Crypto Terms You Should Know Before Investing
Published September 12, 2022
Cryptocurrencies are complicated, but this handy glossary is not. These definitions of crucial crypto terms will help you better understand the crypto investment process.
Concise Overview
- Crypto is new and exciting but also comes with several unknowns
- The market is constantly changing, making it unpredictable for investors
- Understanding crypto terms can help you make informed investment decisions
Introduction
You hear the word cryptocurrency, and it sounds like some magic. The truth is that the technology behind digital currencies such as Bitcoin and Ethereum is exciting and can be helpful in many ways. If you want to invest in cryptocurrencies, it’s crucial to understand the terminologies.
The following list will help you get acquainted with some essential crypto terms you need to know as you explore this exciting market.
Altcoin
An altcoin is a term used to refer to any cryptocurrency other than Bitcoin and Ethereum. It comes from the term ‘alternative coin,’ which means it is an alternative to the major coins. Altcoins are usually cheaper than Bitcoin and Ethereum, which makes them more attractive to investors.
Bitcoin
Bitcoin is a cryptocurrency and worldwide payment system. It is the industry standard for crypto, as the system works without a central bank or single administrator. The network is peer-to-peer, and transactions occur between users directly, without an intermediary. Bitcoin was invented by an unknown person or group under Satoshi Nakamoto and released as open-source software in 2009.
Bear Market
A bear market is a period in which the crypto market is falling. This can occur at any time, but it’s most common during recessions and periods of economic growth. A ‘bear’ refers to an investor who expects a price decline and seeks to profit from it by selling crypto.
Block
A block is a group of transactions that are processed together. Blocks are added to the blockchain in a linear, chronological order. The data within each block contains all the information necessary to verify and link it with other blocks. Blocks also contain cryptographic hash values so they can be easily identified and tracked over time.
Blockchain
Blockchain is a distributed database that records transactions. Generally, it’s a chain of blocks—each block containing data about the transaction that occurred in the previous block. Blockchains can be private (only available to members of an organization), public (open to anyone), or hybrid (available only to selected authorized individuals).
Bull Market
A bull market is a period when prices rise, and investors buy. In a bull market, investors are optimistic about the future of the crypto market. When people buy coins because they expect them to go up, this is considered bullish behavior. The opposite of a bull market is known as a bear market.
Coin
A coin is a unit of account, like the U.S. dollar or the euro, used to calculate value. In the crypto world, coins are usually associated with a particular blockchain or platform that uses them as its currency.
Cold Wallet
A cold wallet is a type of hardware wallet that is disconnected from the internet and used to store cryptocurrency. A cold wallet is often a USB drive or hard disk which has the private keys to your crypto stored on it. Cold wallets are considered more secure than hot wallets because they cannot be hacked remotely, only physically stolen.
Consensus
The process by which nodes in a cryptocurrency network reach an agreement. The consensus algorithm is the algorithm by which a cryptocurrency network reaches a distributed agreement about the state of its ledger.
Crypto Market Capitalization
This is a measure of how much money is invested in all of the cryptocurrencies in existence. The crypto market cap is calculated by multiplying the price of each coin by the number of existing coins.
Cryptography
Cryptography is a set of techniques for protecting information by converting it into an unreadable form without the right decoder. We use cryptography all the time, whether it’s to protect our credit card numbers when we shop online or to ensure that only authorized computers can access our work files. It’s the process of making information secure. There are many ways to do this, but generally speaking, cryptography is the science of encrypting and decrypting messages.
Decentralization
Decentralization is a system in which decision-making power is distributed among different parts or actors. In the case of cryptocurrency, this means that every computer on the network can validate transactions and add new blocks to the chain. The network is not controlled by any single entity, which makes it impossible for anyone to tamper with the system.
Decentralized Applications (DApps)
Decentralized applications are like a decentralized version of apps that you’re used to using on your phone. They’re apps that run on the blockchain and are distributed peer-to-peer, so they don’t rely on a single server or central authority. They’re often designed to run autonomously and require no downtime, censorship, or third-party interference.
Decentralized Autonomous Organization (DAO)
The DAO is a decentralized organization that operates on smart contracts and other blockchain-based technologies. It’s governed by rules encoded in software, which are publicly visible and transparent, ensuring fair and open operation.
