For starters, let’s define cryptocurrency itself. Often referred to as digital assets, cryptocurrencies are digital or virtual currencies that rely on cryptography for security. Bitcoin and Ethereum are the mostly widely known examples. Most cryptocurrencies can be transferred between users with little or no bureaucracy, assuming they have the technical know-how.
Now, on to the top vocabulary terms you should be familiar with to understand the innovative and often volatile cryptocurrency landscape:
Blockchain
A blockchain is a distributed ledger that transparently records cryptocurrency transactions across a network. Think of it as essentially a spreadsheet that is hosted across a limitless number of computers and accessible to anyone. Because there are so many copies of the spreadsheet – and its information is visible to so many users – it is extremely difficult to alter the information in the database, i.e. to shift the location of cryptocurrencies without proper authorisation.
Wallet
A cryptocurrency wallet is a digital tool that allows users to store, receive, and send cryptocurrencies. It consists of a public blockchain address – which you might think of as a set of coordinates on the shared, publicly visible spreadsheet – for receiving funds and a private key for accessing and managing those funds. There are a wide variety of cryptocurrency wallets to choose from, with user experience typically a key selection factor.
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Mining
Cryptocurrency mining is the process by which new cryptocurrency coins are created and transactions are added to the blockchain. It involves solving complex mathematical problems using computer hardware and – depending on the mathematical problems’ complexity, which is often designed to increase over time as a deflationary mechanism – significant electrical energy.
Note that this mining process creates cryptocurrency coins like Bitcoin but not cryptocurrency tokens like USDT, the popular US dollar-pegged cryptocurrency. Tokens are created through smart contracts as designed by their developers.
Smart Contract
A smart contract is an automated, self-executing contract with its terms of agreement directly written into code. Smart contracts automatically execute and enforce predefined rules when specific conditions are met.
In contrast to the cryptocurrency mining process – which rather meritocratically depends on the “work” of computer hardware that in principle anyone can own – the cryptocurrency token minting process depends rather arbitrarily on what its smart contract developers had in mind.
Consensus Mechanism
A blockchain consensus mechanism is the process by which network participants agree on the validity of transactions and the state of the ledger. Common consensus mechanisms include Proof of Work (PoW), designed to give greater authority to participants whose computers do the most work, and Proof of Stake (PoS), designed to give greater authority to participants who have the most amounts of an associated cryptocurrency.
Altcoin
An altcoin is any cryptocurrency other than Bitcoin, the most widely known and highest priced crypto asset. “Alt” stands for alternative, meaning that these are alternative digital currencies.
Decentralisation
Cryptocurrency advocates believe decentralisation is one of digital assets’ key features that will revolutionise finance. As above, blockchains are distributed and transparent ledgers, and many enthusiasts believe that their open and relatively democratic nature will create a fairer economic playing field for everyone, including those without access to traditional bank accounts.
Blockchain Fork
A fork is a technological split in a blockchain that can occur when there is a change in the protocol’s rules. It can result in two separate versions of the blockchain and two separate versions of a cryptocurrency. One notable is Bitcoin Cash, which is a fork of Bitcoin.
Initial Coin Offering
An initial coin offering (ICO) is a fundraising method in which new cryptocurrency projects sell their underlying tokens to investors before the official launch. Investors purchase these tokens as an investment in the project’s potential success. This approach has fallen under scrutiny from securities regulators around the world, particularly in the United States.
Fear of Missing Out
The fear of missing out is a psychological phenomenon where individuals fear missing out on potential profit or exciting opportunities. It is widely regarded as a significant factor in cryptocurrency investors’ decision making. Many analysts believe that the prices of cryptocurrencies are driven almost entirely by investor psychology as opposed to underlying fundamentals like cashflow, which digital assets and their associated blockchain projects typically do not have in the traditional sense.
In closing, bear in mind that cryptocurrency parlance is full of catchphrases and terminology that are widely accepted but not necessarily consistent or technically accurate. For example, stablecoins, digital assets whose prices are pegged to another asset, are often in fact tokens. When confronted with a new cryptocurrency-related term, it is usually worth spending a few minutes assessing its technical meaning as opposed to its interpretation in the broader mass market of cryptocurrency investors.
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