Terms you should know before you invest in crypto

Have you ever sat in front of a financial adviser and been mystified as to what they’re going on about?

The world of finance is full of clever terms and language that are meaningless to ordinary people. The best financial advisers explain things simply, but crypto doesn’t really have those, so it’s up to us! After all, it’s never a good idea to invest in something where you don’t have the first clue as to what’s going on. It’s not that you have to know everything, just enough to get started and not feel lost.

So, what’s cryptocurrency then?

Cryptocurrency is all-digital currency. If it helps, think of it like supermarket loyalty points, except you can send/receive them from other people, and you can trade them. For example, imagine being able to take your Nectar points and convert them to Tesco Clubcard points.

It’s not an exact analogy: cryptocurrencies and “tokens” vary in value all the time against the pound, the dollar and each other.

And, while Nectar points live on Nectar’s servers, most cryptocurrencies live on “public blockchains”: worldwide shared databases that don’t need the “proper” banking system to run.

So, some terms you probably need before you invest in crypto:

Blockchain

First described in 1982, a blockchain at heart is a database usually shared between multiple computers that you can add blocks of transactions to, but not edit.

It took the advent of Bitcoin for the technology to be used in earnest when “Satoshi Nakamoto“ (a person or group of people, but whose identity is unknown to this day) proposed a way that all the computers on a blockchain could have some way of agreeing on what transactions were valid.

Bitcoin

Bitcoin is the biggest cryptocurrency by market value. It was created specifically to be a replacement currency following the debacle of the 2008 financial crash. It’s survived market crashes, glitches, exchange hacks and legislative attacks and has now become much more connected with the traditional financial markets, which have now begun using it as an alternative investment. For some people, Bitcoin is cryptocurrency.  They’re wrong because…

Altcoins

… there are cryptocurrencies other than Bitcoin. The most popular is Ethereum, but other currencies include Bitcoin Cash (which split off from Bitcoin like Robbie Williams split off from Take That), EOS, Tron, and Stellar. These are also blockchain-based digital currencies (i.e. “The Tron Blockchain”, which is fuelled by the Tron cryptocurrency (“TRX”)).

The altcoin family also includes coins that live on a host blockchain, and not their own… these are called “Tokens”.

Tokens

Sometimes the purpose of a blockchain is to actively encourage projects to use it, which means launching tokens. The Ethereum blockchain is designed to be a giant virtual computer hosting thousands of tokens, for instance. These tokens can also be bought, sold and exchanged, and have a monetary value. Many of these tokens are used by dApps. There’s also a separate kind of one-off token called an “NFT”, which is supposed to represent a single digital asset.

dApps (Decentralised Apps)

A dApp is a software application on a blockchain. It consists of an ecosystem of Smart Contracts (bits of code on a blockchain) with a user interface on top of them.

Aside from trendy uses like “CryptoKitties”, the most commonly used dApps are finance-related, usually to do with sending, receiving, lending or borrowing. These dApps are DeFi in action.

DeFi (Decentralised Finance)

DeFi is a version of the finance industry but has no connection to it. Anyone can participate in DeFi if they have the software and the crypto to do it. DeFi usually generates better returns on activities than traditional finance, but it is riskier.

DeFi extends the world of banking activities, such as lending, to normal people. DeFi even extends to real-world currencies and assets, represented by tokens called stablecoins.

Stablecoins

A stablecoin is a digital blockchain token that’s designed to represent the value of a real-world asset in the DeFi space. For instance, USDC is a digital dollar, but there are others. There’s TEUR (true euro), GYEN (a yen-based stablecoin), and even gold (PAXG).

Not all stablecoins are created equal – the ones above are backed by actual assets. For instance Circle, the company behind USDC, backs it with audited assets worth more than the total value of USDC in circulation. Some other stablecoins such as “USDT” claim the same level of backing but with less evidence.

Other stablecoins might try to use other cryptos as assets (“crypto-backed stablecoins”) or even just try some programming jiggery-pokery to try and create value out of thin air (“algorithmic stablecoins”).