The Rule Breaker's Guide to Cryptocurrencies, Part 2: You Asked; We Answered

In this Rule Breaker Investing podcast, Motley Fool co-founder David Gardner recruited Fool analyst Aaron Bush to help him with Cryptocurrencies 101. Turns out that a fair number of his listeners wanted more. So this week -- with bitcoin trading at more than twice the level it was for the previous episode -- he brought Aaron back for a more advanced encore.

A full transcript follows the video.

This video was recorded on Dec. 6, 2017.

David Gardner: Welcome back to Rule Breaker Investing. I'm David Gardner, joined by my friend and co-conspirator Aaron Bush once again this week. Aaron, how are you doing?

Aaron Bush: Doing well. How are you, David?

Gardner: I'm doing really well. And I would be doing a lot better if, when we had first talked about cryptocurrency, which I'm now looking, Aaron -- it was the Oct. 18 episode of Rule Breaker Investing, when bitcoin was at $5,500. And I asked you what I called an unfair question at the time, which I think is always fair game, to ask unfair questions on this podcast.

I said, "Should somebody go out and buy...? Looking five-plus years forward, should somebody consider buying bitcoin today?"

And you said -- and this goes against what a lot of other people were saying in my experience, even here around at Fool HQ -- yeah, sure. It's a speculation, but they could consider it. Where is bitcoin from $5,500 in mid-October to now, Aaron?

Bush: Right now, I see it at about $11,980.

Gardner: So I would be doing better -- thanks for asking how I'm doing -- had I actually bought some bitcoin prompted by your advice. Now, I know both you and I will be the first to say that we're not about two months of returns, and while it's amazing to double one's money in two months, the question was about five-plus years forward.

It's a much bigger question about the meaning of this technology for our society, but, it wouldn't have been bad. I know you own some bitcoin.

Bush: Yes, not bad.

Gardner: Not bad...

Bush: It feels pretty good...

Gardner: ... to double your money since the last podcast. So, last week's Mailbag we got a lot of questions, understandably, about blockchain. Cryptocurrencies. bitcoin, etc. And I said last week, "Well, let's have Aaron back and let's talk more deeply about this subject building on the scaffolding of what we've already put out there."

If you are new to this topic, you should go back right away and listen to the Oct. 18 Rule Breaker Investing podcast. And a week after that, we took in some Mailbag questions reacting to that. If you're deeply into this -- if you're really into this -- go back and start there.

This podcast assumes that you have some clue. Now, I have some clue, but by no means do I have that many clues, which is why I want to keep talking about it, and why we have Aaron back with us, but it does assume that you have some awareness and interest in this. I don't want to leave anybody behind here, so looking in our rearview mirror at times through our 40 minutes or so, Aaron, we'll make sure that we're keeping everybody along with us. But let's get started.

We did get a fair amount of mail and some interesting notes. My friend, Evan DaSilva, a very thoughtful guy. I've mentioned him before on this podcast. He gives me good book recommendations and sometimes writes into the show. He wrote in about bitcoin. Aaron, you looked over that note, and I know we want to start there.

Bush: Evan had a few good questions and I can kick it off. He started with, "Hi, David. I just listened to your podcast on bitcoin -- twice, actually -- and it helped me a lot. I've been trying to understand it, and your podcast was especially helpful in explaining clearly how blockchain works. I had been having difficulty with that concept, and now my understanding is much clearer." I'm glad we could help you a little bit.

Gardner: Yes, and that's what we're going to keep trying to do this week, because it remains a dynamic, sometimes complicated world. We're going to keep trying to untangle things.

Skipping down a few paragraphs, Aaron, he went on to say, "Another question I have is how to determine whether bitcoin is overvalued or undervalued, considering it has no cash flow. When gold was money" -- and he's likening it as a store of value to precious metals -- "when gold was money, the amount of effort it took to produce the goods that an ounce of gold could buy equaled the amount of effort it took to mine the ounce of gold over the long run.

"Of course, if bitcoin truly becomes an alternative to cash, which is what it is at its core," Evan says, "then this same relationship should hold true. Could you figure out a way to estimate such a value based on that technique or any other technique you may think of?"

Bush: That's a really good question, and we could have an entire podcast just about that. I'll answer that in two quick ways. First, I'll just say that the analogy that you gave with gold probably does fall apart at a point, because in the digital world, mining costs can change with simple code updates, and oftentimes there is no mining at all with many cryptocurrencies, so you can't really view that lens consistently.

So I guess, first of all, I'll just say one good or valid lens to think through crypto assets at large is this. Just like a business, you can take that underlying service or use case and extrapolate that out into the future. What do you think will happen? How big do you think this can be? How impactful can it be?

