Do you know your cryptocurrency from your cryptography? There are a lot of terms used when it comes to investing. We’ll navigate you through the lingo to get you on the road to investing with confidence.
(Also known as black-box trading, automated trading, and sometimes algo-trading.) Algorithmic trading automates the buying and selling of digital currencies via a programmed code. This code follows defined rules such as price or volume to execute trades. It’s beneficial because it can analyze data and execute trades faster than a human.
Altcoin, short for alternative coin, is exactly that — an alternative to Bitcoin. You might already know Bitcoin was the first digital currency which then forked away from the original protocol, which remained as Bitcoin Cash (BCH), before this also forked away in November 2018. Bitcoin SV represents the original blockchain protocol. Other blockchains created alternatives in the wake of Bitcoin’s success.
There are far too many altcoins to list here, but here are some of the most popular: Ethereum, Ripple, Dash, Binance, Litecoin, XRP, Tether, and Cardano. The list goes on and on.
Automated Market Maker
An automated market maker (AMM) is just that — an automated market maker. Instead of a person or company owning an inventory of digital currencies and selling them to brokers, an AMM automates the entire process, allowing you to trade currencies with no human intervention. Instead of relying on traditional digital currency markets, buyers and sellers use liquidity pools, which remove intermediaries from the trading process.
So with no go-betweens, who prices all those digital currencies? Well, AMMs use complicated mathematical formulas to price assets depending on various scenarios.
This term has the same meaning as the one used in the stock market. Bid-ask spread is the difference between the highest price someone will pay for a digital asset and the lowest price someone will sell it for. Say you want to buy Bitcoin for $10,000 from someone selling it for $15,000. Here, the bid-ask spread is $5,000 (15,000-10,000=5,000). It’s simple math!
Like the market cap, bid-ask spread indicates how well a digital currency performs on the market because it signals enough buyers and sellers in the market to transact. See Liquidity.
Blockchain is a database that stores data in blocks and then links them together in chains. (Block-chain.) It enters data into a new block, then links that block to the previous one when it’s full, and then repeats that process over again. It keeps an enormous digital ledger of all the transactions on computer networks that use a blockchain and distributes this to all involved (a distributed digital ledger), so everyone who uses the blockchain controls its data — a decentralized process.
(Also known as a cryptocurrency broker or dealer) The person or company (‘middleman’) serving as the intermediary between digital currency markets.
People often use the terms broker and exchange as if they’re the same. They’re not. Brokers trade for you at fixed prices. Exchanges are platforms for those who trade currencies based on current market prices.
Pro-tip: There are loads of brokers out there — the good, the bad, and the downright ugly. Always do your research to find one that is right for you!
No, you can’t light it. A candlestick in a trading market context represents the price activity of an asset like Bitcoin within a particular timeframe, usually a day. It’s essentially a chart that lists the historical prices of that currency over time, providing lots of useful insights for your trades.
A candlestick has four components:
- The open: The price of the currency when a trading period begins.
- The close: The price when the period ends.
- The high: The highest price during that period.
- The low: The lowest price.
It’s pretty simple once you start using them consistently.
A central bank is a financial institution that manages the currency of a particular nation or group of nations. Think the Federal Reserve Bank in the U.S. Or the European Central Bank. These organizations dominate monetary policy in their respective jurisdictions, controlling pretty much all market operations and capital requirements. It’s been this way for hundreds of years.
Central banks have a strained relationship with digital currencies. Like the Federal Reserve, many of them investigate assets like Bitcoin and work with governments to regulate the trading of these currencies.
(Also known as a CEX.) The fancy name for platforms that let you trade digital currencies. Almost everyone who trades digital currencies uses a centralized exchange because it keeps their funds safe. Exchanges add an extra layer of security and typically generate super-fast transaction speeds.
A coin is a digital currency that’s exclusive to its blockchain. Bitcoin is the coin that operates on the Bitcoin blockchain, Ethereum is the coin on the Ethereum blockchain, etc. Basically, you buy and sell coins through that blockchain. (You can’t use Bitcoin on the Ethereum blockchain, for example.)
Coins are like regular physical coins — dollars, cents, pounds, Euros – except they don’t exist in a tangible form!
A digital currency wallet works as a bank for bitcoin. Cold wallets store bitcoin offline, safeguarding against cyber-attack. A bitcoin wallet comprises the bitcoin owner’s public and private keys. The private key is used to access the bitcoin currency and contains a unique combination of alphanumeric characters. The public key is the equivalent of the account name in a traditional bank account. The trading parties share their public keys. Once the blockchain verifies the transaction, the buyer pays the bitcoin tokens to the seller’s address, and the seller can access the funds via a private key.
