Crypto 101: A Guide to Bitcoin and Crucial Terminology Demystified
Bitcoin:
Bitcoin is a pioneering digital currency, a decentralized form of currency that operates without the backing or control of centralized financial institutions. It’s a cryptocurrency, a digital or virtual currency that uses cryptography for security. Unlike traditional currencies such as the dollar or pound, Bitcoin’s value is not tethered to a central authority. Instead, its valuation experiences significant volatility dictated by Bitcoin users’ buying and selling activities.
Despite its current popularity and surges in value, Bitcoin’s history is marked by notable fluctuations. In February 2024, its value rose rapidly, but it hasn’t been long since it witnessed a significant plummet. This volatility pattern has recurred since the cryptocurrency’s inception, making it a subject of both fascination and caution in the financial world.
Blockchain:
Blockchain is the foundational technology for all cryptocurrencies, including innovations like non-fungible tokens (NFTs). It operates as a virtual spreadsheet, recording every transaction within the cryptocurrency network. Transactions are compiled into blocks, linked in a sequential chain, hence the term “blockchain.” The process of validating transactions and updating the blockchain is known as mining, where a network of volunteers verifies transaction authenticity using computer programs. This decentralized verification is incentivized by rewarding the first person to validate transactions with Bitcoin.
One fascinating aspect of blockchain is its periodic “halving” event. With a capped supply of 21 million Bitcoins, the reward for creating new blocks is halved roughly every four years. The next anticipated Bitcoin halving event is expected in the spring of 2024.
Exchange-traded funds (ETFs):
Exchange-traded funds (ETFs) are investment portfolios that allow investors to speculate on multiple assets without directly owning them. Traded on stock exchanges like traditional shares, their value is tied to the real-time performance of the overall portfolio. The introduction of spot Bitcoin ETFs has provided a unique entry point for new investors. These ETFs purchase Bitcoin directly at its current market price, allowing investors to participate in the speculative world of Bitcoin without navigating digital wallets or crypto exchanges directly.
Crypto Exchange:
A crypto exchange is a digital platform that facilitates the buying, selling, and trading cryptocurrencies. Functioning as a brokerage, it enables the transfer of traditional currencies like pounds or dollars into cryptocurrencies like Bitcoin or Ethereum. While similar to traditional investing, crypto exchanges involve transaction fees.
Crypto Wallet:
Crypto wallets are the digital counterparts of traditional wallets, providing a secure space for investors to store their cryptocurrencies. Divided into hot wallets, connected to the internet for quick transfers, and cold wallets, offline devices for safer and longer-term storage, they play a crucial role in the security and accessibility of virtual assets.
Ethereum:
The Ether token represents Ethereum, the second-largest cryptocurrency after Bitcoin. Additionally, Ethereum refers to the blockchain supporting this cryptocurrency. Distinguishing itself by supporting various applications and digital assets, including non-fungible tokens (NFTs), Ethereum underwent a significant change in 2022. It transitioned to a greener operating system, reducing its environmental impact by requiring less energy. This move aligns with growing concerns about the environmental sustainability of cryptocurrency operations.
In essence, these critical terms contribute uniquely to the cryptocurrency ecosystem, playing a vital role in its operation, accessibility, and evolution.