Then, once you have some guess or estimate about that, then you can try to understand its monetary policy. So this is things like what is its future dilution going to be? How much of the base is liquid? What are its transaction volumes like? And from there, taking both of that into account -- how big can the service be and what is its monetary policy building up to that scale -- you can get a rough estimate of what size of the monetary base is needed to support that level of activity. Discounted from the future back to the present, that is what we would consider its network value. In stocks it's often what we would call its market cap, so I think of those pretty synonymously.

And of course, precision is really hard, here. A lot of times you're trying to extrapolate from seed stage before anything has gone fully mainstream.

Gardner: Impossible.

Bush: Yeah, it's impossible, but that's probably the best attempt that you can get at something like valuation for crypto assets at large. Now with something like bitcoin specifically, and bitcoin is going to be an outlier here, compared to other cryptocurrencies, because people view it as a store of value. And over the past year we've seen bitcoin's price has risen far faster than its transaction volume. And to me that does make sense. Who sells things that go up? Who really wants to do that?

Gardner: Right. If I knew my $1 was going to be, in effect, worth $10 this time next year, why would I be spending my $1 right now?

Bush: Right. You wouldn't be using it as currency. You'd be using it more as a store of value. And in my opinion, there can only be one or maybe a couple of stores of value in the crypto world, and in that case the most important metric is the number of believers. So to the effect that any other news, any other metric affects the number of believers, and the number of believers then determines how much money is flowing throughout the bitcoin ecosystem, which then determines how much the network value of bitcoin is, I'd be thinking through it in that lens. A couple of different answers there.

Gardner: You're right. We could keep going along that thread and find ourselves with no more time to talk this week, but we're going to keep moving because there are a lot more things to talk about.

Evan also wrote, "Is bitcoin's blockchain the best blockchain out there? It was the first, but first doesn't necessarily mean most efficient. Could it be usurped by a crypto that can better fill the role as an alternative to cash?" He closed out by saying, "Now I understand what blockchain technology is, but what are the variations of it that might make one blockchain better than another?"

Bush: Right. So I think, maybe to slightly tweak the question, I think maybe a slightly better question would be, "Is bitcoin's blockchain the best blockchain out there for its specific use case?" I think we have to recognize that blockchain is a technology. Really, it's just like an upgraded database. And so comparing something like bitcoin to the company Broadridge Financial's proxy-voting blockchain, those are going to be two completely different things, and you can't really say this one is better than this one, because they're just doing different functions.

Gardner: In fact, when you and I talked on Oct. 18, I was trying to liken Ethereum, which is another cryptocurrency many will know. In fact, at least one of my family members has since bought Ethereum and is pretty happy about that. I was trying to liken it as Pepsi to bitcoin's Coke, and you were saying, "Not really."

Bush: Because many of these different assets have completely different use cases. Taking this one step further, with bitcoin, specifically, there are variations, and right now in the ecosystem we see there's bitcoin. And now there's bitcoin cash, and bitcoin gold. The reason why these forks have happened, which is really just split code, is because there's a big debate over scalability and what is the best way to grow transaction volume in a scalable way across the network. We're seeing how different blockchains going after the same function can be different.

With bitcoin and bitcoin cash, for example -- I won't dwell on this too long -- bitcoin implemented what's known as SegWit, which is short for "segregated witness," and that limits the per-transaction data that is stored on each block. Bitcoin cash, on the other hand, instead of going that path, just increased the size of the block. The same transaction data is there, but now more transactions can fit on the block. They're both approaching the scalability issue from different ways but are doing it differently.

Gardner: That could also "fork" our conversation, but I'm not going to let it. We're going to keep moving, maybe a little bit higher level. But bitcoin -- for what bitcoin is trying to do -- remains close to the best technology that you could want. The best blockchain for what it's trying to do. But even then, there are further refinements in store and in place that people are thinking about.

Bush: That's right, and I think it's important to understand that each of these crypto assets isn't stuck in time. Each of these are also evolving over time. If you think it's the best blockchain, actually maybe bitcoin 2.0, whatever that is, it's going to be an upgraded version of what exists today. So things definitely will improve from here.

Gardner: Evan asked one more interesting question, which we're going to get to in a sec, but I was thinking some more about blockchain, Aaron, and as you defined it on Oct. 18. It's just a database, and a database where every new action or transaction is captured and held and always available. And it's a database that's distributed, so there are infinite copies of it so everyone can see what's happened, even if you and I don't know who exactly was behind that transaction.

And I was thinking in some ways, "Isn't Wikipedia kind of like a cryptocurrency, in the sense that somebody comes along and starts a page on New York City?" I haven't been back to the New York City page on Wikipedia recently, but back in the day it started with a single bit of data. Somebody said, "The city is in the state of New York," let's say. And then somebody else came along and mined it. Added a little value to it. And these days, again not having been to the Wikipedia page for New York City, I'm pretty sure it's both much richer and deeper. Probably more trustworthy. Let's hope so. And you or I could go back in and see every single change that was made to that Wikipedia page to any wiki anywhere. I'm not trying to say that a wiki is like a cryptocurrency, but for those of us who are still trying to get our minds wrapped around this as we think about blockchain, is that an analogy that has some usefulness?

