency.”

“Something I want to clarify: you do not need to buy a whole cryptocurrency – you don't need to buy a whole Bitcoin. You can buy it in just a $10 amount if you want. And there are many cryptocurrencies besides Bitcoin. Bitcoin was the first, so it got a head start and it's the biggest. The second biggest is Ethereum. A lot of people just call it Ether. And there's many others – Litecoin, Dogecoin, Bitcoin Cash, which is actually different from Bitcoin. In fact, there are around 9,000 different coins, different cryptocurrencies, and there are new ones being invented all the time.”

7:00

Will asks Question 2: “I want to build off Cristina’s question and ask you to define blockchain. Can you give us a definition and explain how it works?”

Lou responds: “And you're right, I think the vocabulary sometimes scares people off. So when talking about cryptocurrency, you hear things like, ‘Bitcoin runs on the blockchain.’ So I just want to peel that back for your listeners. A blockchain is simply a list of transactions; somebody sold something, somebody else bought that something. And then it's recorded onto a growing list of blocks on a chain. But this list is not just in one place. It's replicated all across the Internet. And any computer on the network – they’re called Nodes – can update the blockchain.”

“The blockchain is distributed and decentralized. Distributed means there are computer services, these nodes, that are on the blockchain all across the globe. And it's decentralized, meaning there is no owner, there's not one organization that's in control. Nobody owns the blockchain, which causes a little bit of a trust problem. So if anyone can update the blockchain and you can't trust that everybody's going to do the right thing, then you have a potential problem.”

“For example, somebody goes to spend their Bitcoin on something and that transaction gets added to the blockchain. Then they go to spend the same Bitcoin again, since it's digital, and they try to add that to the blockchain. That's called the ‘double spend problem.’”

“The way blockchain solves the trust problem is called a ‘consensus model.’ Every computer on the blockchain, every node in the blockchain, validates every transaction. They all have to agree on it – they have to come to a consensus. So the nodes on the blockchain would agree that that first transaction was valid and the second one would be rejected.”

“So the blockchain is really good at creating trust where trust doesn't exist, but every computer is doing the exact same transaction. So that's super inefficient. When you hear about the huge amounts of electricity that's required to process a Bitcoin transaction, that's why this is happening. You have these nodes all across the globe that are all doing the same thing.”

Cristina asks a follow-up question: “It takes electricity? Because of the servers that the blockchain is running from?”

Lou responds: “These nodes on the blockchain are not just a computer, not just a laptop. These are rooms full of computer servers running the software that specifically can validate the transactions and add transactions to the growing list of blockchain.”

“And one more thing to clarify is there's not just one blockchain. So Bitcoin is on its own blockchain. Ethereum is on a blockchain, and on that blockchain is a whole bunch of other things. And then there are several others.”

“But blockchains are not just for tracking cryptocurrency. There are privately controlled blockchains that are doing things like tracking romaine lettuce from the farm that it was raised to the store that it was sold in. There's a blockchain to track medical devices. There's a blockchain tracking music royalties. There are so many great uses for these nodes that are distributed across the globe that have inherent trust built into it.”

10:31

Cristina asks Question 3: “Let’s define a few more terms before we get any deeper because I think that will be useful. Can you define a node, a crypto wallet, and tell us about Coinbase? And add any other terms you think people should know.”

Lou responds: “When you buy a digital currency, you’ve got to put it in some place that can hold encrypted digital money. So you keep it in a crypto wallet. If you buy your crypto on Venmo, then Venmo becomes your wallet. But if you buy crypto at a cryptocurrency exchange like Coinbase, then you can either have the exchange hold it for you; those are called hot wallets because they're on the Internet. They're always accessible.

“But there's also these devices — they're kind of like thumb drives — where you can take your crypto and move it off the Internet into a cold wallet. Some people prefer these cold wallets because they can't be hacked since they're not connected to the Internet. But you better never forget the password to that because you can't recover it.”

