Are you finding it hard to distinguish a Fork from an Initial Coin Offering? Perhaps you’ve asked: What is blockchain or what is a Bitcoin? Maybe you’ve heard about Smart Contracts but you’re not quite sure what they really are. If so, you’ve come to the right place.
Welcome to the Smart Bitcoin Buyer’s Ultimate Cryptocurrency Glossary!
Average Down Investing
We can assume that an investor who buys bitcoin at $1000 because it is perceived ‘good value’ will then want to buy more if the price drops to $900. He will do this on the basis that bitcoin presents even better value at the lower price.
The investor will use the lower price to buy more bitcoin and in doing so will lower his average entry to $950 ((1000+900)/2). If the price of bitcoin recovers to $950 his investment would breakeven $50 earlier than it would have done had he not increased his investment.
However, although the investor is lowering his breakeven point, he is also doubling the amount of risk he is taking on. What if bitcoin falls to $800 or $700 or even lower? Does he increase his investment each time? What actually he is doing is refusing to recognize that the market is not performing as he expected. That he made the wrong call in buying.
He may well internalize this and take it personally. He feel that that his losing position reflects on him at his ability. At some point though the reality of the paper loss he holds will be too great. He will have to sell his investment. Having doubled his position, the loss on his account will be magnified. Here’s an blog post about such an instance of this happening.
Bitcoins are a digital currency that offer a peer-to-peer system of exchanging value or rather payments. In contrast to traditional money you have in your pocket or you give to your bank, Bitcoin has not physical presence. You can’t touch or hold them.
They exist digitally and once you buy them they are stored in a virtual wallet. There is no central organization that regulates them. If you want to read more about what is a bitcoin read this.
Blockchain technology lies at the heart of the decentralization revolution that’s currently taking place. It is a global technological infrastructure where value and ownership can moved around the global quickly and securely.
The technology itself is effectively a digital ledger or record of the whole history of a cryptocurrency such as Bitcoin. This ledger is decentralized which means that no one person or organization has responsibility for it. It is a public record so anyone, you or me, can access its history.
In in the case of Bitcoin which uses blockchain technology, it gives us, the users of the cryptocurrency, confidence the Bitcoin is real and the person selling the Bitcoin had the right to sell it. The blockchain is constantly growing. It is at its smallest when the Bitcoin is first created. Each new event in the life of the Bitcoin (such as a change of owner) is added as another block.
The traditional design for servers is for each application to have its own server. Each application runs its own code in complete isolation to other applications. This means that when an application goes off-line or hacked its users and other applications are impacted.
With blockchain technology, any individual or organization can join the network. To do this they would set up a ‘node’ which copies the required data which is required on the nodes on the network to reach agreement.
This method allows user’s data to be kept private and applications to be decentralized. You can read more about what is the blockchain in this post.
Cryptocurrency / Crypto-currency
Cryptocurrency is a general to refer to digital ‘money’. While Bitcoin is the original cryptocurrency and is arguably the most recognisable, there are hundreds of others that have come into existence over the last few years.
This is the process of changing plain text into indecipherable text and back again. This allows data to be stored and transmitted in a form that only the receiver will understand.
The film The Imitation Game was based on the work of Alan Turin a cryptographer who’s work during World War 2 did much to help the Allied forces interpret the messages being sent by the Germans.
Nowadays, cryptography draws much from mathematical theory combined with computer programming. It is the basis for blockchain technology that is behind the cryptocurrencies.
Digital currency is more commonly referred to as cryptocurrency.
The currency of Ethereum, ether was launched in 2014. It is essentially the ‘oil’ to the engine of the Ethereum technology. It is a type of payment by the end clients of the Ethereum platform in return for using the platform’s technology. Developers using the technology and who want their applications to be financially affordable to the end client are effectively incentivized to develop quality applications that make minimal use of the platform. The more intensive applications will require more of the platform’s resources and thus the more expensive it becomes to the end user.