Bush: I think it does. Wikipedia, and you could say something like Linux, even. Those are both great examples of open-source projects that in the old world didn't fully capture the value that they were creating, but maybe in today's world in which there are cryptocurrencies, there's tokenization backed up by blockchains.

If a new version of Wikipedia were to be created today, it probably could reward the early adopters and the people helping to build it up at the very beginning. I do think that is a pretty good analogy, and we will be seeing something, not necessarily like Wikipedia, but open-source projects in a similar vein be created in maybe an upgraded way.

Gardner: Where people, through tokenization and just the growth of that new blockchain value, can be paid better than, let's say, the volunteers who have largely helped build Wikipedia. Just an interesting comparison.

Bush: I liken it to these projects that might not have business models, but they'll have incentive models. That is really a breakthrough that we're starting to see compound.

Gardner: Evan's thoughtful, not even quite voluminous, but deep note concluded with this, and I'd like you to speak to this, Aaron. He said, "I hear a futures and options market in bitcoin is going to open in December, so I think the market is just heating up. I'm expecting to hear about wild bitcoin trading profits in the next year or so, but ultimately not sure if bitcoin and cryptos will pop like the stocks in the tech bubble of," presumably he means 2000, "and prove to be worthless, which in essence they are since there's nothing real behind a crypto. Or will some of the best cryptos become permanent features of global commerce and will governments allow them to become permanent features? I'm in favor of it," he concludes, "but they might not be."

Bush: Right, and I think we've touched on some of this before. It is important, just to be clear, that I suspect we will see countless implosions across the crypto ecosystem. After all, we have to remember that this is like seed-stage investing with a lot of bad actors out there. It's just a completely new way of operating, so there's a lot of learning to be done.

However, the movement is real because the technology backing it up is real, and it might take years before crypto assets are widely adopted by financial institutions or launched by big technology companies. But if the financial incentives are in place, there's little reason why it won't. If it saves time and money, I think it's just a matter of time.

As for governments, I think it's pretty clear they will be anxious. A lot of them will be a little nervous, because decentralized code is like free speech that lives on the internet and can't be taken down easily. That is a threat that oftentimes transcends any particular government. So I do think there will be pushback; however, in many countries there will be acceptance, and there will be surprises. We might talk about one of those surprises later on. I think this movement will have a very hard time being stopped.

Gardner: And if you're talking about the surprise that we might talk about later on -- I might as well just give it up right now. It's not that big a surprise. I wouldn't want to hype it, but I think you and I are talking about a little bit of the humor that we've shared...

Bush: Yes...

Gardner: ... over Nicolas Maduro, the president of Venezuela, his effort to create a cryptocurrency. The man who has basically ruined his own country's economy. A beautiful and resource-rich country whose government has largely, through trying to just co-opt private institutions and capitalism, has basically created mass poverty and it's very sad. But arguably even sadder is his announcement to create the "petro."

Let's talk briefly about the petro. This is an oil-backed cryptocurrency. This is, he thinks, going to help save Venezuela.

Bush: Right. So I do think the intentions are, for the most part, probably OK. They're probably trying to replace what currently is a hyperinflationary currency, the bolivar, with a more deflationary one, or at least a less inflationary one. And by being digital, maybe they can find a way to get around certain sanctions boosting exports and helping the economy.

There are so many big questions about this. How will it be distributed? Will they have miners, or will Maduro own all of them and then distribute them as he sees fit? Is there going to be complete central control? Is it going to be open-sourced at all? Will it even happen at all? I honestly don't know. I'm very skeptical that this is going to help much of anything. At the end of the day, whether or not your currency is digital or not, it probably doesn't compensate for other horrible policies, and if they're not careful, they could end up having two mismanaged currencies instead of one.

Gardner: To your knowledge, Aaron, and to close this one, is Venezuela the first country to announce its own cryptocurrency?

Bush: I think so. I wouldn't have guessed.

Gardner: I'm quite sure neither of us is recommending anybody invest in the petro, but it is interesting to watch how the world turns.

Bush: Absolutely.

Gardner: Then we got a nice note from Scott Colson, and we're going to go a little faster with this one. Bitcoin questions. Logistical questions. And here's the first one. He wrote, "As mentioned, I cannot call my broker and ask him to buy a $5,500 bitcoin for me. A more detailed rundown on Coinbase or other methods for capturing tokens and managing risk." Aaron, how does a moderately techie guy know that he's actually received a bitcoin token in exchange for his $5,500?

