One of the most prevalent obstacles for mass adoption of cryptocurrencies is the confusing terms often used when discussing them. Phrases such as “blockchain”, “proof-of-work”, and even acronyms such as “UTXO”. This small guide for beginners will allow them to not only understand what these common phrases mean but understand how they all tie together and make the crypto investing journey a bit less confusing.
First and foremost, we have blockchain. A blockchain is an immutable general ledger that records transactions. When User A, sends bitcoin to User B, the transaction is broadcasted to the blockchain, to forever be recorded. This transaction may never be altered in the future, and the pseudo-information of this transaction is available to anyone in the world.
What makes a blockchain so special though? One of the key features of Bitcoin’s blockchain and all other cryptocurrencies is that they are trustless. This means that no single entity must be trusted in order to send value to a recipient.
Think of it this way, in order to send U.S dollars to a family member across the world, you must trust 3rd parties to carry out the transaction, not to mention the amount of control these parties have on your information, amount able to send, and fees you must pay.
Now that you understand a blockchain’s use-case, let’s go over how it works. A hint is the word itself, block-chain. A chain of blocks! One block is a collection of information that needs to be verified. Verification is done by the “miners,” a global network of supercomputers solving algorithmic functions. Once a block has been confirmed, or verified, it is added at the end of the chain. This is what “confirmations” mean when you try depositing to an exchange.
To summarize, a blockchain is simply a ledger that tells you who sent what, and when. It requires no trust from a third party to utilize it, and the records kept on the chain may never be altered.
The two most common consensus mechanisms are PoW, and PoS. These two differ drastically and can get extremely complicated. We will only stick with the basics.
PoW is when transactions are verified using computational power. Typically, a miner will purchase a computer to verify transactions on a blockchain to hopefully be rewarded and make a profit. This method can be very expensive, as bitcoin miners can cost $5,000+. To mine cryptocurrencies with PoW, people can use ASIC machines, GPUs, or CPUs, depending on their budget or coin that they are mining.
On the other hand, we have PoS. This consensus mechanism is quite the opposite of PoW where it requires minimal computing power. PoS requires a user to hold coins in a wallet, leave the wallet running, and will get paid dividends for verifying transactions.
There are a few variations to staking such as “cold” or “hot” staking, but the idea is always the same. Leave the coins in a wallet YOU own and leave it running 24/7 to get paid dividends. The more of the currency you are staking, the more you will be paid in dividends. (Similar to owning stock in a dividend-paying company)
UTXO stands for “Unspent Transaction Output”. If I have 1 BTC in a wallet and send 0.9 BTC, the UTXO is going to be 0.1 BTC or the amount that I did not send. This term is technical and can get a bit more complicated once more transactions are involved, but this is the simple meaning.
HODL is a play on the word “hold”. The origination of HODL is unclear, but it is a comical interpretation of the buy-and-hold investment strategy.
An “altcoin” is any coin that is not Bitcoin. The term is short for “alternative coin.”
Token vs. Coin
Yes, there is a difference between the two phrases. A “token” is a classification for cryptocurrencies built on platforms such as Ethereum. These cryptocurrencies do not have their own blockchains and are dependent on the main chain such as Ethereum, NEO, and more.
The term “coin” is used to classify cryptocurrencies that utilize their own blockchain. Cryptocurrencies such as Bitcoin, Ethereum, Monero, and more, are coins due to their unique blockchains. One tip for figuring out if something is a coin or token is to find out if it can be mined or staked. If it can be mined/staked, it will be a coin.
The abbreviation DYOR stands for “do your own research.” This sums up the proper fundamental analysis one must conduct when searching for crypto investment. Do not trust what everyone says, and always be sure to verify facts and fiction yourself.
The Flippening is the (unlikely) event that Ethereum (or any cryptocurrency) surpasses Bitcoin in market capitalization. This has never happened, and Ethereum only came remotely close once in history.
Satoshi is the fake name of the person/group that created Bitcoin. Many have claimed to be Satoshi Nakamoto, but none able to prove so. Satoshi has approximately one million bitcoins that are believed to be lost or inaccessible due to the death of Satoshi.
Satoshi or “Sat” (Unit of Measurement)
A satoshi is the smallest unit of measurement for a bitcoin. 1 satoshi = 0.00000001 BTC.
Crypto Tax Software
Cryptocurrency tax software is built to help traders and crypto enthusiasts automatically calculate their bitcoin taxes. Accurately reporting cryptocurrency on taxes can be a challenging task for traders and accountants alike, so the majority of investors use these crypto tax tools to automate the entire process.
These phrases are only the tip of the iceberg, most new investors see these terms and get scared or intimidated, which in the end turns them off completely from the cryptocurrency market.
If you are struggling with learning the market lingo or just want to dive deeper into the meanings and learn some of the more technical aspects of them, it’s highly recommended to get more involved with communities through Discord, Twitter, Telegram, Etc.