A to Z of bitcoins: the bitcoin dictionary
We have created this Bitcoin Dictionary specifically keeping in mind the content of our guide. This is meant to quickly refer certain terms which are frequently used in the guide (as well as a few other essentials). Here’s the A to Z of Bitcoins.
After the creation of Bitcoins, a number of other cryptocurrencies came to prominence. There are over one thousand cryptocurrencies today. Collectively, all the non-Bitcoin currencies are known as altcoins, which basically means alternative cryptocurrencies. They are an alternative to Bitcoin and most of them can be traded for Bitcoins. Currencies carry a monetary value. Most of them are created for a specific purpose - such as paying for cloud storage, paying for adult content, etc. Read more about Altcoins here.
ASIC stands for Application Specific Integrated Circuit. This is basically a chip that is specifically designed for the purpose of mining bitcoins and cannot be used to perform anything else. This is the single most effective way of mining bitcoins and offers up to 100 times better hashing power and the least energy consumption rates. Anyone who considers themselves a serious miner is now using ASICs. In the past, CPU and GPU minings used to give good results. However, the block difficulty has since increased and GPUs are no longer profitable.
As per accountancy, anything (be it physical or virtual) that carries a monetary value of some sort is deemed as an asset. In this guide we have used the word asset time and again with reference to Bitcoins where we are calling them a ‘digital asset’. While currently there are no legal provision in most countries when it comes to Bitcoins, but if Bitcoins were to be declared in the books of account they’d probably go down as Current Assets.
BIP stands for Bitcoin Improvement Proposals. Here’s how a BIP is described in the first ever Proposal (BIP-0001). A BIP is a design document providing information to the Bitcoin community, or describing a new feature for Bitcoin or its processes or environment. The BIP should provide a concise technical specification of the feature and a rationale for the feature.
While we haven’t mentioned BIPs in our guide because they’re not something that a miner or an investor is likely to use, it is essential to know about it. BIPs are basically documents modelled after PEPs (Python Enhancement Proposals) which discuss various aspects of the protocol and software that runs the Bitcoin technology. BIPs are important because they describe hard fork changes in the core protocol of Bitcoin. This requires an overwhelming majority of Bitcoin users to agree on the change and accept it in an organised manner. Basically, BIPs help in forks.
Bitcoins, technically speaking are a digital asset which have been assigned as a currency upon creation. It is a global cryptocurrency which carries the same value across the world. It allows peer to peer transactions between users without the need for a centralized authority. Bitcoins are created after a block is mined, and they are rewarded to miners as a block reward. Bitcoins can be exchanged for other alternative currencies (altcoins) and can be exchanged for goods and services if merchants are willing to accept them. To sum it up in one line, Bitcoin is a virtual currency. Read more about Bitcoin here.
Bitcoin ATMs are becoming a popular means of buying Bitcoins via cash in some countries. While these are still quite rare, but they are getting popular and we expect to see more of them springing up over the next few years. These Bitcoin ATMs are like regular ATM Machines, but you deposit cash in them and withdraw Bitcoins. Basically, you pay the machine the cash in exchange of which you get Bitcoins. The machine identifies you wallet by scanning your wallet’s QR Code. However, the average fee that most Bitcoin ATMs charge is that of 5 to 10% which is quite high for some users.
A Block can be understood as an account statement that carries a set of transactions. Blocks are basically files where data relating to the Bitcoin transactions is permanently recorded. It acts like a page of a ledger. This Block is cryptographically secured and is linked to other Blocks. Blocks identify each other via the hashing function. Data entered in a block can neither be altered not be deleted.
After a miner ‘solves’ or ‘mines’ a block, they are rewarded with Bitcoins as a reward for putting in their resources during the mining process. These rewards are distributed by the network. The block reward is not fixed. It is not even restricted to just Bitcoins. Mining a block of any cryptocurrency would give you some Block Reward.
The block reward keeps changing from time to time. In currencies like Bitcoins which are limited in number, the block mining difficulty keeps increasing and the rewards keep getting lesser. The block reward started at 50 BTC in block #1 and halves every 210,000 blocks. At 144 blocks per day (which is the average number of blocks mined daily), 210,000 blocks take on average four years to mine. Hence, the block reward for Bitcoins halves every four years. The current block reward is 12.5 Bitcoins per block. In June 2020, the block reward will go down to 6.25 Bitcoins per block.
