How to make sense of crypto terminology

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The language to describe cryptocurrency trading is often shrouded in jargon. Photo: NurPhoto via Getty Images

Cryptocurrencies such as bitcoin (BTC-USD) and ethereum (ETH-USD) are skyrocketing and are expected to hit new all-time highs.

The latest bull run has sparked interest from traditional and institutional investors in cryptocurrencies.

However, one obstacle that makes investors hesitate are the unfamiliar acronyms, memes, and technical jargon associated with the crypto sphere.

Many investors follow Warren Buffet’s maxim that you should invest in what you know and nothing more.

So, to understand the world of cryptocurrencies, investors must not only learn the crypto-equivalent of traditional terminology associated with stocks and bonds, but also a host of new concepts, such as smart contracts, non-fungible tokens. (NFT) and decentralized exchanges (DEX).

Blockchain technology

Every investor should have a basic understanding of what a blockchain is and why it is a revolutionary technology.

Blockchain technology is the underlying engine that powers all cryptocurrencies. It is a digital form of tamper-proof, encrypted and decentralized archiving.

This digital data register is fully distributed over a network of computers or nodes.

Read more: How a Bitcoin court case in Japan can create crypto millionaires

The technology is revolutionary because the data concerned is not stored centrally and therefore cannot be controlled by a single authority.

It is a trustless system in which individuals do not have to trust an entity that holds their data in a centrally controlled location.

The system has the potential to do away with custodian banks, as transactions recorded on the blockchain are automated by defined algorithms that are virtually impossible to change once they have been verified by the network.

Watch: What is bitcoin? Smart contracts

Algorithmic programs can be stored on a blockchain which can execute agreements between participants almost instantly and without the need for an intermediary to validate the contract.

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These smart contracts have the power not only to disrupt the world of finance, but also to transform the legal system.

They are one of the main value propositions of the ethereum network, which was the first blockchain network to enable the execution of smart contracts.

The difference between a DEX and a CEX

Cryptocurrencies can be purchased in a number of ways. They can be purchased by wire transfer to a centralized exchange (CEX) such as Coinbase (COIN).

Once funds have been added to the exchange, users can purchase from a list of traditional cryptocurrencies.

Read more: Could Ethereum overtake Bitcoin?

An alternative to buying and holding cryptocurrencies on a CEX is to use a decentralized exchange (DEX), which hosts a multitude of coins and tokens.

Decentralized exchanges don’t store your purchases in a centralized location but instead send your cryptocurrency purchase to a connected digital wallet, such as a Metamask wallet.

Non-fungible tokens, or NFTs, have taken the art world by storm. (Getty)

Hot wallets and cold wallets

A hot wallet is an online storage for cryptocurrencies. This can be done on an established exchange wallet, such as Coinbase, or through a browser extension wallet, such as MetaMask.

MetaMask wallets can be used to interact with decentralized exchanges. However, after a slew of online exchange hacks, where investors have lost a large portion of their wallets, cold storage wallets are considered the safest way to store cryptocurrencies.

Cold storage involves transferring your crypto-holdings to a physical device that looks like a USB drive, a hack-proof method.

Read more: Non-fungible tokens: what are NFTs and why are they making so much noise?

DeFi and DApps

DeFi, or decentralized finance, is the name given to any financial activity that is carried out without the intervention of an intermediary, such as a bank.

Most DeFi applications currently reside on the ethereum network, while a DApp, or decentralized application, is a program that runs decentralized on a blockchain. An example of DApp is Aid: Tech, which connects charitable donors with beneficiaries.

What is an NFT?

Non-fungible tokens (NFTs) are unique digital assets that can be traded on exchanges such as OpenSea.

Over the past six months, many individual NFTs have sold for over $ 1 million (740,000) each. One example is the NFT of digital artist Mike “Beeple” Winkelmann, which sold for $ 69.4 million at Christie’s in March 2021.

Other diverse terminologies that cryptocurrency investors may come across are words such as HODL, which stands for “hold your investment for the long term,” and gas charges, which refer to the price paid to crypto miners for them. transactions to be recorded in the public ledger.

Watch: What are the risks of investing in cryptocurrency?

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