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What is Bitcoin? Key cryptocurrency terms and what they mean

Digital currency, aka cryptocurrency, falling into someone's hand.
[Getty Images: We Are]

After Bitcoin's price banked a new all time high in March, the sticky subject of cryptocurrencies is back in the spotlight.

And while crypto market-moving events such as Bitcoin "halving" or the launch of "spot ETFs" may be familiar to crypto fans, their meaning is less obvious to many.

But worry not.

If you're hearing these for the first time, or just need a refresher, here are a few key words and what they mean.

Bitcoin

While many may struggle with the finer points of crypto, pretty much everyone has heard of its most famous product: Bitcoin. But what actually is it?

Bitcoin is a cryptocurrency, which is to say a type of digital currency. Unlike traditional currencies - the dollar or pound, for example - Bitcoin is not controlled by centralised financial institutions. This makes it popular for people who think decentralisation can bring financial freedom, but it also makes it extremely volatile - rising and falling in value at the whim of Bitcoin buyers and sellers.

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Throughout February and March 2024, its price rose rapidly and it briefly reached a new record high. But its value can plummet just as quickly as it spikes - a pattern which has been repeated multiple times since the cryptocurrency was launched.

Bitcoin 'halving'

The blockchain, the system that underpins Bitcoin, is sustained by rewarding so-called "miners" - whose job it is to validate transactions - by paying them with the cryptocurrency.

However, unlike some other digital currencies, there is not an infinite supply of bitcoins. The amount that can be mined is capped at 21 million, and most are already in circulation.

So roughly every four years - or when the Bitcoin blockchain reaches a certain size - the number of bitcoins rewarded to those who successfully validate transactions is cut in half. The most recent Bitcoin "halving" (or "halvening") event took place on 20 April 2024, reducing the reward for miners from 6.25 bitcoins to 3.125.

This ensures Bitcoin's supply is drawn out for longer while demand, in theory, goes up over time. But with fewer rewards for miners, it can also lead some to consider whether it is financially worthwhile for them to continue the costly operation of running their powerful computers.

Blockchain

Blockchain is the technology underpinning all cryptocurrencies, and many related products like non fungible tokens (NFTs). In essence, it is a virtual spreadsheet on which all the buying and selling of crypto is recorded. They are arranged in blocks linked together in a giant chain - hence the name.

Every cryptocurrency transaction is individually recorded onto the blockchain by a huge network of volunteers verifying its authenticity by using computer programmes.

The incentive to do this for Bitcoin's network is that the first person to validate transactions is rewarded in Bitcoin. This potentially lucrative process, known as mining, is also controversial because of the incredible amount of energy used as people the world over race to be the first to successfully update the blockchain.

Crypto Exchange

A crypto exchange is the digital platform where investors can buy, sell and trade cryptocurrencies. Similar to traditional investing, a crypto exchange acts as a brokerage where people can transfer traditional money, like pounds or dollars, from their banks into cryptocurrencies like Bitcoin or Ethereum. Most transactions are accompanied by fees.

Crypto Wallet

A crypto wallet is a place where investors hold their cryptocurrency. It stores the virtual assets much like a traditional wallet holds cash. There are two types, a hot wallet and a cold wallet. Hot wallets are connected to the internet, and thus more accessible for quick transfers and easy access. Cold wallets are physical devices like specially designed USBs that store crypto offline typically for safer and longer term storage.

Ethereum

Ethereum is used to describe both the second largest cryptocurrency after Bitcoin, represented by the Ether token, and the blockchain underpinning it. This supports an array of different applications and digital assets, such as non-fungible tokens.

It functions in a similar way to Bitcoin and other cryptocurrencies, but in 2022 switched to a greener operating system requiring less computers and energy.

Exchange-traded funds (ETFs)

ETFs are portfolios that let investors bet on multiple assets without having to buy any themselves. Traded on stock exchanges like shares, their value depends on how the overall portfolio performs in real time. They can comprise a combination of gold and silver bullion, for example, or a mix of shares in both technology and insurance companies.

A spot Bitcoin ETF buys the cryptocurrency directly, "on the spot", at its current price, throughout the day. While some ETFs already contained Bitcoin indirectly, the US approved several spot Bitcoin ETFs in January 2024. This allowed new investors, such as investment management firms like Blackrock and Fidelity, to enter the speculative world of Bitcoin without having to worry about digital wallets or navigating crypto exchanges.