12 cryptocurrency terms to know before you invest
Cryptocurrency is a growing industry, with more businesses and individual investors getting involved on a daily basis. But it’s also a highly technical field that you should understand to a certain degree before jumping in.
Here are 12 cryptocurrency terms to make sure you know before you dip your toes into the market.
Let’s start with cryptocurrency itself. Yes, we have all heard of it, but what does it actually mean? Cryptocurrencies are digital assets that use cryptography to work as a medium of exchange in financial transactions.
It is important to note that cryptocurrency is not controlled by any central authority (such as a government), which is one of its largest appeals to investors. But how do we earn cryptocurrency? At the most basic level, it is earned through the process of mining.
Mining occurs when high-powered electronic devices known as miners compete with one another in an attempt to be the first one to solve a complex math problem that corresponds with a group of transactions known as a block.
The miner that solves the problem first gets the reward from the block. Profitability is primarily determined by the reward of the block (which varies with time and with the cryptocurrency you are mining), the power of the mining equipment, and the cost of operation.
Blockchain is the distributed ledger technology through which most cryptocurrencies work. It serves as a public financial transaction database to confirm or validate transactions to the rest of the network as having taken place.
Blockchain is a proof of completion and of the transaction being accurate and true. It ensures the same coin isn’t mined or spent more than one time. Blockchain has many potential uses beyond crypto that we may begin to see take hold in the near future.
Hodling is an investment strategy that avoids reactionary trading in response to short-term price fluctuations and instead promotes buying and holding positions for the long haul. Its name is derived from a misspelling of the word “holding” that occurred on the BitcoinTalk forum in 2013.
Hodling as a strategy says that unless you’re highly skilled in navigating the market, making quick decisions based on sudden shifts is most likely going to hurt your portfolio more than if you had stayed the course.
Altcoins are alternative cryptocurrencies that launched after bitcoin in an attempt to replicate its success. Many altcoins are built upon the same basic framework of bitcoin but try to target some of its perceived shortcomings in order to attract miners.
Popular altcoins include Ethereum, ZCash, Litecoin, and Ripple.
Colocation is the practice of hosting high-powered data initiatives in facilities that offer a low cost of operation and high power efficiency. Hardware hosted in a colocation facility is allowed to run at high speeds while minimizing cost and maximizing profit.
High-quality colocation centers provide investors with efficiency, security, logistics, expertise, and more.
Hash rate is a measurement of a mining device’s performance. It is the speed at which a miner operates and is able to successfully solve a block. It also measures the amount of power a network is consuming in order to remain functional.
Hash rate is measured in hashes per second (h/s). A rig operating at 100 h/s will make 100 guesses per second toward solving a block and earning the reward. When the difficulty of a network goes up, hash rate must also increase in order to keep up and remain profitable.
Every 210,000 blocks, the value of bitcoin is halved. This has already happened twice since bitcoin began and is on track to happen again in May. Past halvings have been major catalysts in setting off new bull markets for bitcoin.
As bitcoin halves, fewer of the currency are generated and this increased scarcity generally leads to an increase in value. This impending halving is a major market event that is going to have a dramatic impact on portfolios. You need to educate yourself and be prepared.
VPN stands for virtual private network and is a feature that provides added security for miners, including encrypted data transfers, hidden IP addresses, location masking, and more. VPNs also allow miners to operate more privately and to further conceal their identity and trading history from the public.
Mining pools combine the resources of a group of miners who all share processing power over the same network. Pool members split their earnings among one another based on a predetermined payout structure.
Miners with higher-powered operations can contribute more to the pool and can thus reap a greater share of the reward. Pools help small-scale miners mine more quickly and earn more consistently by teaming up with other miners of similar capability and motive.
GPU stands for graphics processing unit and is a type of mining technology used for cryptocurrencies of a lesser difficulty. It is the smaller-scale alternative to ASIC mining and is often operated out of homes while utilizing less power and reducing expenses – and profit.
ASIC miners are high-powered devices used for large-scale cryptos like bitcoin. They operate at a higher speed and have the capability to more effectively solve complex blocks. Due to their increased power usage, ASICs are most often used in mining colocation centers where electricity costs are reduced and profit can be maximized.
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