While the sole purpose of Bitcoin is as a digital currency, Ethereum takes the technology at the heart of Bitcoin, the blockchain, to the next level. It is a decentralized platform on which runs ‘smart contracts’. The Ethereum Foundation is the the creator of Ethereum. The foundation is based in Switzerland and runs on a non-profit basis. The funding for the foundation came via an Initial Coin Offering (ICO). Fans of the technology were offered the chance to provide financial support for the project in August 2014. In return for their support they were given ethers.
The aspiration of Ethereum is to counter the growing centralization that has been part of the digital age. For example, apps on your phone will probably be using a 3rd party to securely store your personal information such as the credit card details.
This company stores your personal information along with that of the hundreds or thousands of other users of the app. Effectively, in using the app, the user is also agreeing to lose control of their personal data. Ethereum’s technology gives the user control of their data.
For the developers of these apps, Ethereum’s smart contracts provide security, prevent fraud or any kind of interference from third parties. The use of blockchain’s global infrastructure where value and ownership can be transferred around the globe and which provides enormous potential to developers using the Ethereum blockchain. The process eliminates both the middleman and counterparty risk. For further reading on Ethereum, read this post.
Fiat currency is the name given to traditional money. So for example, the Dollar, Yen and Euro are fiat currencies. These currencies have been deemed by the government of that currency to be legal tender. Fiat currency has no intrinsic value.
The economic principles of supply and demand determine the day to day value of a fiat currency. When investors buy and sell currencies they are actually investing in the interest rate they will receive for owning that currency. The more risk there is in owning a currency, the higher the interest rate will have to be to attract buyers of that currency.
Forks are either ‘hard’ or ‘soft’. A hard fork occurs when a cryptocurrency splits in two. This happens when the original code of the cryptocurrency is changed. Consequently, there are two versions of the code, the old (original) and the new. A soft fork also sees a change to the code of the cryptocurrency. However, in this case only one blockchain remains after the change. Conversely, a hard fork creates a new blockchain which means a new coin is created. A soft fork only amends the existing blockchain. No new coin is created as a result of the amendment.
This is a method for proving or disproving the ‘correctness’ of an algorithm. It is a process that lies at the heart of the blockchain technology.
Initial Coin Offering (ICO)
An ICO is the sale of ‘tokens’ by companies or individual projects which use blockchain technology.
You may have come across this term while buying or selling your cryptocurrency. A limit order to buy is the price you give to the exchange at which you wish to buy at. Exchanges should act in good faith so if they can provide a better (lower) buy price than the one you give them they should execute at that level. The same is true for sales. If the exchange is able to execute the sale at a higher price than you requested, they should do so. In either a buy limit or sell limit, unless the price reaches your order level, the exchange will not execute your order. Do not confuse limit orders with market orders (see below).
Unlike a limit order, a market is carried out immediately at the best available price. In a fast market when lots of investors want to buy (or sell) the price can move quickly away from your ideal entry or exit point. Although limit orders do give some confidence there is no guarantee exchange will be able to carry out the order at the level you wish.
A node is a single unit with a set of rules under which to operate by. Thus, a network is a collection of these nodes.
The term peer-to-peer was used in a 2008 academic paper written by Satoshi Nakamoto. The title of the paper was ‘Bitcoin: A Peer-to-Peer Electronic Cash System’.
In this context, the term was used to transferring value or rather Bitcoin directly to another party. Doing this directly bypasses an intermediary who is traditionally the intermediary’s bank(s).
Unlike Bitcoin and other cryptocurrencies, it is not possible to mine Ripple. Ripple’s supply into the marketplace is controlled by one organization, a company of the same name. This San Francisco company was started in 2014 with the goal of improving global financial transactions.
Notably, major banks such as UBS and Bank of America have started using the technology. Originally, 100 billion coins were created and 38 billion were supplied into the market. Similar to Bitcoin and Ethereum, the payment system behind Ripple, called RippleNet uses blockchain technology.
Programmers who use the Ethereum network for their code projects will use tokens. Tokens are the currency the programmer issues to raise money for these projects. Some examples include Golem, Augur and Iconomi.