David Rounick discusses how Cryptocurrencies are akin to a winning sports’ book and offers an intro lesson on Cryptocurrency jargon for the newbie.
Very Brief Explanation of Cryptocurrency and its Definition
Although a specific cryptocurrency known as Bitcoin has been charged up in the mainstream media as of late, there are actually a number of different digital “coins,” and all are known collectively as “cryptocurrency.” This term, cryptocurrency, refers to any of the numerous digital currency systems that are encrypted in a way such that they are impossible to counterfeit, anonymous (untraceable to any certain holder or owner), and most importantly, decentralized. Decentralized means that it does not depend on a single central server (or government-run agency) to function, and is instead interconnected to other servers. In fact, all transactions are publicly visible on what is known as a public ledger. The most alluring aspect of cryptocurrencies is arguably the fact that it’s value is supposed to be free from the influence of any third party, such as governments, individuals, political groups, organizations, etc.
Blockchain? It’s a what, who, when…ummmm, huh?!?
Just about every financial institution, bank or financial business has looked into cryptocurrencies over the past few years (even as far back as 2008 when the first blockchain was conceptualized by an anonymous person (or group) known as Satoshi Nakamoto and implemented in 2009 as a core component of bitcoin where it served as the public ledger for all Bitcoin transactions). These organizations continue to pay close attention to either investing in an existing cryptocurrency such as Bitcoin or others such as Litecoin (often referred to as the “silver” to Bitcoin’s “gold standard”) and Ethereum — and there are now many additional cryptocurrencies to choose from outside of those three. Some companies have even conducted their own “blockchain” project in an attempt to create their own version of a workable digital currency.
So what is “Blockchain”?
A Blockchain in its basic form, is simply a “snake” (chain) of blocks connected together with technology where each of the blocks is a single transaction. Think of this chain of transactions as a living, breathing and most importantly, growing “snake” that communicates with many, many computers at different locations (aka, “peer-to-peer”). The Blockchain is a technology based on complicated math (algorithms) formulas and each “transaction block” contains specific information, such as the location of Bitcoins (as an example), and other related transaction data. As the blocks continue to get added on, the core math making up the chain, becomes more and more difficult to solve. All cryptocurrencies function with a Blockchain, so when you possess a Bitcoin, for instance, what you really have is a “key” to solve the math problem that keeps the chain secure — and the location of your digital currency is revealed when you input the key. But keep in mind that If you lose the key — you have no recourse — and you will not be able to locate your currency. It is truly lost forever. Every Blockchain used for cryptocurrency also contains a public key that allows crypto-funds to be deposited into your account by other sources.
So What Does HODL Mean, and other Crypto Terms You Should Know?
Many of you have likely seen terms such as, “HODL” on social media lately, and it’s related to the “crash” of the Bitcoin market. It simply uses the internet’s love of intentionally misspelling words to refer to the idea of “holding” your Bitcoin, despite how low the value of it drops on the markets. It is an emotionally-driven ideal that crypt-purists believe should be applied to crypto-markets based on the understanding that sharp rises and falls are normal in cryptocurrency markets, and not a reason to panic that might normally cause investors to sell their Bitcoin for fear of economic loss.
Other terms that you might see in cryptocurrency language these days include:
- Bitcoin mining – the process by which transactions are verified and added to the public ledger, known as the blockchain, and also the means through which new Bitcoin are released. Anyone with access to the internet and suitable hardware can participate in mining.
- Altcoin – any digital coin that is not Bitcoin, such as Litecoin, Dash, Monero, Ethereum, Ripple, etc. It is a term that has become accepted as common in the cryptocurrency community.
- Distributed and Central Ledger – a distributed ledger is an agreement of shared, replicable and synchronized data, which is spread across multiple networks and across many individual computers; on the flipside, a central ledger is the opposite of a distributed ledger, in that all of the data, while being synchronized and replicable, is instead controlled by a singular network or individual.
- Node – any individual computer connected to the network where a given cryptocurrency is being traded.
- P2P – another abbreviation used for “peer-to-peer,” which is arguably the biggest selling point related to decentralization of cryptocurrencies. It’s a means by which many individuals connected to a network that’s not run by any one central server can communicate in order to “check” with each other that all the ledgers match identically in order to prove the authenticity of a coin or even a transaction itself.
- Public/Private key – a cryptographic key that can be utilized by any party to encrypt a message. Another party can then receive the message and using a key that is only known to that individual or group, decode the message.
- Signature – the mathematical operation that lets someone prove their sole ownership over their wallet, coin, data, etc.
There are many terms other than those mentioned here but these are a good start to learning about the cryptocurrency world. It is also important to mention that before delving too deeply into a cryptocurrency endeavor (and one that is fraught with risk), it is recommended that you seek the help from someone experienced in the space. Keep checking my website www.DavidRounick.com regularly for more info about investing in various digital currencies, and for other great financial advice and information.