Block Time is the time it takes on an average to solve one block. In case of Bitcoins the Block Time is fixed at 10 minutes. This means every 10 minutes a block is solved. However, the block mining difficulty keeps increasing constantly to ensure that the time taken to mine blocks is constantly at 10 minutes.
The Blockchain is the technology that powers the movement of Bitcoins from person to person. It is like a ledger distributed across millions of people. The Blockchain is basically the force that keeps Bitcoins in motion as it enables transfer of Bitcoins and records all transactions. It is a decentralized ledger which has no central authority governing it. It is distributed across all the users and everyone has access to all the transactions happening on the Blockchain.
To sum it up in one sentence, the Blockchain is a ledger that records all the Bitcoin transactions. Read more about Blockchain here.
Cold Storage is a term which is used for a place where Bitcoins are stored which is not connected to the internet. This could be a flash drive, a hard disk, or even a computer which is not connected with the internet. Even a paper wallet can be considered as a cold storage. Cold storages are often compared to bank vaults and are considered among the safest places to store your Bitcoins.
A cryptocurrency is basically a secure form of digital token that carries a monetary value. It is not a physical asset and it cannot be manipulated. The value of a cryptocurrency is standard for all users across the globe. It is the common term used to describe all coins, including Bitcoin. It is a form of currency based on Mathematics. All cryptocurrencies are created when users solve mathematical problems based on cryptography using their processing power. Read more about Cryptocurrency here.
Etymologically speaking, the word is derived from the latin word kryptos which means ‘to hide’. ‘Grapy’ on the other hand is derived from ‘graphie’ in French and German which stands for ‘the process of writing’. Back in the medieval times, crypts used to be vaults hidden below the ground which stored important artifacts.
Basically, cryptography is the process of writing in a hidden manner. Cryptography in the modern sense is basically the art of writing codes, which when decoded would result in a meaningful statement. Cryptography emerged during the second world war to ensure that the even if the messages being sent across on radio signals are intercepted, they won’t make sense unless you know the right way to decrypt them.
A currency is basically a monetary token - something that carries a monetary value and can be exchanged for goods or services. Before there was currency, there was the barter system and things were exchanged for other things without no specific value. The currency system brought in more stability and formed an economic system.
Coins and Notes are the most common forms of currency. However, checks, money orders and other similar forms of paper are also currency. Cryptocurrency takes things one step forward - towards a digital system of currency.
Another word which we have used a number of times in this guide to cryptocurrencies is ‘Decentralized’. A decentralized system is one which does not have a central governing authority but is instead managed by all who are invested in it or working on it. The blockchain is a decentralized system because there is no governing body in it but instead it is run by all the users collectively who are a part of the system.
An escrow is a service which is used when two parties who do not know or do not trust each other want to conduct a business. Escrow is basically a middleman between two parties. If person X and Person Y want to trade Bitcoins for a direct bank transfer, but they do not know each other, they can take use of an Escrow service. X will pay bitcoins to the Escrow and Y will pay the money to the Escrow. The Escrow, which is a trusted name, will then transfer the Bitcoins to Y and cash to the bank of X.
Ethereum is an open-source platform for developers, which allows them to create decentralized applications. Ethereum, with its decentralized nature and decentralized applications challenges the very system upon which the internet is based!
Ethereum wants to democratize the way the internet functions. The Ethereum network wishes to replace the servers and clouds with nodes which will be distributed all over the network. These nodes will be operated by volunteers all across the planet, thereby giving Ethereum it’s nickname of world computer. Read more about Ethereum here.
Similar to miners on the Bitcoin Blockchain, there are miners on the Ethereum Blockchain too. Miners here work towards mining ‘Ether’ instead of Bitcoins. Unlike Bitcoin which was created just as a cryptocurrency, Ether has a more definite purpose behind it’s creation. While Ether can be traded as a cryptocurrency, it is also used to pay for transaction fees and services on the Ethereum network by application developers.