“Since I just mentioned exchanges, I do need to talk about those. Remember we spoke about that bouncing QR code that broke the Internet during the Super Bowl? That was an ad for Coinbase, a cryptocurrency exchange, meaning that's where people go to buy, to sell. You can exchange your Bitcoin for Ethereum, etc. You can exchange your money — your US dollars — for Bitcoin. There are hundreds of cryptocurrency exchanges around the world. Some of them are not so trustworthy. So you need to take care when you're looking at what cryptocurrency exchange you want to deal with.”

Will asks a follow-up question: “I'm going to make a wild guess and say that if our listeners have made it this far in the episode, they may be interested in buying and selling crypto as a personal investment. If that's the case, how would they get started?”

Lou responds: “Two decisions that need to be made: where to buy it and what to buy. To make it easy, Venmo, PayPal, Robinhood, Cash App and a bunch of other places allow you to buy Bitcoin — and in some cases other coins, like Ethereum — and they make it really simple. You just get into the app, hit the ‘Buy’ button, say how much you want to spend. That's all you have to do.”

“But there's limitations. A lot of them just have Bitcoin, or just Bitcoin and Ethereum. You can't use your crypto to buy things. You can't move your crypto from Venmo into a cold wallet, which some people do prefer to do. So, if you do want that flexibility, if you don't like those limitations, then you buy your crypto from an exchange, like one of the ones that advertised on the Super Bowl.”

“Coinbase, for example, allows you to buy up to 100 different cryptocurrencies. I mentioned there are 9000. Coinbase offers 100 of those to choose from. There are trade offs, though. Buying from an exchange typically has higher fees than buying them in someplace simpler, like Venmo and PayPal.”

13:32

Cristina asks Question 4: “So you've walked us through how we can get started, but is this something that I should even consider? Is it a little too risky, should I even get into it?”

Lou responds: “The only answer I can give you is maybe. We’ve all heard about people who've gotten rich off of Bitcoin. A lot of those people bought Bitcoin two, three, four years ago and then they saw that ten-fold increase, and they love to talk about it. You don't hear the people that bought Bitcoin when it was up at $64,000 and then watched the amount of Bitcoin tumble down to $30,000, $40,000. And that's why I say make sure you only invest what you can afford to spend.”

“Another warning: we have data at PSU that shows that when Bitcoin reached its peak around $64,000, a whole bunch of people went out to purchase Bitcoin. It's kind of like when Powerball’s jackpot gets to $100 million and everybody rushes out to buy a ticket. So, was the jackpot at $50,000 not good enough?”

“If you think that Bitcoin is something that you want to do, then yes, go for it, but make sure that you're comfortable with it. Only invest what you can lose. Watch it. And then, if you're still comfortable with it, maybe invest a little bit more. But again, never more than you're willing to lose.”

15:34

Cristina asks Question 5: “So, let's say I purchase crypto. How do I spend it? What are the limitations with how to now utilize my crypto?”

Lou responds: “So, a pretty frequent question is can you spend crypto? The quick answer is yes, but it's limited and it’s kind of difficult. A little history first: Bitcoin was started as a currency with the intent that anyone who owned it could use it to make purchases anywhere in the world without the involvement of a bank or credit union, without the need for a debit or credit card. And it was supposed to be safer. Your debit card can be stolen. Your Bitcoin that's in your wallet can't be stolen — at least theoretically, it couldn't.”

“But as Bitcoin became popular and its value kept fluctuating — mostly rising, sometimes falling — two things happened. One, this constantly changing value made it really hard for merchants to accept Bitcoin. I don't know if you heard the story that Tesla was going to accept Bitcoin, then it's not going to accept Bitcoin, and then maybe it might again. So, just imagine you have $50,000 worth of Bitcoin and you're going to spend it on one new Tesla. And then the next day that Bitcoin that you paid to the car dealer is worth $40,000, or maybe it's worth $60,000. How does the car dealer deal with that changing value?”