(Also called digital currency.) Cryptocurrency is simply a type of digital store of value or payment used for goods and services online. Think of it like a regular currency — the U.S. dollar ($), British pound (£), or whatever your local currency is. Instead of physical coins and paper bills, you exchange virtual funds solely on the internet. A technology called blockchain manages and records all transactions associated with a digital currency. See ‘Blockchain.’
There are over 1,000 digital currencies on the market, and blockchain startups are thinking up new ones all the time! Bitcoin, Binance, Tether, Cardano, and XRP are just a few examples of digital currencies.
Cryptography is the process of converting text into an encrypted format for security. That means other people can’t read your messages. Cryptography protects your identity in the blockchain network by transforming data into an unintelligible format so other people in that network can’t understand it.
Cryptography means information recorded in a blockchain is secure, so you trade digital currencies with confidence.
A custodian is a third party that holds your digital currency for safekeeping. Custodial services also include managing the assets and executing transactions based on customer instructions. The custodian has fiduciary or trust powers, meaning they have a legal relationship to oversee the assets, to manage the funds.
Day trading is a type of short-term trading where investors buy and sell digital currencies on one trading day, typically over several hours or less.
This method can be risky, but traders hope to generate enormous profits by taking advantage of short-term price fluctuations.
Say a digital currency quickly rises over a specific price on a Monday morning. Day traders might buy and sell lots and lots of it over the space of an hour or so, hoping its price doesn’t drop during that time. It’s all about making a quick ‘buck.’
(Also known as DEX.) It lets you buy and sell digital currencies without a centralized exchange. That means no intermediary platform. Instead, you create something called a smart contract, where you and the buyer/seller define the terms of trade and write these terms into lines of code. It’s a whole new way of trading. Some traders use a decentralized exchange as it provides even more anonymity than a centralized exchange.
DeFi (Decentralized finance) is financial services that do not rely on traditional central financial institutions (like banks, brokerages, and exchanges.) Instead, DeFi is blockchain-based and works in open markets, and does not depend on the stringent policies of financial intermediaries. This allows transactions to be made on a peer-by-peer basis instead of through a financial institution.
A digital asset is pretty much anything with usage rights and/or a perceived value that exists in a digital format. Something like a digital music file, a GIF, or, of course, a coin like Bitcoin. (An old photo uploaded to a database is an example of a physical asset converted to a digital asset.)
A digital coin only exists electronically. You can’t physically touch it like a U.S. nickel.
Digital currency is a type of asset that exists in digital form. There are many different digital currencies – cryptocurrency is one specific type, the digital format of a fiat currency is another.
Diversification is a way to mitigate risks. By diversifying your investment portfolio to include a range of digital assets, you can reduce the effect of volatility on a single asset at any point in time. With a good diversification strategy, you can balance out your potential losses with your profits.
Data encryption is the encoding of information to prevent unauthorized persons from gaining access to its content. Usually, only the authorized parties can decrypt the transmitted message. A key or unique password decodes the data.
An exchange-traded fund (ETF) is an investment fund that is traded on any stock exchange — Think stocks sold and bought on the London Stock Exchange. Or bonds. Or mutual funds.
Digital currency ETFs (or cryptocurrency ETFs) work in the same way. People can buy and sell them through a traditional exchange rather than a digital one. An example of a digital currency ETF is The Bitcoin Fund (QBTCu.TO), which trades on Nasdaq Dubai rather than blockchain.
In this context, fiat isn’t an Italian automobile manufacturer, but the term used to describe legal tender tied to a government-issued currency. It’s the opposite of a digital currency tied to its native blockchain. The U.S. dollar is a fiat currency because it derives value from the American Government.
Fiat on-ramp is a type of exchange that lets you convert a fiat currency into a digital currency. For example, you can exchange U.S. dollars for BTC then transfer these assets from your regular bank account. A fiat on-ramp service facilitates this process for you, typically for a small fee.
A fiat off-ramp does the opposite — it helps you convert cryptocurrency into fiat money so you can transfer it to your regular bank account.
(Also known as pegged cryptocurrency.) Fiat-pegged cryptocurrency is a digital currency that’s linked to a government or bank-issued (fiat) currency. These digital currencies reflect the price value of their respective fiat currencies. If a fiat currency gains or loses value, so does the associated digital currency.
A fiat-pegged cryptocurrency is a type of stablecoin. Because digital currencies can be volatile, stablecoins ‘peg’ to fiat currencies or traded commodities like gold to avoid sudden price fluctuations.
Hash is a function that converts any length of code into an encrypted, fixed length of code. The result is always the same length, regardless of the input amount. A hash is like a blender — once the code has gone through the hash function, it cannot be extrapolated back into its original form. The purpose of a hash is to encode data aimed at providing a solution for blockchain calculation. The hash rate of digital currency is a measure of the amount of hash operations that can be performed in a specific amount of time.
