If you are already a trader, you’ll know that there is a whole glossary of words, terms, and expressions that are encountered predominantly in the world of trading. Technical and fundamental analysis, Bollinger bands, support and resistance levels, swing trading… these are just the tip of the iceberg.
It’s the same with almost every specialist topic – they all have their terms and jargon that can take some time to familiarise yourself with.
Cryptocurrencies are no different, so if you are starting to trade them or are considering trading them it makes sense to get yourself up to speed with the specialist terms and expressions that you’ll likely encounter in the world of cryptocurrencies.
To get you started, we’ve prepared a beginners guide to some of the key terms you’re likely to encounter in the crypto world.
Blockchain Technology and Associated Crypto Terms
- Before we elaborate on the main types of cryptocurrencies, we should first explain the term ‘blockchain’. Blockchain is a special type of software technology that most cryptocurrencies are built on.
- Blockchain uses a peer-to-peer network of computer nodes to verify cryptocurrency transactions and ownership. This verification process uses cryptography for security. Cryptography involves the use of complex mathematical formulas and is what gives cryptocurrencies their name.
- Nodes are every computer in a network that runs a particular software. Some specialist nodes are tasked with solving cryptographic problems, which are used to secure cryptocurrency transactions. They are awarded newly minted cryptocurrency units for their trouble. Because they put in work to eke out new cryptocurrency units, the term used to refer to these specialist nodes as ‘miners’.
Different Kinds of Cryptocurrencies – Coins and Tokens
One of the first things to learn around cryptocurrencies is why some are referred to as ‘coins’ and others as ‘tokens’, or sometimes even ‘utility tokens’.
Cryptocurrency coins are cryptocurrencies which are intended to be used to buy and sell all kinds of goods and services as an alternative to traditional ‘fiat’ currencies such as the dollar, pound, euro or yen. Bitcoin, the very first cryptocurrency, is an example of a ‘coin’ cryptocurrency, as are other coins such as Bitcoin Cash and Litecoin.
Bitcoin Cash came into existence as a result of a ‘hard fork’ in the Bitcoin blockchain. For a chance to be made in the underlying ‘protocol’, or blockchain software, at least 51% of the nodes that form the blockchain have to be in agreement about implementing the change. A part of the Bitcoin network wanted to make some technical changes they thought would make the blockchain more efficient. They didn’t have the 51% majority required but went ahead with the change to the protocol anyway. This created a hard fork in the blockchain, which means it split into two separate coins. One part of the network approved the changes, and the other rejected them. From the fork onwards, the side of the blockchain that included the changes became a new cryptocurrency – Bitcoin Cash.
Whenever a cryptocurrency’s blockchain is updated there is a fork. When one side of the fork is continued as a new, standalone cryptocurrency, that side is referred to as a ‘hard fork’.
Another term you will often come across is ‘Altcoins’. Altcoins is a term used to refer to any other cryptocurrency that is not Bitcoin and was first ‘coined’ when cryptocurrencies of different kinds began to appear after the concept of cryptocurrencies was popularised by the launch of Bitcoin.
Cryptocurrency tokens are not designed to be ‘spent’ in the same way as traditional currencies. Instead, they are associated with blockchains that have a particular function. This function could be a smart contracts blockchain like Ethereum which is used to build decentralised applications, known as ‘Dapps’, or a payments blockchain like Ripple. Tokens are only ‘spent’ to pay for the use of these single-purpose blockchain platforms.
Smart contracts are software-based sets of rules. When they are combined in different and complex ways they can be used to create applications, much like any other software application. The only difference is that these contracts are verified and enforced through the peer-to-peer blockchain. This is why applications created from such contracts are referred to as decentralised applications – Dapps.
While the above is certainly not a comprehensive round-up of all of the specialist cryptocurrency terms you will encounter, it should briefly cover many of the terms you will come across. There are plenty of online resources available should you wish to learn about them in more detail.