10 Terms to Know if You're New to Crypto
You've heard about it. You've seen people tweeting about it. You've seen it in the headlines.
2021 may go down as the year of crypto, but there's still a lot of confusion as to what it even is.
And it's understandable.
We definitely didn't grow up with this technology, but we can't use that as an excuse either because we made fun of our parents for saying the same things about smartphones and social media..
So this article is a quick primer to get you up to speed on some of the lingo to know in the crypto world and how it works:
Bitcoin was the first and is currently the most valuable cryptocurrency. People are able to buy bitcoin and purchase things with it (where it's accepted) or hold it as an investment.
While its value has increased since its creation in 2009, it's been a rollercoaster to say the least.
In 2021 alone, the price of bitcoin has fluctuated from a record high of $60,000+ to well below $30,000.
I'm not going to dive into the details and technology behind Bitcoin in this article, but an important takeaway here is that it's a digital currency with a finite supply of 21,000,000.
There will never be more than 21,000,000 bitcoin in existence. This is why people make the comparison of it being digital gold. If there's demand for it, the price will typically go up because there's a limited supply of it.
Pro tip: Bitcoin (with a capital B) refers to the underlying blockchain and bitcoin (with a little b) refers to the actual coin.
To give you an idea of what a blockchain does, it's like a public Excel sheet freshly exported out of Quickbooks.
It keeps track of every transaction made with a cryptocurrency and creates a permanent, irreversible ledger of transactions (or other data).
The reason it's permanent and irreversible is because of the "chain" part of blockchain. But first, let's get an understanding of what the "block" part is.
Each piece of data (such as a transaction) is contained in a block.
Blocks include more than one piece of data and must be verified.
After a block is verified, it gets pushed back and a new block falls into its place and the process happens again.
The "chain" part of blockchain means there is an ongoing string of blocks (which contain every transaction and piece of data stored on the blockchain).
In general, data cannot be altered once a block is verified and added to the chain, which is why it's considered to be very secure.
By definition, a blockchain is "a digital form of record-keeping, and the underlying technology behind cryptocurrencies. A blockchain is the result of sequential blocks that build upon one another, creating a permanent and unchangeable ledger of transactions (or other data)."
DeFi (Decentralized Finance)
As defined by NextAdvisor, DeFi is "financial activities conducted without the involvement of an intermediary, like a bank, government, or other financial institution."
This is possible by financial products becoming available on a public decentralized network.
Real-world use cases for DeFi include things such as lending and borrowing, banking services, investing, and even digital proof of ownership of assets (such as real estate).
Decentralized finance is basically like regular finance, but without large institutions such as banks playing middleman.
Ethereum & Ether (ETH)
Ether (ETH) is the second most popular cryptocurrency behind bitcoin.
It's fluctuated in price since its creation in 2015 and has reached all-time highs of $4,100+ in 2021.
Ethereum (the blockchain) is one of the largest and most established networks in crypto. It has many use cases but two of the most common are the execution of smart contracts and storage of data from decentralized apps.
Aside from the ethereum blockchain, you can use ETH (the currency) to buy things such as NFTs or you can invest in ETH through exchanges like Coinbase.
If you want to teach your friends something new about crypto, you can explain the difference between ethereum and Ether (ETH):
ETH (Ether) refers to the coin - and Ethereum refers to the underlying blockchain.
ETH: pronounced "eeth"
An exchange is a place where people can buy and sell cryptocurrencies, similar to how you can buy and sell stocks on Robinhood.
If you've started to dive into the crypto/NFT space, you've probably heard about gas or been victim to high gas fees.
Gas refers to the fee that is required to process a transaction on the Ethereum blockchain.
Investopedia defines gas as "payments made by users to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain. The exact price of the gas is determined by supply and demand between the network's miners, who can decline to process a transaction if the gas price does not meet their threshold, and users of the network who seek processing power."
What this basically means is that to purchase something with ETH, the transaction has to be verified on the blockchain (like we talked about earlier in the article).
To incentivize the network to verify and complete the transaction, we have to pay a fee.
When there are a lot of people making transactions at the same time, gas prices go up.
HODLing is a slang term adopted by the crypto community which refers to holding an investment (i.e. not selling).
The term was "created" in 2013 when a guy left this comment, misspelling "holding" in the subject line:
NFT (Non-Fungible Token)
At its most basic form, an NFT is a digital asset.
Like a digital version of a sports card.
Or a digital version of the Mona Lisa.
Or a digital version of a concert ticket with VIP passes.