Bush: The simple answer is that it will show up in your wallet or your account on an exchange, and what's showing up is backed by the bitcoin blockchain, so you can trust that it is actually in your account.

Gardner: And what is a wallet?

Bush: First, to clear one popular misconception, crypto assets are not stored in wallets. They live natively on the internet. Instead, what is stored in wallets are your private keys, and your private key is what gives you access to the funds that are associated with that particular address. That is what is stored in a wallet.

And there are two main types. There are software wallets, which are often called "hot wallets," and these are applications that either live in-browser or downloaded onto your computer, and you can hold your funds management there. And then there are "cold storage" or hardware wallets, which you generally plug in via USB and you can transfer your information from your computer to this device. It's not connected to the internet; therefore, it is less susceptible to any form of hacking. Some people also just write their private key on paper, and that's known as a "paper wallet." That's the gist of what wallets are.

Gardner: We talked earlier about how bitcoin functions more as a store of value right now. I wouldn't want to spend it if I think it's going to go up over the course of time. But I know there's a big point to currency, which is to spend it. Transact and use it. And it's harder to spend it if it's in $5,500, or now $11,900 increments. Can I get fractional bitcoin? Can I spend fractional bitcoin?

Bush: Yes. Bitcoin is divisible up to eight decimal points. So you can get much smaller than 0.5 bitcoin.

Gardner: Wow! So, I start an account on Coinbase. Is that what I'm doing? Do you have an account on Coinbase?

Bush: I do, yes.

Gardner: So we start an account on Coinbase. There are other places, too, but this is just a common bazaar where we can transact. I go in and say, "Basically, I don't have $11,900, but I have $1,000. I can go in and buy $1,000 worth of bitcoin on Coinbase."

Bush: Sure. You could buy 0.08 bitcoin.

Gardner: That's nice. That's the way things should work. How can I exchange bitcoin tokens for value and/or hold them as an investment?

Bush: Somewhere like Coinbase will handle that for you. You can buy or sell based on their platform. However, for something that's not bitcoin, or maybe you want to trade bitcoin elsewhere, you would exchange on exchanges and then if you just want to hold, you keep your information in your wallet and don't touch it.

Gardner: What does a typical transaction cost that I would have? What is Coinbase charging me as a percentage? If you and I transact, is it like the ATM machine where I'm getting my $200? Or $400 would be a better percentage, these days, if somebody is going to put a $4 ATM fee on you. Is it like that -- 1%, 2%?

Bush: I forget the exact number, but it is a small percentage, yes.

Gardner: And probably going lower the more it's used.

Bush: Yes.

Gardner: Scott closes out by saying his current computer may not last the five years of our investment horizon we've been talking about. How would Scott, or anybody like him, transfer tokens? How do you know that you're, again, actually carrying your value forward even when you do something as mundane but important as buying a new computer?

Bush: This would only be an issue if you're using a non-browser software wallet that actually lives on your specific computer. Honestly, in most cases you can simply just download it again and log in using your credentials, and that won't be much of an issue. Your particular computer should not be the breaking point, unless you keep your private key in a Word document that you couldn't access.

Gardner: A couple of months ago, when you and I talked, you mentioned another cryptocurrency, because there are a lot of them out there and they're interesting. A lot of them are creative. I'm interested. You were talking about Filecoin.

That's a cryptocurrency where you can basically get paid, if you have extra space on your hard drive, for somebody else to upload their stuff. Encrypted, so it's not quite, I hope, as scary or sounding like a dumb mistake that you or I would make, getting a virus from somebody putting their stuff on our computer, but Filecoin enabling that, which is, arguably, a clouded trillion-dollar-like opportunity. Have you kept up with Filecoin at all since?

Bush: I've kept up with it a little. It's still very early stage. I think it actually is still prelaunch, but they're in heavy engineering mode right now. They raised significant money. And I'm not sure when the launch date is, but I think it's coming up soon.

Gardner: All right, well, let's keep moving. So we got an email from Kyrsk Kadva. "Hi, David. Your podcasts are very interesting, especially the one with Aaron Bush talking about bitcoin, Ethereum, and blockchain technology. There's buzz about Ripple XRP" -- that's capital "R" Ripple, and then XRP, an acronym after it -- "which is going on. Could you please make a podcast on Ripple XRP? It would be really interesting to hear what experts have to say about that."

Bush: Ripple is the name of the cryptocurrency. XRP is its ticker symbol, I guess you could say. I'm glad you asked about it, because this is a great non-bitcoin example of a crypto asset that creates real value. I don't have any great insight into its valuation, but I'm happy to explain it a bit for everyone.

