|
|
The best way to demystify cryptocurrencies for new investors is to explain the vocabulary around it. Because cryptocurrency represents a new asset class (Bitcoin was created in 2009), most investors who are new to the space will need a primer in its basic terms.
In the U.S. alone, Gallup reports that 6% of investors now own Bitcoin, which is triple (300%) the ownership that existed only three years ago in 2018. The consulting firm added that three years ago, three-quarters (75%) of investors considered cryptocurrency to be an “insecure asset”.
While 60% still consider it a risk today, there is growing awareness, understanding, and acceptance of crypto among investors under the age of 50.
For this reason, this article breaks down the most common terms you’ll encounter and explains exactly what they mean—in simple English. Let’s dive in.
15 Must Know Cryptocurrency Terms
Since the pandemic hit in 2020, cryptocurrency’s popularity among investors and traders has surged. Bitcoin, which was selling for roughly $6000 in March 2020, is trading for more than $60,000 today. That represents an astounding 1,000% gain (10X) in approximately 18 months.
Much of this popularity has been driven by the Fed’s abundant creation of new money, which is driving investors to move into verifiably scarce assets.
With Bitcoin’s total supply capped at only 21 million, it represents one of the most logical assets classes to move into if you want to pair a hedge (protection) against inflation with the potential for robust price appreciation.
If you’re ready to start investing, here at the “must know” cryptocurrency terms that will get you up to speed.
Altcoin
There is a common misconception that Bitcoin is the only type of cryptocurrency, but this simply isn’t true. Alternative coins (“altcoins”) are any virtual currency that isn’t Bitcoin., specifically.
These can include Ethereum (ETH), Cardano (ADA), Ripple (XRP), and Dogecoin (DOGE), as well as thousands of others.
Bitcoin
First introduced in 2009, Bitcoin is the most popular cryptocurrency and the coin that started it all. It has the biggest market share among cryptocurrency coins, closely followed by Ethereum and Cardano.
As of this writing, one Bitcoin is worth $61,800, as compared to its eight cent ($0.08) value when it first started trading in 2010. That’s an impressive change!
Block
A block is like a file that records transactions in the blockchain, which is the technology behind cryptocurrency.
Blockchain
At its core, a blockchain is a database of large amounts of information stored in blocks that can be accessed by several users.
Think of it as a timestamped spreadsheet that is magnified in size.
Cryptography
“Crypto” is rooted in the Greek word “kryptos” which means “hidden”, while “graphy” is derived from the word “graphein” which means to “write”.
Cryptography literally means to write in secret, which lends to the secure communications that power the blockchain.
Simply put, this mathematical practice is the encryption of data in the blockchain.
Cryptocurrency
You might already be able to tell that cryptocurrency, like Bitcoin and Dogecoin, is a digital or virtual currency that operates on blockchain technology.
Like fiat currency (e.g. USD, GBP), crypto is designed as a medium of exchange. Beyond investing in cryptocurries, you can use cryptocurrencies like Bitcoin or altcoins to pay for goods and services.
Crypto Exchange
The cryptocurrency market operates just like other financial markets. Investors and traders buy and sell coins through an exchange platform, with Wealthsimple explaining that a crypto exchange is similar to a stock exchange.
Most of the crypto trading volume happens through these exchanges, which is estimated to be billions of dollars every day.
Examples of crypto exchanges include Binance, Huobi, and Coinbase, some of which have their own coin. For instance, Binance coin or BNB can be used to pay for transactions on the platform, while USDC is Coinbase’s own stablecoin.
Decentralization
The blockchain is described as decentralized, which means no single entity has control of the network. Instead, it is operated by a network of people dispersed worldwide, all of who have equal control.
This digital technology allows users to transact directly without a traditional (centralized) exchange, like a bank.
Fungibility
You might have heard of the word ‘fungible’ in recent months from the new term Non-Fungible Token or NFT. Fungibility simply means interchangeability.
An example of this is cryptocurrency, as coins can be traded for one another. Another example of fungibility is fiat currency (like USD), which can also be used to pay for goods and services.
Initial Coin Offering (ICO)
If you’ve heard of an IPO (initial public offering) in the stock market, then an ICO (initial coin offering) holds the same purpose: to raise funds for a new cryptocurrency.
A company does this by launching a coin into the cryptocurrency market, thereby allowing investors to buy, own, and sell it.
Immutability
Immutability means not being subject to modification.
The blockchain is immutable, which means data stored in it cannot be altered, falsified, or manipulated. This makes it extremely secure.
Keys
To transact in crypto, you need public and private keys. A public key is essentially an address that lets you receive coins, while a private key is a unique password that allows you to access your funds.
These keys are generated together and form a pair.
Mining
Crypto mining is the process of creating new coins on the blockchain that get put into circulation.
Stablecoins
Stablecoins are digital currencies that have their value linked to an underlying asset, such as the US dollar (USD).
The Conversation notes that stablecoins pair some of the advantages of fiat currencies with some of the advantages of cryptocurrencies. For example, they can be used 24/7, making money transfers convenient. Stablecoins also allow for transactions to be immutable, that is, not subject to modification.
Because their value is “pegged” to fiat currencies, stablecoins are less volatile than Bitcoin and altcoins.
Wallet
Much like a physical wallet, Time describers crypto wallets as a place to store your virtual currency.
While your crypto assets aren’t stored in the wallet itself, it is where your public and private keys go. This allows you to control and access your funds.
A Beginner’s Guide to Cryptocurrency Terms
With cryptocurrency looking more and more like a legitimate asset, it is time for both beginner and experienced investors to deepen their understanding of it.
Familiarizing yourself with these cryptocurrency terms is a fantastic way to start building your crypto knowledge, and hopefully, your investment portfolio.