Due diligence is important when looking into any asset class. However, doing one's homework may be even more important when it comes to digital currency, as this asset class has been around for far less time than more traditional assets (like stocks and bonds) and comes with substantial uncertainty.
Conducting the proper research on cryptocurrencies may require a would-be investor to explore many areas. One area in particular that could prove helpful is simply learning the basic industry terminology. Certain lingo is highly unique to digital currency, making it unlikely that traders would have picked it up when studying other asset classes like stocks, bonds and commodities.
This article will explore the more popular terms and phrases relevant to cryptocurrencies, providing a strong foundation for those interested in exploring this innovative asset class.
In digital currency, an address is basically a destination where a user sends and receives digital currency. In a way, it is similar to a bank account. These addresses usually include a long series of letters and numbers.
An altcoin is a digital currency other than Bitcoin. There were more than 1,000 altcoins listed on data source CoinMarketCap at the time of this writing. Another way of describing the term "altcoin" is referring to it as an alternative protocol asset, meaning that it follows a protocol (set of rules) that's different than that of Bitcoin.
In crypto, arbitrage refers to taking advantage of the price difference between two different exchanges. If Bitcoin is selling for £8,950 on one exchange and £9,000 on another, a trader can buy the digital currency on the first exchange and sell it on the second for a modest profit.
"ATH" is an abbreviation of "all-time high." This term can be quite helpful to know for tracking the digital currency markets. These assets are so volatile, so keeping their ATH in mind can prove valuable. A digital currency could potentially hit several local highs before rising to a new all-time high.
"Bears" believe that an asset, for example a digital currency, will decline in value. Another way of putting this is that if a trader thinks a cryptocurrency will depreciate, their sentiment surrounding the digital asset is "bearish." In many situations, traders will make use of this expectation by taking a short position on an asset, meaning that they will make a wager that will pay off should the asset in question fall in value.
Many digital currencies make use of blocks, which contain transactions that have been confirmed and then combined together.
The blockchain, which is a distributed ledger system, consists of a series of blocks. These blocks contain verified transactions. The blockchain was designed to be not only decentralised, but also immutable, meaning that entries could not be erased once placed on this distributed ledger. The idea of the blockchain was first introduced when the Bitcoin white paper was released in late 2008.
If a trader believes that an asset will rise in value, he or she is a "bull." When an investor has this optimistic expectation of an asset's future bull, this frame of mind is described as "bullish."
The network for a digital currency reaches consensus when the network's nodes agree that a transaction took place. This agreement is crucial if the varying network participants (nodes) are to have the same information. In other words, consensus is crucial to distributed ledger systems.
A cryptocurrency is merely a currency that relies on cryptography. Bitcoin, for example, leverages cryptography in order to verify transactions.
Cryptography is basically the process of encoding and decoding information so that would-be observers are unable to understand the information being sent.
Directed Acyclic Graph
A Directed Acyclic Graph (DAG) is a kind of data structure that builds new transactions on top of old ones. Each new transaction needs to reference prior transactions before it can be accepted into the network. This is different from the blockchain, where each new block in the chain would reference previous blocks.
Several considerations differentiate DAGs from blockchains. DAGs don't have miners, and therefore they don't have transaction fees like blockchains do. Further, these networks can keep their transaction speeds high.
A distributed denial of service (DDoS) attack takes place when multiple parties work together to overwhelm a system by inundating it with either requests for information or malicious data. Basically, the nefarious parties involved in such an attack want to prevent a resource, such as a server, from being able to provide some specific service, such as serving a web page.
Some digital currency exchanges have suffered DDoS attacks from nefarious parties looking to cripple these marketplaces and hopefully take advantage of this vulnerability to steal cryptocurrency. While efforts to steal digital assets may not work, an exchange's users could become unhappy simply because they cannot make trades through the marketplace.
Distributed Ledger Technology
Distributed ledger technology (DLT) is a system of recording information that is simply distributed, or spread across, many different devices. The blockchain, for example, is a type of DLT that was originally created to keep track of all Bitcoin transactions.
Escrow refers to a third-party holding financial resources on the behalf of other parties. A third-party would hold funds in escrow when the other entities involved in a transaction may not trust each other.
Fiat currencies are currencies that have value because they are minted by a central bank. Fiat means "by decree," and these currencies have value because some central authority has decreed that they have monetary value. Examples of fiat currencies include the British pound, euro and Japanese yen.
Exchanges are basically just marketplaces where traders can make digital currency transactions. If a person wants to buy Bitcoin, going to an exchange is the fastest way to accomplish this objective.
The term "FOMO" stands for the phrase "fear of missing out." This occurs when investors start buying up a particular asset based on their expectations that it will rise in value. Market participants can easily flock to an asset should that asset experience sharp gains.
Getting caught up in FOMO can be dangerous. More specifically, buying up an asset because it has recently enjoyed some notable upside can cause one to fall victim to market manipulation.
A fork is a change in a digital currency's rules or protocol. Developers update a cryptocurrency's protocol from time to time. A fork can be either a hard fork or a soft fork. A hard fork is a change to a digital currency's protocol that makes blocks created using the old protocol incompatible with the new chain.
Fear, uncertainty and doubt can be summed up using the term "FUD." The idea behind this is that market participants may spread misleading or inaccurate information in order to cause an asset's price to decline. A trader may want an asset's price to fall so they can either short it successfully or buy in at a lower price and increase their chance of generating a gain.
A hard fork is a type of fork that creates a permanent change to a digital currency's protocol, or rules. When one of these forks takes place, it results in a whole new blockchain, which will not accept any blocks mined using the old rules.
The old chain can survive, however, leading to a scenario where both the old and the new blockchains can continue.
