Don't skip the basics: 10 crypto terms to know before you invest

·6 min read
Image of Bitcoin, man thinking
Familiarise yourself with crypto terminology before you jump into investing. (Source: Supplied)

Intrigued by the boundless opportunities to get rich by investing in the crypto currency world, but don't know how or where to begin your investment journey because it all sounds like Greek and Latin?

A good place to start would be to get acquainted with some of the basic terminology and jargon involved if not all, right off the bat.

You might've already heard some of these terms in common parlance; but when used in the crypto context, the meaning and value it carries might leave you surprised.

While there are hundreds of associated terms which can't all be decoded in one go, bear in mind the fact that learning even a few of these terms can serve as a guiding light to your pot of gold or crypto treasure.

Here's our first instalment of basic crypto-related terminology for you to get a better understanding:

1. Cryptocurrency 

A type of currency that’s digital and decentralised. It can be used to buy and sell things, or as a long-term store of value.  

2. Decentralisation

The principle of distributing power away from a central point is known as decentralisation. Blockchains are traditionally decentralised because they require majority approval from all users to operate and make changes, rather than a central authority as in the case of a banking system of a country. 

3. Blockchain

A system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.

A blockchain is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains several transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.

The decentralised database managed by multiple participants is known as Distributed Ledger Technology (DLT).

Blockchain is a type of DLT in which transactions are recorded with an immutable cryptographic signature called a hash.

On cryptocurrency blockchains, blocks are made up of transaction records as users buy or sell coins. Each block can hold only a certain amount of information. Once it reaches that limit, a new block is formed to continue the chain.

Bitcoin on motherboard,3d rendering,conceptual image.
A blockchain is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. (Source: Getty)

4. Hash

When a transaction has been verified and needs to be added to a block in a chain, it will be put through a hash algorithm to convert it into a set of unique numbers and letters, similar to what would be created by a random password generator. 

Then two transaction hashes will be combined, and put through the hash algorithm to produce another unique hash. This process of combining multiple transactions into new hashes continues until finally there remains just one hash – the ‘root’ hash of several transactions.

What makes hashes unique, and a key security feature for blockchains, is that they only work one way. While the same data will always produce the same hash of numbers and letters, it is impossible to ‘un-hash’, or reverse the process, using the numbers and letters to decipher the original data.

(This essentially means that while you can carry out a crypto transaction to transfer a certain amount from A to B, you cannot reverse the transaction from B to A in the case of an incorrect transaction; as would be possible in the case of a bank transaction)

5. Wallet

A place to store your cryptocurrency holdings digitally. Crypto wallets keep your private keys – the passwords that give you access to your cryptocurrencies making them safe and accessible, allowing you to send and receive cryptocurrencies like Bitcoin and Ethereum.

They come in many forms, from hardware wallets like Ledger (which looks like a USB stick) to mobile apps which makes using crypto as easy as shopping with a credit card online.

6. Bitcoin

The first and most valuable cryptocurrency, launched in 2009 when its implementation was released as open-source software. Bitcoins are created as a reward for a process known as mining.

They can be exchanged for other currencies, products, and services, but the real-world value of the coins is extremely volatile. While its value has climbed steadily since 2009, it has witnessed fierce fluctuations.

7. Mining

The term crypto mining means gaining cryptocurrencies by solving cryptographic equations through the use of computers.

This process involves validating data blocks and adding transaction records to a public record (ledger) known as a blockchain.

WATCH BELOW: Inside Australia's largest Bitcoin mining operation

8. Altcoin

Any coin which is not a Bitcoin is an altcoin. Altcoins are alternative cryptocurrencies that were launched after the success of Bitcoin. They generally project themselves as better replacements for Bitcoin. Bitcoin's emergence as the first peer-to-peer digital currency was paving the way for many to follow.

Most altcoins are trying to target any perceived drawbacks that Bitcoin has and come up with competitive advantages in newer versions. 

The term 'altcoin' is a combination of two words: 'alt' and 'coin' where alt means 'alternative' and coin means 'cryptocurrency'. Together they imply a category of cryptocurrency, which is an alternative to the digital Bitcoin currency. 

After Bitcoin's success story, many other peer-to-peer digital currencies have emerged to try to mimic that success. Altcoins, even with many overlapping features, vary widely from one another.

9. Cryptocurrency exchanges

Cryptocurrency exchanges are online platforms in which you can exchange one kind of digital asset for another based on the market value of the given assets. The most popular exchanges are currently Binance and GDAX.

It is important not to confuse cryptocurrency exchanges for cryptocurrency wallets or wallet brokerages. Cryptocurrency wallets and wallet brokerages generally allow you to buy and sell a small range of popular digital assets (Bitcoin and Ethereum), which you can then send to a different exchange to trade for other digital assets like altcoins.

However, most cryptocurrency exchanges will usually limit their users to only trade digital assets for digital assets, but a few allow trades of fiat currencies such as US dollars for cryptocurrencies.

10. Fork

When a blockchain’s users make changes to its rules it is known as a Fork. These changes to the protocol of a blockchain may result in two new paths, one that follows the old rules, and a new blockchain that splits off from the previous one (example: a fork of Bitcoin resulted in Bitcoin Cash).

Blockchain forks are essentially a split in the blockchain network. The network is an open source software, and the code is freely available.

This means that anyone can propose improvements and change the code. The option to experiment on open source software is a fundamental part of cryptocurrencies, and also facilitates software updates to the blockchain.

Forks occur when the software of different miners become misaligned. It’s up to miners to decide which blockchain to continue using. If there isn’t a unanimous decision, then this can result in the creation of two versions of the blockchain. There can be periods of increased price volatility around such events.

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