Regular crypto traders or spenders use wallets to send and receive digital currency tokens. There are two types: hot and cold. A hot wallet is connected to the internet, making it quicker to transact to and from, but can make it more vulnerable to attacks. A cold wallet is the opposite — offline and more secure but less convenient for quick trading.
Inflation is a general increase in the prices of goods and services which results in a decrease in the value of money. So, a unit of money buys less than it did before.
Digital currencies are designed to have low rates of inflation because the supply is limited and known. Because of this, some investors see digital currencies as a worthwhile investment in times of inflation.
Initial Coin Offering
(Also known as an initial currency offering.) An initial coin offering (ICO) is the launch of a new coin. When an ICO takes place, investors can buy its respective coin. While this process is unregulated, it can prove highly lucrative for investors.
Cryptocurrency startups sometimes use an ICO to raise capital funds. They sell coins to investors and speculators for fiat money or more established digital currencies like Bitcoin.
The digital currency public ledger, akin to traditional public ledgers used to track commodity prices and other financial data, is a record-keeping system. The ledger has records of the crypto participants and holds their identities anonymously. The shared public ledger is the blockchain and supports records of the entire bitcoin network, including all confirmed transactions. The blockchain enables the calculation of available balances in wallets, allowing for new transactions to be verified on the network and confirming the actual ownership by the spender.
These orders are more flexible with prices as you can set the minimum and maximum prices you can trade on. When executing a purchase order, you set the maximum acceptable price at which you will buy. With a sales order, you determine the minimum sales price you agree on. Limit orders give you a sense of control over your assets and are ideal when you’re buying or selling an asset that is very volatile, thinly-traded, or has a large bid-ask spread. These limit orders are functional in stock markets and the crypto market as well.
Liquidity is a term used to describe how easy it is to convert a digital coin into cash. How fast does this process take? Does it affect the value of the digital currency when it happens? Investors ask those questions when determining the stability of a digital currency.
A particular coin might have high liquidity or low liquidity. High liquidity typically means people like you can easily buy or sell that coin. Low liquidity often means the opposite: Lots of buying and selling of that coin could significantly affect its price volatility.
When you place a limit order, you add your expectation to the order book and have ‘made the market.’ You are then a ‘maker.’ Large traders often assume the title of makers, and smaller traders can also assume the same role by placing orders which are not executed immediately. In a market of makers and takers, the former creates trade orders that are not executed immediately, creating market liquidity. See ‘takers.’
(Short for market capitalization.) Market cap measures and monitors the market value of a digital currency. Investors use this metric to benchmark the popularity and dominance of digital currencies to inform their trading strategies. Market cap isn’t the only indicator of how well a digital currency is performing, but it is the most popular for determining the relative size of a cryptocurrency.
You calculate the market cap of a digital currency by multiplying its current market price by its circulating supply — the number of coins or tokens available and circulating on the internet: market cap = price X circulating supply.
A market order in digital currency is similar to that in stock markets. It is an order to execute a trade at the best price in the market. Your trade will happen within the specified time, but you cannot determine the price at which it executes. It is ideal when you need a trade to be executed urgently, as once placed during market hours, your order is at the top of all pending orders. If placed outside market hours, your order will go through only at the next open market and possibly at significantly varying prices than the previous close.
A market maker (MM) is the name for a person or company that ensures there is always someone willing to buy and sell in the market. The market maker buys from those looking to sell and then resells to others when they’re ready to buy. For this service, they earn a bid/ask spread. Under challenging markets, this spread may be wider, but strong competition coincides with an efficient market consensus price.
MMs play a significant role in the digital currency world. That’s because they keep markets full of buyers and sellers, which improves liquidity and lowers transaction fees.
Digital currency mining is the use of bitcoin to reward network users for validating crypto transactions. The miner who can solve the complex math problem the fastest verifies the bitcoin transaction. The miner’s reward is a fixed amount of digital currency. Once the blockchain verifies the transaction, the miner adds data to the blockchain, effectively the public ledger. A bitcoin miner’s role in verifying blockchain transactions is vital. The mining hardware and software, and the wallet are the critical components in a mining process.
(Also known as a mnemonic passphrase, mnemonic seed, or seed phrase.) A mnemonic phrase is a group of words used in sequence to access a single wallet. It’s a bit like a password for your email account but far more secure. You might enter a mnemonic phrase to access funds from a wallet or recover a wallet if it gets lost.
A mnemonic phrase is usually 12 or 24 words. Most wallets use something called the BIP39 standard, which implements the mnemonic phrase.
An order book provides an electronic representation of the trading activity of an asset on a specific trading platform. Most financial exchanges use order books to list orders for various asset classes, including bonds, stocks, and digital currency. It shows the number of asset units being ordered at different price points. Sale requests are the ‘ask’ orders on the right side of the order book, while purchase requests are the ‘bid’ orders on the left side of the book. It promotes market transparency by offering information on the trade depth, market participants, price, and availability.