Decentralized Finance (DeFi)
Decentralized finance is an emerging area of fintech that uses blockchain technology to provide financial services. It allows for the creation and trade of assets such as loans, stocks, futures, and options without relying on a centralized authority or third party.
Ethereum
Ethereum is a decentralized platform that runs smart contracts. It’s also a blockchain-based distributed computing platform, meaning it can run applications. Ethereum also has its cryptocurrency called ether (ETH). Ether can be traded on exchanges for Bitcoin or other cryptocurrencies, or it can be used to pay for transactions on the Ethereum network.
Exchange
An exchange is a business that facilitates the buying and selling of cryptocurrencies. Exchanges are usually based online, with users able to access them through a web browser, or on their mobile devices.
FOMO
FOMO, or fear of missing out, is when people buy into an asset class because they are afraid they will miss out on future gains. FOMO can be a good thing if you are buying into new technology but can be harmful if you are buying into a bubble.
Fork
A fork is when a blockchain splits into two separate chains. This can happen when there is a disagreement over how to upgrade the network or if there is a disagreement over how to deal with an attack. Soft forks are backward-compatible upgrades that allow new rules to be added to a blockchain without disrupting the network. Hard forks are incompatible upgrades that create a new blockchain and leave the old one behind.
FUD
Fear, uncertainty, and doubt. When someone spreads FUD about a coin, they are trying to convince others that the coin is not worth investing in due to some perceived flaw in its design or implementation. This often causes panic selling as investors sell off their coins at a loss when they hear rumors about a project’s viability. This further depresses the prices as more investors fear losing money if they don’t sell quickly enough before prices drop even lower.
Gas
Gas is the unit of measurement used to determine the cost of a transaction on the Ethereum network. It’s used to pay for computation time, storage and bandwidth. The more complex a transaction, the more gas it will require.
Genesis Block
The first block in the blockchain. It’s often called the ‘genesis block’ because it is the very first block ever created. Most cryptocurrencies have a genesis block that contains special details about the currency, such as its name and date of creation.
Halving
Halving is the process by which a cryptocurrency’s mining reward is cut in half. This happens at regular intervals, giving each coin an established lifespan of about four years before it reaches a point where the reward is too small to be worth mining for.
Hash
Hash is a mathematical function that takes an input and produces a fixed-length output. The hash function takes in data and returns a unique string of characters for each piece of input data.
HODL
HODL is a popular crypto term for ‘hold on for dear life.’ It refers to holding onto your cryptocurrency even when tempted to sell during volatile moments. The idea behind HODL is that if you keep your money in crypto, you’ll benefit from the long-term upward trend of prices.
Hot Wallet
A hot wallet is an online wallet that allows you to access your cryptocurrency anytime. Hot wallets are a good solution if you are looking for a quick way to make small transactions, but they are not ideal for large amounts of money because they can be susceptible to hacking attempts.
Initial Coin Offering (ICO)
An ICO is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for Bitcoin, ether, and other cryptocurrencies. The most popular way to participate in an ICO is through a ‘digital wallet.’
Long/Short/Flat
Refers to whether or not you believe an asset’s price will rise or fall. “Long” means you expect it to go up; “short” means you expect it to go down; and “flat” means you have no opinion either way (you’re just holding onto your position).
Margin Trading
Buying and selling cryptocurrencies using borrowed funds from your broker. This increases your potential gains and losses if things go wrong (and fast).
Mining
Mining refers to the process of creating new Bitcoins or other cryptocurrencies. It involves solving complex mathematical problems using computers and high-powered computers called ‘miners.’
Node
Nodes are computers that connect to the blockchain network. They are responsible for validating transactions and maintaining the blockchain, as well as creating new blocks.
Non-Fungible Tokens (NFTs)
Non-Fungible Tokens, or NFTs, are a type of crypto asset that can’t be divided into smaller parts. They are unique and not interchangeable, like a collectible card or a piece of art. Because they are unique and can’t be broken down into smaller pieces, NFTs are often used in the gaming industry to represent digital goods—such as virtual pets or characters in games—and can also be used to represent real-world items such as real estate or stocks.
