Cryptocurrency Investing Starter Guide: Basic Vocabulary (Part 1 of 5)

This is a 5 part guide for beginners on investing in cryptocurrency. This is Part 1, and we cover the fundamental understanding of Bitcoin, Blockchain and Cryptocurrency that you need to have before throwing money at this exciting-but-extremely-volatile investment class.

As always, the content of this site should only be considered for entertainment purposes only, not financial advice.

I believe in understanding and researching any investment before committing money into it. For that reason, if you’re interested in buying Bitcoin, learning the basic vocabulary in this space is absolutely critical.

The new terms we’re going to learn today will help you…

  1. Remove dangerous misconceptions of crypto investing
  2. Understand crypto at a high level so you can invest with more confidence
  3. Help you be the annoying new relative at the holidays who won’t shut up about cryptocurrency.

So it begins.

To understand Bitcoin, we must first understand what cryptocurrency is.

Let’s break down “cryptocurrency” into its two constituent parts, cryptography + currency.

  • Cryptography = a method of storing and transmitting data so that only intended parties can access that data.
  • Currency = money, or something that could be used as a means of exchange.

Hence cryptocurrency is a new type of money that relies on cryptographic technology to make it secure.

There are thousands of cryptocurrencies. Because Bitcoin is the first widely popular cryptocurrency, the general masses think “Bitcoin = cryptocurrency,” while the more correct way to think about it is that Bitcoin is just one out of many cryptocurrencies.

Bitcoin = cryptocurrency, but cryptocurrency ≠ Bitcoin
Facebook = stock, but stocks ≠ Facebook.
The US dollar = money, but money ≠ U.S. dollars.

For a more visual understanding, visit the popular Coinmarketcap.com. It lists all the cryptocurrencies available like Ethereum, Ripple and Litecoin (at the time of this writing there are over 1300).

Best Video Explanations Of Cryptocurrency:

Cryptocurrency explained in 60 seconds is an info-packed, visual explanation of how crypto works at a high level:

If that video whet your appetite, then watch Ever wonder how Bitcoin (and other cryptocurrencies) actually work?(26 min). It explains crypto from the very interesting point of view of what you’d have to do if you were to create Bitcoin yourself:

What this means for the beginner crypto investor

  • Bitcoin is not the only game in town. Lots of coins like Ethereum and Litecoin have made more gains in 2017 than Bitcoin did, and they’re worth looking into.

Bitcoin was created in 2009 by someone under the alias “Satoshi Nakamoto.”

It’s the first popular cryptocurrency, and its introduction brought with it many innovations like…

Divisibility

The biggest common misconception for new cryptocurrency investors is that they have to buy 1 entire Bitcoin, which can be very expensive.

You can buy a fraction of a Bitcoin, for example 0.001 BTC. Or buy $100 worth of Bitcoin at whatever the current rate is:

Most popular cryptocurrencies like Dash and Monero can also be bought in fractions.

Privacy

Bitcoin has a level of anonymity to its design, such that it’s hard to personally identify individuals to their transactions.

For this reason, hackers have demanded Bitcoin as ransom. Other cryptocurrencies tout their privacy features as well.

Limited Supply

There are only 21 million Bitcoin that could ever be created:

As you see in the screenshot, only about 16 million Bitcoin are in circulation.

Bitcoin is created by through a process called “mining,” in which miners use computing equipment to solve cryptographic puzzles.

Bitcoin’s design is such that the remaining Bitcoins will be harder to mine. The last Bitcoin will be mined in 2140.

The “work” involved as well as the controlled supply help give Bitcoin value.

Most cryptocurrencies have their own features and a roadmap of new feature stop be released. Here’s an example of Bitcoin’s features and Litecoin’s development roadmap.

Best Video Explanations Of Bitcoin

How Does Bitcoin Work? (4 minutes) explains what Bitcoin is in the context of what money is:

What this means for the beginner crypto investor

  • You can invest whatever amount you’re comfortable with, since you can buy Bitcoin in decimal values.
  • Each cryptocurrency has factors like supply, volume and price that are all considerations to make when investing. For example, lower supply may imply that a coin is more scarce.
  • Cryptocurrencies tend to have their own “tech” features, whether it’s privacy or being optimized for a certain industry (e.g. marijuana or energy management).

Saving the most complex best for last. The technology behind Bitcoin and most cryptos is called Blockchain.

Blockchain is a system of making records that are both public and immutable (means it can’t be tampered with).

The blockchain gets its name because it organizes data in blocks. Each block references and identifies previous blocks through cryptography, forming an unbroken chain. Hence “blockchain.”

Explanation from Standard Chartered Bank

Just as we don’t need to understand http and internet protocols to benefit & use the internet, blockchain is like a new type of internet providing users these major benefits:

  • Decentralized — can’t be controlled by a single entity
  • Trustworthy — records are public and immutable
  • Distributed — because databases are hosted millions of computers simultaneously, there is not single point of failure.

Blockchain technology is sweeping all industries and systems of governance, from voting to energy management to insurance.

Best Video Explanations on this topic:

“Understanding Blockchain in 2 Minutes” is the best video I’ve watched that succinctly explains blockchain tech.

19 Industries The Blockchain Will Disrupt is an inspiring video on the transformative effect blockchain will have across many aspects of our lives.

What this means for the beginner crypto investor

  • Whether a certain cryptocurrency “fails” or not, blockchain technology is here to stay. Many internet startups have come and gone, but the internet itself is the digital infrastructure that has stayed.
  • You can invest whatever amount you’re comfortable with, since most cryptocurrencies are divisible.

When I began my journey in crypto, it was hard to wrap my head around this new market. If I had known the implications of what I was investing in, I would’ve jumped in earlier and made more money.

Hopefully this provided a high-level understanding of a new technology that’s changing before our eyes, and gives you a starting mental framework to approach cryptocurrency investing.

Look out for a part 2, a step-by-step guide on buying your first crypto.

Writing about personal finance OzChen.com and UX Design on UXBeginner.com