“The other thing that happened is that people realized that they don't really want to spend it like dollars. They want to hold onto it because it might appreciate — at least it looks like it's been appreciating. With all that said, yes, you can spend it. You can spend your Bitcoin in the Microsoft Xbox store, you can spend it at Overstock.com, you can spend it at one of your daily haunts, Cristina; you can spend it at Starbucks.”

“Oh, and fun fact: El Salvador made Bitcoin legal tender. And as part of that decree, merchants in El Salvador must accept Bitcoin for payments. We're talking KFC, McDonald's and Starbucks, etc.”

“But here's a warning. Let's come back to the U.S. If your Bitcoin has appreciated, you are on the hook. It's the honor system, but you're on the hook to report your gains to the IRS at tax time. And it's kind of a pain to do that if every day you're buying coffee with appreciated Bitcoin.”

Will asks a follow-up question: “It's so funny that Tesla isn't accepting it considering Elon Musk was the one that came up with Dogecoin, right? He was making it a meme and the meme became like a thing. I might be getting it wrong.”

Lou responds: “Dogecoin did start out as a joke, but the community around Dogecoin just kind of rallied around the coin. You might be thinking of Mark Cuban, the Shark Tank guy — maybe more accurate to call him the Dallas Mavericks owner — tweeted something like ‘This is the one coin that people can use for transactions.’ And all of a sudden, that made Dogecoin rise up to…I think it's the number ten cryptocurrency as far as total value.”

19:34

Will asks Question 6: “You’ve mentioned risk a few times. We did an episode last season about financial frauds and scams. What should our listeners know about potential fraud and security risks associated with cryptocurrency?”

Lou responds: “I'm glad you asked that because it's really important that your listeners understand the risks. I'll say this again: there is way more interest than there is understanding, especially when it comes to the risks. The first obvious risk, which is not fraud related, is just that depending on when you buy and when you sell, you can lose your money.”

“Scams are the second thing to talk about. There are so many scams. Some websites claim to make it really simple to buy cryptocurrency. Get this: just give them your name, address, Social Security number, debit card number, and scan in your driver's license. By the way, you don't get any cryptocurrency — but now they have your identity and they can spend your money.”

“There are scam websites that advertise a brand new coin, and if you hurry up and you get in now, you get in on the ground floor, which means you can make a lot of money. Remember I said that there are new coins being invented all the time? There's a lot of scam coins that have been invented a lot of the time.”

“Here’s a stat to throw at you. Between October 2020 and May 2021, Americans lost $80 million in cryptocurrency scams. I don't know whether it was Will or Cristina that said, on that last episode of season two, when you see something that looks too good to be true, it probably is. That is absolutely true when it comes to the scams associated with cryptocurrency.”

“In all fairness, on legitimate exchanges like Coinbase, you have to pay for your cryptocurrency. So you give them your debit card number. They need to have a scan of your driver's license because they need to check that the name on the account is really you, that you're not a made-up or synthetic person. So the legitimate exchanges are asking for most of that same information.”

22:19

Cristina asks Question 7: “What do you think is the biggest barrier to people who want to buy cryptocurrency but haven't yet?”

Lou responds: “I hear this term, so I'll use it: it’s called the ‘crypto curious.’ Something like 68 percent of all Americans are crypto curious, meaning that they kind of want to get into it, but they don't know where to start. And then they start doing a little research and they hear about blockchain and things like that, and they walk away because they don't have a good understanding. I don't want people to walk away, which is why I'm happy that I'm hopefully helping your listeners to understand a little better so that they don't have this barrier to buying crypto. It can be simple, but make sure you go into it with your eyes open.”

23:56

Will asks Question 8: “There's another virtual product I want to ask about. I’ve seen it pop up a lot on Twitter. I saw Gwyneth Paltrow of all people — and some other celebrities too — start hawking them. They're called NFTs and there are relatively new products. So can you explain what an NFT is?”