First, let's take a step back and look at the issue Ripple is solving. Say you're a Guatemalan company trying to go through a Guatemalan bank to settle some transaction with another business, and you've got to go through a Vietnamese bank. An avenue like New York City to London might be fairly efficient for settling that transaction, but for other paths it might not be as much. Transactions like that might take three to five days to settle, and they might have annoying fees involved. That's pretty slow for everyone involved.

Ripple's goal is to make the cross-border settlement process faster and more efficient, and they have a really smart strategy in how they've gone about this. To start, they are selling transaction-processing software to banks. The software is effective, it helps improve their systems, and it can work with or without blockchain and with or without Ripple, the token XRP. Institutions aren't generally opposed to using blockchain, but oftentimes just because things are so complex, they have to be slow to adjust, so Ripple's taking a step-by-step approach to getting these institutions on board.

And their game plan is to build a massive network of financial institutions. And Ripple's already made good progress on this front through its software and through just bringing people together, and its incentives are sound. It provides instant liquidity that can bypass all the middlemen you normally would have to go through. Just imagine you turn your peso into Ripple and then you turn your Ripple back into yen. You don't have to go through so many middlemen. You can just go through a process like that. The processing time is four seconds, which is a little shorter than three to five days, and the data is secured and backed up by the blockchain, so you know there won't be errors that you have to go figure out.

And so not all banks and businesses are using XRP, the token, yet, but they are joining the network and laying the foundation for XRP to be used more in the future. And once it is used to manage substantial monetary flows, it will need a sizable monetary base or network value to be able to support all of those transactions. And so that's why this has become one of the most valuable crypto assets right now. The team is about 160 people right now, so it's a big project, and it's had some venture funding. I think it's a good example because it has a very clear use case and a very clear strategy.

Gardner: I think you were saying that the market cap value of Ripple, in effect the network value, is something around $10 billion, and when you say there are a lot of people working on this, 160...

Bush: It's amazing.

Gardner: ...that's pretty remarkable, isn't it? It makes me think that maybe you and I should just scotch this whole Motley Fool thing and we should just start our own -- you code better than I, so we're going to need some more people to code. I'll just be a supervisor. I'll just stand and supervise.

Bush: Foolcoin.

Gardner: Foolcoin! Maybe Foolcoin should exist, because we have more than 160 employees here, at The Motley Fool, and I'm pretty sure we have not created $10 billion, unfortunately, of market cap value. And I realize a lot of this remains speculative. The No. 1 most valuable cryptocurrency, the broadest and most important one today, is bitcoin. Is Ethereum No. 2?

Bush: It is No. 2.

Gardner: And you told me that Ripple is No. 4. What's No. 3?

Bush: Bitcoin cash, which is a fork of bitcoin.

Gardner: All right. Let's next go to Jimmy Simons's email. He starts with, "Dear David. Knowing your love of defining and categorizing investing terms and ideas, I was more than a little disappointed with the RBI podcast on cryptocurrency with Aaron Bush."

Bush: I try my best, but I guess I can't win over everyone.

Gardner: You've got a lot of props here, and that's part of the reason we had you back. Jimmy goes on. "Granted cryptocurrency and blockchain technology is a difficult, technical topic to attempt covering on a podcast. My main concern," Jimmy writes, "is that (1)," and he's got two -- "(1) cryptocurrency and tokens were not well defined in the podcast in regard to Foolish investing, and (2) a balanced view of cryptocurrency was not presented -- i.e., many downside risks and issues were not mentioned." Aaron, could you speak to those two?

Bush: We probably didn't talk about that enough, to be fair.

Gardner: And it's my fault, because I'm the host, so if we're not getting to the bottom of terms, this is on me. Jimmy, I take this very personally, what you've done to me with this email, saying that we're not good enough. That we didn't do a good enough job for you. Didn't you listen to all the other people who said it was a great podcast, Jimmy?

But being serious about this, Aaron, I think you've done a nice job once again this week and a couple of months ago just defining cryptocurrency. We talked about tokens in that Oct. 18 podcast more than we did here, tokens which basically create some scarcity and, therefore, can drive more value in support of cryptocurrencies. We talked some about that.

But Jimmy's asking in the context of Foolish investing -- Foolish investing, which, I hope, everybody has a much better handle on who's never listened to this podcast. But a couple of our basic foundation points would be that we're thinking five-plus years forward. We're looking to invest in things that we support. That we believe in. That we think the world will be better for as these things grow to the moon over the following five or 50 years. And I guess there's something there as well, about making sure that you're diversified and that you understand some of the downside, which Jimmy's asking about in his second constructive criticism. But how do you frame this up against Foolish investing?

Bush: Well, I think it's very important to be transparent about the risks that are included in this. And so I think he has a great point in saying that this is a very risky endeavor. As I mentioned, this is like seed-stage venture investing. Many of these projects simply will not pan out despite their best efforts. The ecosystem is currently filled with bad actors and people just trying to take advantage of people. The regulatory environment is unclear. I think, just as technology improves, there's always going to be a war against hackers. There definitely is risk here.

