If you’re new to the world of crypto, you may be hearing or reading some new terms that could leave you scratching your head.
Even if you consider yourself a savvy investor, cryptocurrencies are built on emerging technologies, which means there are a number of technical terms that will be new to even some of the most seasoned traditional investors.
If you’re intending to do your own research on the vast array of available cryptocurrencies for trading, here are a few important terms to wrap your head around.
Hard fork or Soft fork
Forks are events that change the underlying protocol a cryptocurrency is running on. At its most basic, a fork is a change to the set of rules that participants agree on when validating and verifying transactions on the network.
Hard forks are changes that aren’t backwards compatible. In the instance of a hard fork, miners need to agree on how they will validate new blocks going forward. In an uncontested hard fork, all miners agree to upgrade and everything continues to run smoothly.
Where members of the community disagree with the changes, the fork is contested, so some will choose to accept the new protocol rules and others will continue to use the old protocol rules.
This results in a split in the blockchain which creates two separate cryptocurrencies: an old and new version.
On the other hand, soft forks are changes that are backwards compatible, meaning that participants don’t need to upgrade to new software in order to continue participating in building the network.
Whether they update or not, they’ll still be able to recognise new blocks on the blockchain. Soft forks happen fairly often and don’t generally affect users.
Cold wallets or hot wallets
Wallets are tools that allow cryptocurrency owners to receive, store, and send cryptocurrency. Wallets come in a variety of forms, but one important difference is whether the wallet is ‘hot’ or ‘cold’.
Hot wallets are cryptocurrency wallets that are connected to the internet and so allow you to quickly send cryptocurrency to other addresses and are easy to access remotely.
But because they are connected to the internet, like anything else connected to the internet there is always a risk they could be hacked.
Cold storage refers to a storage mechanism that isn’t connected to the internet which protects the wallet from unauthorised access, cyber hacks and other vulnerabilities to which a system that is connected to the internet is susceptible.
Cold storage wallets can be as simple as a private key printed on a piece of paper and stored in a bank vault (paper wallet), or a specialised dongle which contains your private keys on a secure element known as a hardware wallet, which you would connect to via USB to spend your coins.
Cold wallets are considered to be very secure in protecting your cryptocurrency holdings - just don’t forget your recovery phrase!
A hash function is a mathematical function that converts an input of arbitrary length into an encrypted output of fixed length. This means no matter how big the original data or file, its unique hash (the output produced by running the hash function) will always be the same size.
Hash functions have a number of useful properties that Bitcoin mining uses:
● Running the function on the same input always produces the same output
● Running the function on any input always produces the same length output
● Changing even one letter of the input radically changes the output
● It is impossible to reverse engineer the input from the output
The problem Bitcoin miners are trying to solve is to find what input (including current pending blockchain transactions) will result in a hash that starts with a certain number of leading zeros.
The amount of leading zeros required changes over time, and this is what is known as mining difficulty (the more leading zeros required, the harder the solution is to find)
It’s a bit like a giant sudoku puzzle: it’s difficult to solve but easy to verify the solution once it is solved. Once a miner has solved the problem, they let all the other miners know, who then quickly verify the solution.
Once verified this block is accepted as the next block in the chain and the miner that solved the puzzle is given Bitcoin as a reward for mining the block.
But what about crypto slang?
Because the rise of cryptocurrencies is so entrenched in the internet, it only makes sense that internet culture would influence some of the terminology that people use when discussing crypto investment strategies.
Here’s a brief rundown of some of the most common slang terms.
HODL or Diamond hands
The term HODL originally came from a typo of the word ‘hold’ in a Reddit thread about Bitcoin, where a user was talking about how they were not going to sell during a market crash but hold instead.
HODL has now been widely adopted by crypto enthusiasts to describe the strategy of holding on to a cryptocurrency, even through market volatility, and not selling no matter what happens.
This strategy is also referenced in another common turn of phrase, ‘diamond hands’, which is an investor who adopts this strategy and holds on to their cryptocurrency without fear, even when facing losses. It’s a term used to rally other investors when a cryptocurrency’s value is dipping.
To the Moon or Mooning
“Going to the moon” or “mooning” are expressions used by people to describe when a cryptocurrency is skyrocketing in value, usually past its previous all time highs.
A whale is someone who owns such a large share of a particular cryptocurrency. People are sometimes concerned that buying and selling by whales can affect the price of a cryptocurrency, especially smaller cap cryptocurrencies.
Edward Cooper is the Head of Crypto for the global personal finance platform, Revolut.