Lou responds: “This might be a long one, so settle in here. First, NFTs stand for non-fungible tokens. Non-fungible means it's unique. If I have a dollar bill, and let's say I just swap dollar bills with you, I still have a dollar. I still own a dollar bill. To me, they're interchangeable. They are fungible. The NFTs are non-fungible; they're one of a kind. They can't be replaced by anything else. The ‘T’ of NFT stands for a token. The NFT is a token that represents ownership of something — some piece of digital art is what's typically represented by NFTs.”

“To understand how NFTs work, we've got to go back to our discussion about blockchain. So remember how blockchains were just lists of things that somebody sold and somebody purchased? And then that transaction was validated and then added to the blockchain So, the Bitcoin that was sold and then bought is represented by a token. So the ‘T’ of token.”

“Now, instead of thinking of it for cryptocurrency, think of it for the ownership of artwork, of some piece of digital art or a piece of music or something like that. Let's say Christina creates a piece of digital art. That art, which is stored in a file — that file can be copied countless times, but she creates an NFT, which represents the single ownership of that piece of art. She sells the NFT, the ownership of that piece of art, for like $50. And somebody out there thinks that it's going to be worth 10 times that in a few years. So they invest in buying the NFT.”

“The NFT represents ownership. When it comes to art, it's typically a speculative investment, like Bitcoin is somewhat of a speculative investment. And just like in the real world of modern art, the world of art within NFTs, there are some famous artists there. There are names like Beeple, Bored Ape Yacht Club, Cryptopunks.”

“I know these names don't sound familiar to most people, but art from these artists are selling at crazy amounts. One of Beeple's works sold for $69 million; the NFT representing ownership of that work sold for $69 million. Four of the pieces created by Cryptopunks sold for $7 million up to $23 million.”

“And NFTs are not specifically limited to art. There are NFTs for video clips, for tweets — like Jack Dorsey's initial tweet on Twitter. And I want to talk about real estate. I live in St. Petersburg. There's a waterfront community just outside of where I live, a couple of miles from my house, called Gulfport. And there was a house in Gulfport recently — this was February — that was sold as an NFT. The NFT, which represented ownership of the house, was auctioned on an NFT site. The transaction was paid for using Ethereum, and the transaction was recorded on a blockchain.”

“Just like investing in cryptocurrency, if you think you're going to get rich off of NFTs, there's a whole bunch to beware. We’ve got to talk about counterfeits, and one of my other favorite topics is Disney. At the end of January, Disney released a set of NFT artwork. They were called Mickey and Friends, so think of them like character trading cards. Each trading card had custom music associated with it, and the back of the card had that character's autograph.”

“The series sold out within minutes, and within hours after that there were pirated versions available for sale on other NFT platforms. In fact, the largest NFT trading platform is called OpenSea. They admit that 80 percent of the NFTs created on its platform are fakes. So, if you're an artist, this is a great way to make money, right? You establish ownership of your own art, of your own music, and you make money from it. But if you want to be an investor, you need to be able to spot fakes, and you need to be really, really good at predicting which pieces of art are going to be the ones that appreciate.”

Cristina asks a follow-up question: “I guess what I don’t understand is — okay, I have an NFT of a piece of art. How do I show people it? I can't hang it on my wall. What do I show for it?”

Lou responds: “You can show the art on your wall. You can also display the NFT on your phone, on your computer, or a digital screen on your wall showing that you have ownership of a Cryptopunk that you paid $23 million for.”

Will asks a follow-up question: “So, from the investor standpoint, let's say I buy an NFT. I could technically then resell that NFT. I could sell my token back into the marketplace and try to make money off of it”

Lou responds: “That's exactly what these art investors are doing. They're hoping that they paid $23 million for a Cryptopunk, that that's going to be worth $68 million in a couple of years.”

33:10

Will asks Quick Question 1: “There's another type of crypto called stablecoin that I've been hearing about. What is it and how does it differ from other cryptocurrency?”

Lou responds: “As the name implies, it's a newer form of cryptocurrency that is intended to not fluctuate in value. Hence the name Stablecoin. It's typically pegged to the U.S. dollar so the value doesn't rise or fall. It's not for investment. It's intended to be easier for things like cross-border payments, sending money overseas, lending purchases — financial activities where you don't want changes in value.”

