Here’s the lexicon to know and learn before you start investing in cryptocurrency.
Looking to invest in cryptocurrency but terms like bitcoin, Ethereum blockchain, gas, minting, and mining seem too confusing to you? If your answer is yes, then you must first learn the lexicon commonly used in the cryptocurrency ecosystem.
Let’s begin with ‘cryptocurrency’. It is a type of currency that is encrypted and digitised for trading. It uses algorithms to monitor the creation and transfer of funds between buyers and sellers. All crypto transactions take place without the involvement of financial intermediaries like banks.
That’s not all. The entire process of trading cryptocurrencies includes many steps of which any entrant should have thorough knowledge.
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10 cryptocurrency terms to know before investing
When a verified cryptocurrency transaction takes place between a buyer and a seller, it is recorded in a digital ledger called a blockchain. Each transaction is time stamped and individually coded with the help of the virtual ledger.
Blockchain is also the underlying technology that is used in cryptocurrencies.
You can think of it as a series of blocks that build upon one another. A blockchain network will keep adding cryptocurrency or other transactional data, making it an unceasing and irreversible process. When it reaches its capacity, a new block gets added to the chain.
It can be accessed using the internet, on any laptop or computer. This also means blockchains are decentralised and are not confined to one location, laptop or network.
Fiat refers to money that is issued and recognised by governments, such as the US dollar, euro and pound. It is also circulated via banks.
Unlike cryptocurrency, fiat currency is centralised and is controlled by a central authority.
If you are looking to transact fiat currencies in the blockchain network, then you will need a centralised institution for the custody of your funds.
In such transactions, you receive a ‘token’ which implies the money you owe. The value of each token depends on the current market value. It fluctuates daily.
Tokens are cryptocurrencies that are not native to the blockchain they are a part of. For example, the native currency of the Ethereum blockchain is Ether, but the blockchain itself supports several other coins. Thus, Ether is a cryptocurrency, while the others are crypto tokens. This makes tokens non-mineable and transferable units of value.
Additionally, tokens can be built without creating a blockchain, as the support function can be provided by a different party. They can be utility tokens or security tokens. The former is used for transactions within an ecosystem. The latter are more like shares issued by companies.
Bitcoin and altcoin
Bitcoin is a cryptocurrency that is increasingly becoming an accepted form of payment system alongside fiat money. Transactions using bitcoin do not have third-party involvement and, unlike fiat money, are usually free from regulatory mechanisms. Additionally, it can be offered as rewards to blockchain miners for verifying transactions as well as traded as assets on cryptocurrency exchanges.
Altcoin is a digital currency that is not bitcoin, meaning it is a centralised digital currency that includes banks and other financial intermediaries, apart from buyers and sellers. It is an amalgamation of two words — ‘alternative’ and ‘coin’.
Each altcoin has its own set of rules and regulations, properties and specific use cases. The non-bitcoin crypto includes the second-most popular coin to mine, Ethereum, as well as thousands of coins added regularly, which have very minimal market value.
If you are looking to invest, financial experts recommend investing only in the bigger, more popular cryptocurrencies.
To buy or sell cryptocurrency, you will need a common platform. Think of an exchange playing that role as a digital marketplace.
You can use this online service to change your digital assets or exchange your crypto for fiat, depending on their market values. You can even trade one cryptocurrency for another.
Similar to traditional brokerage, you can deposit or encash money using netbanking, your debit card, bank transfer and other standard deposit methods, as enabled by the exchange.
Some Indian crypto exchanges include Unocoin, CoinSwitch, WazirX and CoinDCX.
They include different fee structures for transactions. The exchanges can also differ based on the currency conversions they allow.
The wallet only stores the location of your cryptos on the blockchain; it does not hold the currencies per se. It enables you to store and fetch your digital currencies and comes with a unique code that represents your blockchain address.
Although the wallet address is public, it comprises a number of ‘private keys,’ signifying the owners along with the account balance.
There are two types of crypto wallets in the crypto landscape — hot and cold. While a hot wallet is connected to the internet and is more susceptible to online hacking, a cold wallet works without the internet and is considered to be the more secure way of safeguarding your crypto investments.
In fact, cold wallets come with specially designed USB drives that store your crypto for later use. Two well-known cold wallets are the Ledger Nano X and Trezor Model One. Ledger Nano X is known for supporting 23 different types of cryptocurrencies along with other additional features.
Gas is a fee charged for operating in the Ethereum network. It is used to allocate resources of the Ethereum virtual machine so that decentralised applications like smart contracts can be self-executed securely.
For the uninitiated, smart contracts are blockchain programmes that get executed when certain, predetermined conditions are met. They can either automate a workflow or an agreement, without any time loss or middlemen.
While some operations entail a small cost of 3 to 10 gas, a full transaction costs 21,000 gas. This depends on the demand and supply between the miners and the users of the network. Gas is charged in Gwei, which is a tiny fraction of Ether.
Minting is the creation of a new coin for circulation in the cryptocurrency ecosystem. It might appear similar to mining, but there are fundamental differences on a deeper level. The term mining is usually used to refer to the process known as proof-of-work, which is basically validation of transactions (or work done) on a block through problem solving.
The other method is known as staking. It follows the proof-of-stake mechanism in which a certain amount of pre-existing cryptocurrency is staked by those who want to validate transactions for a profit.
Minting happens through both mechanisms.
Mining is primarily the process through which tokens are minted. Once they are minted, it becomes part of the blockchain. The blockchain is, therefore, the one which maintains the transactions.
Most of the cryptocurrencies depend on a reliable mining system, which entails solving complex maths riddles to secure and empower a network along with generating new tokens. This is done with the help of computing resources, such as computers.
DeFi stands for Decentralised Finance. It includes conducting financial transactions without any exchange, brokerage, bank or any financial institution.
This means the digital currencies that are exchanged include crypto. Also, the particular cryptocurrency transactions are done between two parties only, i.e. the buyer and the seller, without a middleman.
Some of the famous DeFi projects have decentralised exchange protocols, which seamlessly automate the crypto transactions among buyers and sellers.
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