Bitcoin for dummies: Basics to get started in crypto investing
There is life beyond physical money. It is not unusual to reach for your wallet and find anything but coins or banknotes, at least for the more than 100 million users around the world who already use cryptocurrencies, as the website CriptoNoticias points out.
Cryptocurrencies such as Bitcoin are becoming increasingly popular. There is no doubt about it. But what are the concepts behind their revolutionary technology? Are you taking your first steps into crypto-investment or do you want to brush up on some key concepts?
Whatever your goal, here you will find a glossary of the most important terms in the world of cryptocurrencies. Or rather, Bitcoin for dummies.
Brief contextualisation of Bitcoin
For a long time, we have been accustomed to the usual formula that has been repeated for centuries: physical money. However, most of the money in the world is neither coins or banknotes like the ones you can carry in your pocket, but virtual money.
Banks keep very sophisticated ledgers, but they are totally centralized and only they are in control. Now, imagine a decentralized ledger, not controlled by the bank, with thousands of copies spread around the world that anyone can consult. That's how Bitcoin works!
The computers that store a copy are called nodes. To ensure that this ledger is not tampered with, every time a new transaction is made, thousands of computers compete for the privilege of being able to write that transaction to the ledger. These users are called miners, and in return for their work they are paid with freshly mined bitcoins.
Thanks to the large number of competing computers, it is virtually impossible to modify the ledger. It would be like trying to alter a document while millions of people around the world are watching you. Hard to believe, isn't it?
This is possible thanks to the technology at the heart of cryptocurrencies: the blockchain. It is a decentralised and distributed database used to record transactions on many computers, so that these records cannot be altered without the consensus of the entire network involved.
Satoshi Nakamoto, the creator of the first cryptocurrency, put a cap on the supply of bitcoins that is regulated through an algorithm in its source code: there will be a maximum of 21 million Bitcoin cryptocurrencies, not one more. Currently, around 90% of the total that can exist has already been mined and it is impossible to alter the code so that there can be more. As a scarce commodity, it could increase in price in the future.
This is the opposite of fiat money, such as the peso, dollar or euro, which are created at the will of each government's central bank. This makes the money worth less and less (inflation). To acquire bitcoins, you can access exchanges, such as Binance, Kriptomat or Kraken, or buy them from other people who already have them. Cryptocurrency exchanges allow you to exchange these assets for fiat money or other cryptocurrencies.
However, going from the conventional to the unusual is easier when you have a glossary of Bitcoin terms for dummies. Read on!
Ultimate Bitcoin for Dummies's Dictionary
Here is a list of terms related to cryptocurrencies in alphabetical order:
- Digital asset. A resource that exists in digitized form and whose content may be associated with a right to use it. As property, it can be bought or sold. For example: real estate, music files, cryptocurrencies, etc.
- Airdrop. This is the free distribution of a number of cryptocurrencies or tokens to the community. The recipients are chosen at random. The main objective of Airdrop is to deliver a currency so that users can get to know it and start using it in order to generate interest.
- Bitcoin. As well as being the first cryptocurrency in history, it is also the most popular. Created by Satoshi Nakamoto in 2008, it uses peer-to-peer technology to operate without central authority or banks. Its transactions are managed collectively through the network.
- Blockchain. It is a giant ledger in which the records or blocks are linked and encrypted with each other to protect the security of transactions. In other words, it is a distributed database that can be applied to all types of transactions, not just economic ones.
- Coinbase. This is an exchange for Bitcoin and other cryptocurrencies, such as Ethereum or Litecoin. On the one hand, it acts as a wallet to store virtual currencies, and on the other hand, it is used to buy and sell cryptocurrencies.
- Cryptocurrency. A digital asset that uses cryptographic encryption to ensure the integrity of transactions and control the creation of additional units. They do not exist in physical form, but are stored in a wallet.
- DApp. This is a decentralized application that uses blockchain technology so that users can relate directly to each other and close deals without the presence of a central authority. For example: Safe Network or MakerDAO.
- Dogecoin. This is a cryptocurrency that works with blockchain that emerged in 2013 and has a very active online community. It is aimed at raising money for charitable causes.
- Ethereum. It is a decentralized open source platform based on blockchain technology for creating smart contracts. It uses a token called ether to execute smart contracts over its network.
- Faucet. It is the reward system used to provide users with small pieces of cryptocurrency in exchange for small tasks. It is so named because the system 'drips' small amounts of cryptocurrencies as if it were a faucet dripping water from time to time.
- Hash. A process that transforms any set of data into a new series of characters with a fixed length. In the case of cryptocurrencies, the hash generates unique identifiers from the input information. They are a key part of blockchain technology.
- Hodl. This is an investment strategy that consists of buying a quantity of cryptocurrencies and storing them for a long time. It is widely used by users with little knowledge of trading.
- Mining. This is the process carried out by computers to verify transactions on the blockchain.
- NFT (Non Fungible Token). These are digital assets that allow real-world objects with unique and unrepeatable qualities to be represented on a blockchain through a smart contract. NFTs are indivisible. For example: a work of art.
- Node. A server or computer connected to the network and capable of transmitting information to other computers. When we talk about a decentralized network, we mean a network composed of multiple nodes.
- Token. A digital asset that can be used in the ecosystem of a project that needs another blockchain platform to function. A cryptocurrency can be a token, but a token is not necessarily a cryptocurrency. There are fungible tokens (utility tokens, security tokens, equity tokens, governance tokens) and non-fungible tokens.
- Trading. A strategy used to speculate on different assets in order to generate short-term profitability.
- Wallet. Software that manages accounts and passwords in order to store, send and receive cryptocurrencies.
- Zcash. It is known as a decentralized open-source cryptocurrency based on blockchain technology and whose focus is to offer privacy and transparency to users.
Are you familiar with these terms, are you hearing about them for the first time, and have you had any doubts? We hope this quick and easy guide to Bitcoin for dummies has helped you. Contact us without obligation, Cresio will be happy to help you.