Over-the-counter, or OTC, is the phrase used to describe the exchange of a large volume of digital currency negotiated between two parties. This means there isn’t a public order listing the trades. An OTC trade is beneficial because it usually won’t disrupt markets when large sums are being moved. OTC happens in three ways:
- Crypto-to-crypto: Trading two separate digital currencies. For example, trading Bitcoin with Cardano.
- Fiat-to-crypto: Trading a fiat currency with a digital currency. For example, trading U.S. Dollars to Cardano.
- Crypto-to-fiat: Trading a digital currency with a fiat currency. For example, trading Bitcoin to U.S. dollars.
(Also known as a secret key.) Think of a private key like a password for your email account. It’s a string of data — a combination of letters and numerals — corresponding to a specific digital wallet that holds digital currencies. It’s a highly sophisticated form of cryptography.
You use a private key to access your digital funds, so never reveal it to anyone. Warning: If you lose your key or your seed words, you can’t access your wallet!
A protocol refers to a base set of rules. With digital currencies, protocols are a set of predetermined rules that define a blockchain’s structure and setup and how it operates. All the parties within the network need to follow these rules for the effective functioning of the blockchain. These rules establish the process interactions of the blockchain, inflationary incentives, and governance structure. As developmental specialists work on new blockchain networks, a single protocol can provide a standard structure for these networks.
Just as we often split traditional paper currency into smaller denominations for ease of trade, we can also convert bitcoin into smaller units for convenience and facilitate smaller transactions. One satoshi is a bitcoin’s smallest unit and corresponds to a hundred millionth of a single bitcoin. Satoshi Nakamoto is the founder of Bitcoin and is the inspiration behind the vocabulary of the unit. Amounts existing in the blockchain are in satoshi. Fractions of a bitcoin are shown in satoshi.
When a trader buys or sells a digital currency, the price might change before that trade becomes final. Slippage is the term used to describe this. The trader settles for a different price than that of her initial request. Slippage doesn’t just happen with digital currencies but all kinds of trades, and it can be seriously stressful for traders.
There are a couple of ways traders can prevent slippage from happening. The first is using something called limit orders instead of market orders, where the trader sets the maximum buy or minimum sell limit and doesn’t execute the trade straight away. Algorithmic trading might also predict a sudden rise or fall in price value.
Cryptocurrencies that are pegged to an external reference or backed by a reserve asset are stablecoins. The reserve asset could be a traditional currency like the U.S. dollar or a commodity such as gold. This offers price stability, being pegged to a conventional, fixed currency. Stablecoins have become very popular as they offer the multi-benefits of quick processing, the privacy, and security of digital currency payments, as well as the non-volatile valuations of flat currency.
Takers fulfill orders that have been created by makers (see makers). For example, a maker places an order to “sell ETH when the price hits $3k.” When someone then goes to buy ETH at $3k they become the taker and the order is filled instantly. Essentially, a buyer or seller becomes a taker when their order transacts.
Tax Loss Harvesting
Tax Loss Harvesting is when an investor sells their assets for a loss to offset capital gains liability.
(Also known as trade volume.) It’s the number of assets bought and sold within a defined time. Digital currencies with high trading volumes are often more attractive to traders than those with low trading volumes.
Example: Traders regularly check Bitcoin’s trading volume to learn how many people are buying and selling on a given exchange.
A term borrowed from the stock market to describe the price fluctuations of a particular digital currency within a specific time. All digital currencies, by nature, are volatile. That’s because these assets have a limited supply and varying perceptions of value.
You’ll often see something like Bitcoin rise to incredible new price levels and then fall and then rise again — a seemingly never-ending cycle — these peaks and troughs prove lucrative for some traders.
A digital wallet is a data purse or pocketbook. Unlike a physical wallet that stores dollar bills, a digital wallet stores cryptocurrency. A wallet keeps any type of digital asset secure because you need a private key to open it.
You can withdraw funds and transfer them to trading or investment accounts or other wallets like a physical wallet.
There are different types of wallets for desktop, web, mobile, and hardware. You might have one wallet, or you may choose to split your digital assets across multiple wallets for increased security.
A wash sale is when an investor sells their digital asset for less than they purchased it for. This is done purposefully to claim a capital loss on taxes. Investors will then repurchase the asset at a lower cost post-taxes, but to remain compliant, the repurchase usually cannot be made until 31 days after the asset is sold – depending on the tax jurisdiction. This helps investors maximize tax benefits while still staying invested in a company that they think has potential.
Yield farming is an investment strategy where a cryptocurrency owner stakes their digital asset in exchange for interest on the investment or more coins. The staking process lends one investor’s coins to another investor looking to borrow and make investments. This creates liquidity in the market and can also benefit the borrower and lender. For the lender, yield farming is like the yield of a dividend or a bond in the traditional finance market.
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