But in my opinion, that doesn't necessarily mean that everything is worth avoiding. It means that due diligence is extra important. And I think that we can bring a Foolish mindset into how we look at and analyze these, not as speculations but as real investments.

Gardner: Aaron, the way that new blockchains can form, I'm seeing these days initial coin offerings. It's almost like there's going to be so much more of all this than we already think. And it's kind of like when you and I talked in October, I likened this to trying to explain the internet to a Viking, where, let's just say it's 1995 and we're talking about what the internet is going to be. And the Viking is not really understanding what computers are, but we're talking about it ahead of a lot more stuff. And so much has happened.

If we just think about e-commerce -- which is only one, if you will, cryptocurrency within the internet blockchain metaphor -- and you just think about all that this is going to be, and you can understand why there would be some room for some bad actors and some players coming in. But I think a lot of this is well motivated. A lot of it won't work out.

It's kind of like your friend who says, "You know, Aaron, I'm starting a blog and I hope you'll check out my blog and maybe click on the ad there." And a lot of people are going to start blogs here, and not all the blogs are going to work out. And some people are just going to stop their blogs because they're like, "I can't keep this up," or, "Why am I tweeting when I'm eating lunch?" So I mean, there's going to be some of that, right? Inevitably there will be a lot of creative destruction, but coming out of that are some big, foundational things that you and I have been talking about.

Bush: Right. And I think a decent analogy is that where this crypto ecosystem is right now, it might be similar to where the internet was in 1994, something like that. It's imperfect, but I think right now we're seeing the infrastructure stage. And so a lot of new organizations coming out with applications that might not have the infrastructural support needed to fully make their dreams realized yet. As an investor, I'm interested in a lot of the infrastructure plays going on here, and then later, it will lay the foundation for all the new, exciting applications to come.

Gardner: OK, we have a few more questions to go to, and even though I was making a joke about Jimmy Simons being a critic of this show, it was a constructive criticism, and I absolutely appreciate that. You and I can probably never underline enough some of the risks here, and how if something can double in two months it can also get halved in two months. And I just want to make sure everyone has clarity around that, and I think we've spoken to that, so thank you for that note.

M. Stewart writes about BitConnect. I know you've done some homework, here, Aaron and it's interesting, so you'll share a story with us in a sec. But M. Stewart wrote, "Thank you for broadcasting a most informative call. Here's a question I would love to see addressed. There's quite a buzz surrounding BitConnect."

Now that's all one word. CamelCase, which gives me an opportunity, once again, to make sure everyone knows that there's uppercase. There's lowercase. But then, if you didn't know, there's CamelCase, where you have something like iPad, where the "P," all one word, the "P" is capitalized in the middle of the word. So BitConnect is a CamelCase word with a capital "C".

"There's quite a buzz surrounding BitConnect," M. Stewart writes. "What can you tell us about it and the role it plays within the ecosystem? I assess it to be a Ponzi scheme."

Bush: And I think you are right, because I also assess it to be a Ponzi scheme, and that's not something I say lightly.

Gardner: OK, so five points to M. Stewart for ferreting out a Ponzi scheme. Aaron, what did you find when you looked further into BitConnect?

Bush: Right, so, BitConnect is a bitcoin lending platform with so-called guaranteed returns. How it works is that people trade their valuable bitcoins in for BitConnect tokens, and then as they hold their BitConnect, they get paid interest in bitcoin.

And so, two things I immediately take issue with. First of all, those BitConnect tokens are pre-mined. They don't have miners. Instead, they're owned by the team. And so when you trade your bitcoin for BitConnect tokens, you're just giving bitcoin to the team, essentially. Not the greatest incentive model.

And second, the bitcoin that you receive in interest is really just taking back fractional pieces of what you just gave them. And the system, where people can make more interest in bitcoin than they initially put in, which really is their value proposition, that only works as long as new people are joining the network and they're giving more bitcoin in exchange for BitConnect tokens. And as soon as people stop doing that, the whole thing falls apart, because then they won't be able to pay those interest rate payments and people will pull out in masses. And it could be a while until that happens because people are pretty hyped about it, and I think regulators so far have been pretty slow to touch this. To me it seems to be a pretty clear Ponzi.

Gardner: That's obviously, on the one hand, very disappointing and disturbing, and I'm glad that you called it out. I'm glad that M. Stewart called it out. And then, on the other hand, here we are even talking about it. I mean, in a sense we're kind of giving some publicity to it, and that's part of what happens with scams, is that they need to get people aware of the possibility and the opportunity in order to sucker them.