Peer-to-Peer
Peer-to-peer is a system of interaction between two parties or more in which each party interacts directly with the other(s) without the need for a central authority. In crypto, peer-to-peer can describe transactions without an intermediary such as a bank or payment processor.
Price Action
Price action is a term used to describe price movement in a market. Price action is considered to be an indicator of investor sentiment, and it can be used to help predict future price movements.
Proof of Authority (PoA)
Proof of Authority (PoA) is a consensus protocol that employs small, designated validators to validate transactions. It uses a centralized group of validators chosen by the network’s operator. These validators are rewarded for maintaining the network and must have stakes in their respective networks to be validated.
Proof of Stake (PoS)
Proof of Stake (PoS) works differently than Proof of Work (PoW) because it does not require miners to solve complex mathematical problems to confirm transactions on the blockchain. Instead, it uses something called ‘forging,’ which means that users who hold more tokens are more likely to be chosen as block validators (and therefore receive rewards for doing so).
Proof of Work (PoW)
Proof of Work (PoW) involves miners solving complex mathematical problems to confirm transactions on the blockchain. The first miner to solve the problem gets rewarded with new Bitcoins. The more computational power a miner has, the more likely they will be able to solve these problems first and get rewarded.
Public Key
A public key is a cryptographic key used to encrypt messages sent to or from a user. The Bitcoin network uses it to verify that a message has not been tampered with. The public key can be freely shared and distributed.
Private Key
A private key is a string of characters that allows you to access an account. It’s used with a public key to encrypt and decrypt messages. The private key can only be generated by the same software that created it, which means that if you lose your private key, there is no way to recover it.
Satoshi Nakamoto
Satoshi Nakomoto is the mysterious creator of Bitcoin. The name Satoshi Nakomoto was used by the person or people who created the original Bitcoin white paper. Still, it is not known whether this refers to a single individual or a group of people. The name is a pseudonym and could represent anyone.
Smart Contract
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible.
Stablecoin or Digital Fiat
Stablecoins are usually backed by collateral, such as fiat currency reserves, crypto reserves, or physical assets (gold). These ‘collateralized’ cryptocurrencies can be used as a hedge against the volatility of other cryptocurrencies and can serve as an alternative payment method in developed markets.
Pump and Dump
Pump and Dump is a type of market manipulation that occurs when someone buys a cryptocurrency and then promotes it to others, which drives up the price. When the price is high enough, they sell their coins and make a profit, while other investors buy into the hype and lose money.
Technical Analysis
The study of historical patterns in the price movement of an asset to predict future movements. Investors use it to identify trading opportunities, though it has been criticized for being unreliable and subjective.
Token
A token is a digital asset that can be used to represent something else. It’s usually associated with a specific application or network, built on top of another blockchain platform. Tokens are sometimes referred to as app coins or utility tokens.
Vitalik Buterin
Vitalik Buterin is one of the most influential people in the cryptocurrency world. He pioneered Ethereum, a decentralized platform for smart contracts and applications that uses blockchain technology to transparently and securely store data without relying on a trusted third party.
Wallet
A wallet is a software program that allows you to store and use your cryptocurrency. You can access your wallet through an online or offline device or a third party, such as a web browser. You can also use your cryptocurrency to buy goods and services directly from other people using your wallet.
Whale
A whale is a significant investor in the cryptocurrency market. Whales can influence the price of cryptocurrencies, especially if they’re buying or selling large amounts. If you see that a whale has bought into a particular cryptocurrency and its price starts going up, it might be worth checking out to see if it’s worthwhile investing in (if you have enough coins).
Whitepaper
A whitepaper is a document that outlines the purpose, process, and use of a cryptocurrency or blockchain project. It’s like a business plan for a tech company—and if you’re an investor in crypto, you’ll want to read every one of them.
The Bottom Line
If you’re new to the world of cryptocurrencies, it can be challenging to understand the terminology. But once you do, you’ll better understand what it all means, making your experience much more fun. Also, when you clearly understand these terms, you can make a more informed decision about whether or not you want to invest in digital currencies. Such information can help you navigate the investment process more efficiently.