“We spoke about how Bitcoin doesn't have an owner, it doesn't have anything backing it up. Stablecoins do have an owner. There's an issuer that tries to makes sure that the value of the stablecoin remains stable.”

34:10

Cristina asks Quick Question 2: “All right, Lou, on the lighter side, what is the funniest misconception or misunderstanding that you or someone that you know has about crypto?”

Lou responds: “So, I’ve got to share a story. Unfortunately, it may not be funny after you hear it, but I have to talk about scams because this was interesting. Have you ever heard of the show Squid Game? It’s a really popular Netflix show. I started to watch it, it got a little too gory for me.”

“Some programmer started a new coin. He didn't intend it to be a scam. It was a joke. It was a penny per coin. Anybody can buy it. And he called it a Squid Coin. It was not associated with Netflix, it was not associated with the series. But a Reddit group caught on, talked about it, and in less than a week, over 4000 investors invested in Squid Coins and they drove up the value from a penny to $2,861 per coin.”

“And the developer just looked back and could not believe that this happened. So, he shut down the site and walked away with $3.3 million. And by the way, that's real money, not Squid money — which, as you can imagine, became completely worthless. So it would be funny, except a lot of people lost money.”

36:11

Will asks Quick Question 3: “You mentioned that the cryptocurrency is rapidly evolving. What do you see coming in the future?”

Lou responds: “It's kind of boring to talk about regulation, but there's a lot of activity going on, right now. The White House just issued an executive order to look at putting in place regulation at the federal level. I believe this is a good thing because regulation creates trust, which makes it easier to use cryptocurrency for more purposes like purchasing things.”

“I see a future where using cryptocurrency allows you to buy stuff from anywhere in the world, from any merchant in the world, using the same cryptocurrency. I easily see getting loans in cryptocurrency and being able to make loan payments in cryptocurrency. I definitely see real estate, car buying, boats, other physical things, moving to the blockchain with purchases, using cryptocurrency for payments. And I definitely see blockchain being used for many other areas where security and proof of ownership is important.”

“We spoke about digital wallets that store our Bitcoin and NFTs. I think there has to be a lot more access to digital wallets. Digital wallets that are a lot easier to use, that are a lot more accessible, a lot more intuitive. And unfortunately, when looking into my crystal ball, this topic is evolving so quickly that there's really no telling where it's going to go.”

Will asks a follow-up question: “If we're talking about using crypto more and more, does that threaten the idea of the current way that we view money? Where we have credit cards and debit cards, and there are companies that back up those credit cards and debit cards like Visa, MasterCard, American Express, Discover.”

Lou responds: “Potentially. There's some movement of payment from a debit card to a cryptocurrency. But, go back in time — we used to just have cash and checks. And then we added credit cards, then we had ATM-only cards. Then we added debit cards. Then ACH along in the late 70s, early 80s. So now, we had direct deposit of our paychecks instead of grabbing our paychecks on Friday and then running down to the record store.”

“And then, ACH became same-day ACH. And then real-time payments came along. And now cryptocurrency payments came along. Each time, the previous thing didn't really go away. Yes, there’s somewhat of a decline in checks, but checks have not gone away. So I don't see anything going away. There's organic growth in every form of payment. Cryptocurrency is just going to allow us to do things like move money around the world faster, easier, hopefully safer and more secure.”

39:36

You can find Lou Grilli on LinkedIn here, or on Twitter at @LouGrilli.

41:19

On this episode, Cristina and Will shared a previous Making it Count episode called Retirement Strategies for People Under 40. With the help of guests John Stanton and Rob Mazur, both financial advisors at CUNA Brokerage Services, they tackle the big retirement questions for our younger audience: When should we start saving for retirement? What’s the best strategy for younger people to save and invest for retirement? Is Social Security going to be around when those under 40 hit retirement age? This is a great episode for anyone under 40 looking to pair the more risky cryptocurrency investing with more stable strategies like contributing to 401ks.