So we're definitely not doing that here. I'm glad that we've received this note. I'm glad that you looked into it further, Aaron. I'm hoping that the average person could see this on their own and not participate. How easy is it to create a Ponzi scheme through cryptocurrency?

Bush: Well, it's obviously fairly easy if something like this can come up, and they're probably not the only players doing something like this. And I think part of why organizations like this are getting away with it is because there's not much institutional money at play yet. And that probably will change over the next year or two, and I have a feeling schemes like this will probably have much shorter life spans as institutional money flows in.

Gardner: I remember when we first started The Motley Fool, that was early days in the internet and there was a lot of concern, and rightly so, about so-called chat rooms in which penny stocks were being hyped. And particularly from the mainstream media and some of the bigger players within finance, they all kind of viewed the internet as a Wild West. Crazy. This is all a Ponzi scheme itself. And all of the chatter, a term that was consistently used in cyberspace about stocks was clearly of no value or was just hype.

Now, we were there saying there's a lot of value, here, and you have to do it right. But there's no question there was a lot of penny-stock hyping. This is kind of the same thing, just at the dawn of this technology.

Bush: Yeah. What makes this slightly worse is that there are referral programs for something like BitConnect, so people will be able to receive even more payment the more they get people onboard and using whatever their key is, which just makes the problem worse.

Gardner: All right. Well, we need to bring this baby in under... I always try to do these podcasts under 50 minutes, and I think we can do that through the help of our talented producer, Rick Engdahl. We'll see. But toward that, we should probably start shutting things down.

So I'm going to close it out with a note from Daniel Scrugham. Now, I've gotten to know Daniel just a little bit through his notes to our podcast Mailbag. He's 15 years old. He's in Knoxville, Tenn. And we've answered one or two of his questions before. He wrote in, Aaron, and I'm glad that I'm getting to share this question with you, because you, yourself, were once a young teenager tapping those days back into The Motley Fool figuring out the world of the stock market.

Here's Daniel, kind of in analog, and this time he's trying to figure out this world of cryptocurrency. Here's the note, and I quote. "I am facing problems with the details of making a cryptocurrency purchase." This is back, earlier, once again to how do you actually do this thing. "Most major exchanges only allow bitcoin or Ethereum or Litecoin" -- that's L-I-T-E coin -- "so would I have to buy those and then exchange them somewhere else for the small, less-common cryptocurrency?

"In addition, I have even more problems because I'm a minor. I'm under 18." Not that kind of miner -- the minor with an "o," not an "e.". "I'm under 18. Unlike my brokerage account, I haven't found any way to make a custodial account on a website like Coinbase, and I don't know if it would be a good idea to have one of my parents make an account there, buy coins with my money, and then just give them to me when I was 18. If not, wouldn't it be best to use a wallet to buy the cryptocurrencies where my age would not matter? I don't know if I could do this, and then you factor that I can only spend $500 on cryptocurrency, gets even more difficult.

"Everything seems so complicated. I would really appreciate any help or advice from you or specifically Aaron Bush" -- and you're right to call out Aaron and not look for help from me, Daniel -- "on how I, as a 15-year-old, could buy cryptocurrency with U.S. dollars."

Bush: All right. So there's a bit to unpack there, but I think I can answer this pretty quickly. So at the most fundamental level, there is no age discrimination in mining and in buying and holding something like bitcoin. However, to open an account somewhere like Coinbase or to open an account with exchanges, in which you would trade bitcoin in for another cryptocurrency -- or U.S. dollars for another cryptocurrency -- you will have to prove your identity, and I think all those places, as far as I know, do follow 18-plus rules. So that is a bummer.

I don't think custodial accounts exist yet. I think there might be two paths. One would be consider mining or consider following something along that path, actually joining in the ecosystem. You might not have to buy it, but maybe you could buy it with your electricity, in other words, where you can put up your machine to figure out how to support the ecosystem and get compensated for that. So find something that you believe in and join that network. That might be a way depending on the crypto asset, to get involved.

Beyond that, if you don't want to do that, the best suggestion I have is to open something under a parent's name and then once you turn 18, create a new account and then transfer it into your account. That should be fairly easy. And if the tax laws transfer from how they work with equities and cash into cryptocurrency, then you will be able to transfer a certain amount tax-free without triggering any form of gift tax. Ar least in my experience, that's how that's worked. I'm assuming those laws will probably solidify before you turn 18.

Sp I don't know if that's a great answer. Unfortunately, there are limitations, but I still think there are ways to sort of get around that problem.

Gardner: A solid answer, and I'll just add, Daniel and everybody else. Whether you're 15, 55, or 105, there's a lot of value just to leaning in and listening. There's value for you having spent this time with us that you did today, to listen to Aaron talk more about this, even if you or I are not speculating -- and that's what it is, right now -- by buying some bitcoin or bitcoin gold. Litecoin. Bitcoin cash. Even if you're not doing that, just think about the value to you of your world perspective, and how you think about investing, and looking in at technology going forward.