Cryptocurrency investors developed the term "HODL," which stands for "hold on for dear life." The acronym originally came from a misspelling of the world "hold." Digital currencies can be highly volatile, so when they start experiencing significant price fluctuations, some market participants state that they should simply "HODL."
Initial Coin Offering
An initial coin offering (ICO) represents the first time that an organisation offers digital tokens to the public in an effort to raise money. Companies frequently hold these offerings so they can finance projects.
These digital token sales have often been likened to initial public offerings (IPOs), where companies sell more traditional assets such as stocks and bonds in order to raise money.
Initial Exchange Offering
An initial exchange offering (IEO) is simply a token sale that takes place through an exchange. In one of these sales, interested parties can purchase digital assets directly from one of these platforms. This is different from an ICO, where the team behind a particular project offers digital tokens.
One major difference between an IEO and an ICO is that in the former, exchanges research tokens thoroughly before offering them, in order to safeguard both their reputation and their customers.
KYC stands for "know your customer." Many jurisdictions have KYC regulations, which have come to affect startups holding ICOs. These regulations require companies holding these digital token sales to verify the identity of their investors.
Going long, also known as taking a long position, means making a wager that an asset will rise in value. If a trader purchases a digital currency like Bitcoin, for example, they are making a bet that the cryptocurrency will appreciate.
While simply buying digital currency is one example of taking a long position, there are other methods available. For instance, traders can leverage options and futures.
Market cap is short for market capitalisation, which is a term for total market value. The market cap of Bitcoin, for example, is the number of BTC outstanding multiplied by the digital currency's price. The term can also be used to refer to a group of digital currencies.
Mining is the process for creating new units of a digital currency. For example, the Bitcoin network releases new bitcoins every time a block is mined. In this instance, mining involves confirming transactions and combining them in to blocks.
This verification requires hardware and electricity, and miners are rewarded with digital tokens for contributing these needed resources.
The mining incentive is a reward that miners get for confirming transactions and mining them in to blocks. Verifying the transactions of the Bitcoin network, for example, requires specialised hardware and substantial electricity, so miners are compensated with a mining incentive.
Initially, Bitcoin's mining incentive was 50 BTC, but at the time of report, the reward had dropped to 12.5 BTC.
When a digital currency moons, that means it rises sharply in value. For example, a crypto trader could talk about how an altcoin is going "to the moon!"
Newcomers are frequently described as "noobs" by industry insiders. If you are this person, you may want to sit back and observe before "jumping in with both feet." Digital currencies are highly volatile, so those who are newer to these assets should keep their risky nature in mind.
POW is an acronym for "proof of work," which is a system of proving that a digital currency's transactions have been verified. Many digital currencies, including Bitcoin, use POW. Under such a system, miners must do "work" that is difficult for them to contribute, but easy for the broader network to verify.
Miners are usually rewarded for verifying transactions by receiving units of a digital currency.
POS stands for "proof of stake," which is another method of confirming transactions. The digital currencies that use this approach to verification frequently provide all their digital tokens up front, and miners are selected based on how many units they have (their stake). In these cases, users who confirm transactions, sometimes referred to as "forgers," receive transaction fees for their contributions.
A private key is a piece of information—presented as a string of numbers and letters—that an investor can use to access their digital currency.
A public key is an address where an investor can receive digital currencies. This public key, like the private key, is a combination of numbers and letters.
Pump and Dump
A "pump and dump" is a type of investment scheme where a market participant—or several—work together to inflate the price of an asset so they can sell it when its value is artificially high. This practice may be particularly pervasive when it comes to digital currencies, as traders can easily get together using Telegram groups with the goal of causing specific cryptocurrencies to rise sharply in value.
The term "rekt" is crypto trader slang for "wrecked." Basically, it means that a trader lost substantial amounts of money.
ROI is short for "return on investment." Basically, if an investor puts their money in to a digital currency, they are doing so with the hope that they will receive a compelling return.
Satoshi Nakamoto is the pseudonym for the creator of Bitcoin, and more than one individual has claimed to be Nakamoto. However, none of these claimants have managed to convince the broader cryptocurrency community that they are, in fact, the creator of Bitcoin.
Security Token Offering
A security token offering (STO) is a sale where investors buy tokens that U.S. law would recognise as being securities. Many different kinds of tokens, including so-called utility tokens and asset-backed tokens, can count as security tokens.
Under the Howey Test, U.S. law defines a security as an "any contract, transaction, or scheme" whereby investors put their money into a common enterprise where they expect to obtain returns primarily from the efforts of other people.
Shorting an asset, also known as taking a short position, means making a bet that the asset will fall in value. There are several methods that traders can use to short digital currencies, including futures, options and margin trading.
Investors considering this method should keep in mind it involves a lot of risk, especially with cryptocurrencies because of their volatile nature.
A digital token is a unit of a digital currency, such as a Bitcoin. It is worth noting that some of these tokens are used for specific ecosystems, and those are frequently referred to as utility tokens. Other digital tokens are essentially securities.
The term "whale" is used to describe a trader who makes sizable bets. This term is a good one to know because market participants with the ability to execute very large transactions can potentially manipulate the market—or "make waves in the ocean."
The developers who create digital currencies usually provide white papers for these innovative assets. These documents generally offer comprehensive information on the digital token in question, as well as its underlying technology.
For example, the Bitcoin white paper provided information on a "peer-to-peer electronic cash system." Investors who are considering taking part in ICOs can benefit greatly from reviewing any available white papers on the subject.
Investors who are thinking about getting involved with cryptocurrency should keep in mind that industry terminology can be hugely beneficial. By performing the necessary research and learning this information, would-be traders can increase their chances of meeting their investment objectives.
This article was last updated on 19th October 2021.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.