You can prove ownership of your NFT on the blockchain (and right-click saving someone else's NFT doesn't mean you own it...) and I like to think of them in 5 different ways:
- The Profile Picture NFTs
- The Functional NFTs
- The Passion/Art NFTs
- The Community NFTs
- The Utility NFTs
Just like how you can pay to join a creator's Patreon community, some NFTs give access to a community. The thing that really sets a community-based NFT apart from a standard community where you pay like a $100 to join is that you may be able to resell your NFT for a profit down the road if the community is built around value.
And I believe that's the thing a lot people don't realize with NFTs right now — for it to have real value, value has to be created in some form.
Additionally, creators of community-based NFTs can give more incentives and have more flexibility with member benefits than a standard pay-to-join membership framework.
Right now, a lot of new "profile picture" projects are popping up every day that have no value whatsoever. People are buying them to use as their profile picture on Twitter, hoping it picks up in popularity, so they can resell it for a profit. Not saying there's anything wrong with it, but that style of NFT won't last because there's no true value being created.
The utility or functional NFTs mean they have real-world use cases. They could grant access to an event, you could use it in a digital game, you could receive royalties from the collection's transaction or hold commercial and licensing rights for your NFT - the opportunities are endless.
And finally, the passion NFTs. I view these as digital art because people buy them because they like them. There's no utility, no real-world purpose, just digitally designed art. It's hard to value this style of NFT because the value is subjective. Like I personally don't think the Mona Lisa is worth millions of dollars, but someone does.
To buy an NFT, you can go to OpenSea.io and get one just like you could go to Amazon and buy canvas wall art.
Public keys (Address)
For simplicity, public keys are like your home address.
They're a 42-character string of numbers and letters and are what you would give to someone if they wanted to send you crypto - just like how you would give out your home address if someone wanted to send you a package.
Your public keys are paired with your wallet - not the leather one by your front door, but your crypto wallet (which we'll cover below)
If you're in crypto, your private keys and seed phrase (covered below) are probably more important than your social security number. The private keys to your crypto wallet allow you to send funds from your wallet and allow you to complete transactions.
DO NOT ever give your private key address to anyone.
Nobody needs to know it, especially not some random person online asking for it.
(Bonus) Seed Phrase
Your seed phrase is like a fancy version of your private keys and they are also tied to your crypto wallet.
I really like this explanation from Coinbase:
"Think of your crypto wallet as being similar to a password manager for crypto, and the seed phrase as being like the master password. As long as you have your seed phrase, you’ll have access to all of the crypto associated with the wallet that generated the phrase — even if you delete or lose the wallet."
Your seed phrase needs to be written down and stored in a safe & secure place so you can access it if needed and so nobody else has access to it.
Some common ways people save their seed phrases are:
- Writing it down pieces of paper and keeping copies in different locations (like a safety deposit box)
- Engraving the seed phrase into a pieceof stainless steel
Remember: If you lose access to your seed phrase, you could lose access to all the crypto in that wallet
A crypto wallet is very similar to a regular wallet.
It's a place to "store" your owned cryptocurrency or digital assets, just like how a regular wallet holds cash and cards.
Now, stay with me here – wallets can be either hot/soft or cold/hard.
A hot (or also known as soft) wallet exists online and connects to the internet. This would be like Metamask, which can be installed as a Chrome extension, and is what people generally use to buy things such as NFTs.
Soft wallets are less secure than hard wallets since it's a software that lives online.
Here's a screenshot of one of my Metamask wallets so you can get an idea of what it is and looks like:
A cold (also known as hard or hardware) wallet exists offline, usually on a device like a USB drive. These are more secure than soft wallets and people tend to store valuable NFTs and large amounts of crypto on them.
The Wrap Up
Unfortunately, this isn't a comprehensive list of everything you need to know about the world of crypto.
But it's a starting point.
I like to think of crypto like math.
You started with learning the numbers and basic operations like addition, subtraction, division, and multiplication. With those 4 disciplines, you can generally solve any math problem.
Yes, they get more complex, but the basics are still there.
In crypto, it's the same thing.
Once you understand how bitcoin works, why it has value, how blockchains work, and how it all works together - you begin to understand other aspects of the crypto world because you can piece together the knowledge you've gained from other places.
Then once you understand the basics, you can begin to form your own perspectives and opinions based on your own knowledge and pattern recognition.
The workings of NFTs, smart contracts, and other DeFi/crypto-related pieces are all based on the fundamentals.
I will be developing content around crypto over the next several months to help you get a better understanding of how it works, so if you have any suggestions or things you would like to learn more about, feel free to reach out or DM me on Twitter!