It's kind of like even if you didn't buy Amazon.com when it IPO'd back in 1997, if you were paying attention, it gave you a lot of insight into where the world was headed, and even if you didn't buy that stock in 1997, you still did pretty well if you bought it in 2002. And if you were figuring out the world over those five years, especially if you're 15, Daniel, there is a lot of value right there. So congratulations to you, sir!

Aaron, let's close it out. Let me just ask this. We're never going to be able to keep up with all of the demand and interest for cryptocurrency through Rule Breaker Investing. We're just a podcast. We pop up once a week for 40 minutes or so. The other six days of the week, some of us have a lot more interest in this topic than we'll ever be able to cover here. Do you have a couple of sources or places that you keep up with what's happening in that world? Because while it's going to be a minority of our listeners that actually want to do that or spend time to do that, they are out there, and I know they're starving for an understanding of how to be Aaron Bush. How to keep up with what's going on. What do you do?

Bush: Right. I think the two main resources actually for me, just in general, one would be Twitter, because most of the thought leaders and engineers in this space are active on Twitter, and there's a pretty vibrant community of people talking back and forth and debating on Twitter. I've personally learned so much there, just about how the ecosystem works.

Gardner: Give three Twitter follows. Satoshi Nakamoto?

Bush: Unfortunately, not. So just to mention three people off the top of my head, I think one is Vitalik Buterin [@VitalikButerin] who is the creator of Ethereum. I think he's a great person to follow just because he tends to be very interactive with people talking about Ethereum and explaining just technically how things work. And I've personally learned a lot from him.

Gardner: How is Buterin spelled, just for the fun of it? I mean, Vitalik I'm guessing is V-I-T-A-L-I-C.

Bush: And Buterin is B-U-T-E-R-I-N.

Gardner: OK, good.

Bush: Yes. And I would say another person worth following is Naval Ravikant [@naval]. He is the founder of AngelList. He is a prominent angel investor.

Gardner: AngelList. OK.

Bush: Yes, AngelList. And he very much is a leading person in just explaining, big picture, how this stuff works. He often has great tweetstorms, long series of tweets, explaining how this fits into society.

Gardner: Great.

Bush: And I would point out one last one. Laura Shin [@laurashin], who is a Forbes writer, does a great job unpacking a lot of the day-to-day news and explaining in a really simple way what it means for people who are starting to become interested in this space. There are so many more people than those three, but I think those three are a good starting point.

Gardner: OK. So that's Twitter. Now you said there was a second source. A second thing that you do.

Bush: Yes, I think Reddit is actually a very valuable tool for community building around this. Just say we mention Ripple. You can type in "reddit" and "ripple," and there's going to be a community there, that, one has links to all of the basic Ripple information that you can follow.

Gardner: Almost like an FAQ or just onboarding research.

Bush: Yes. So it will send you to the white paper. It will send you to links of the team leaders detailing their strategy. But also, it's a good place to keep up with news and people really discussing maybe more in-depth than they would have on Twitter what's going on. And I've personally found that very valuable for digging in deeper.

Gardner: Great. And I think many of our listeners will know Reddit, but that's R-E-D-D-I-T, which is the online site that has lots of conversation around infinite topics, it seems. So good. Reddit, Ripple as an example, but Reddit, cryptocurrency; Reddit, bitcoin; Reddit...

Bush: Reddit, insert any cryptocurrency.

Gardner: All right, let's leave it right there for now. I suspect we'll probably have you back at some point again, Aaron.

Bush: I would be happy to.

Gardner: People can follow you, though, on Twitter. What are you on Twitter?

Bush: I am @aaronbush100.

Gardner: OK, good. And, of course, they can follow you through our Motley Fool services. You're on my Rule Breakers team. You're on the Supernova team. You do a lot here and around Fool HQ. Aaron, you created a report about cryptocurrencies.

Bush: I did. It was part of when we reopened Premier Pass and we created Crypto Society within that. I wrote the few reports and I'm still writing some emails to that group.

Gardner: All right. So next week we're going to talk about stock gifting. It is that time of year where we give, and giving stock is a wonderful way to do it. We're going to talk about a little bit of the ins and outs of that. I'm also going to review five stocks that I picked this time last year. If you listened to my podcast, December 2017, Five Stocks to Put Under The Tree, we're going to review how those stocks have performed in 2017 since, no doubt, you did put them under the tree last December. And so let's see how you and your family are doing with Five Stocks to Put Under The Tree plus stock gifting on next week's Rule Breaker Investing.

In the meantime, thanks Aaron

Bush: Thanks, David!

Gardner: Fool on!

As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.