Similar to other cryptocurrencies, Ether too can be stored in a wallet, transferred from one wallet to another and can be traded over various exchanges for a monetary value.You would need Ether to do anything on the Ethereum Platform. Ether is the payment you make to do things on the platform (Thereby it’s like an fuel that powers the Ethereum system).
Exchanges are basically digital marketplaces where traders can buy and sell Cryptocurrency among each other and with the exchange in itself. Users can buy Bitcoins using Altcoins, as well as fiat currencies (Govt authorized currency) depending upon the type of Exchange they are dealing with. Bitcoin exchanges act as the platform between buyers and sellers. Read more about Cryptocurrency Exchanges here.
Fees are the transaction fees that you pay while making different transactions. There are a number of fees involved though they might not be applicable in each case. However here’s a list of the different kinds of transactional fees that might be applicable:
While depositing currency to wallets
While withdrawing money from wallets
While transferring bitcoins to exchanges
While converting bitcoins to altcoins
While converting altcoins to bitcoins
While transferring bitcoins from exchanges to other wallets
Fees is also charged by pools
These are just some of the most basic fees that users tend to pay while trading in cryptocurrencies. There are many other fees involved in the process.
Fiat Currency is the term used to describe the legal tender that we call money in real life. While currency might refer to cryptocurrency or real life currency, the term fiat currency is used to describe real life money in conversations about cryptocurrencies.
A Genesis Block is the first ever block of any cryptocurrency which is mined. It is the first block of the blockchain and carries no information about any previous block.
GPU, which stands for Graphics Processing Unit is basically a chip on Graphic Cards which, up until now was primarily known for gaming. However with the rise in awareness around cryptocurrencies, GPUs are largely being used for cryptocurrency mining. Miners tend to set up a number of GPUs together to create a cryptocurrency mining rig.
GPU mining is no longer profitable while mining for Bitcoins. However, most altcoins support only GPU based mining as their algorithm prevents the use of ASICs.
Hash Rate is the unit used to measure the mining power of a Bitcoin mining equipment. It is expressed in hashes per second. The latest standards are GH/s (Giga-Hash). The higher the hash rate, the quicker an equipment will mine for coins.
Holding a coin is expressed as ‘hodl’. This became an internet meme and has since stuck. Most people who have been mining or trading cryptocurrencies for some time use this instead of the correct spelling. Hodl originated from a Bitcointalk forum post where a user accidentally typed hodling instead of holding and it has since stuck.
To Hodl a coin is to keep it even during a fall in price, hoping that one day it would boom. To Hodl is basically the opposite of panic selling.
Law of Demand
The law of demand is what controls Bitcoin prices. It is a theory in economics which states that the demand of a commodity is likely to decline as the price soars. Basically, this means that people are waiting for a dip in the price to buy Bitcoins. When the Bitcoin price is on the rise, less people would prefer to buy it.
This is what keeps the prices stable - people buy when the price crashes and people sell when the price rises. There are also anomalies to this - some investors prefer to rise when the markets are on a high too. Also read how prices of bitcoin are determined.
A ledger is a book of accounts where financial transactions are recorded. Ledger records all the funds that have flown in or gone out of the business. In the world of cryptocurrencies, the blockchain functions as a ledger. However, it is quite different from the way we know regular ledgers to be. Unlike bank’s ledgers which are centralized and maintained by the central banking authority, the blockchain network is decentralized and distributed - meaning everyone who is a part of the network has access to the ledger and can monitor all transactions without knowing the identity of the person who is making the transfers.
mBTC is the thousandth of a Bitcoin, i.e. 0.001 BTC.
A person who mines for cryptocurrencies is called a Miner.
Mining is the process of solving blocks to generate cryptocurrencies. Mines in real life exist for for resources which lie beneath the surface of the earth. Let us take gold for example. Gold is a depletable resource and requires energy and manpower to be mined out. Consider a similar analogy for cryptocurrencies too. Mining requires energy and manpower. Energy here is the electric energy as well as the computational force which solves complex algorithms. It requires manpower too - which is why miners tend to mine in pools. Read more about cryptocurrency mining here.
Panic Selling is when users begin to sell the coins that they hold once the markets begin to fall. These are usually novice traders or short term investors who do not want to take a long term risk and do not want to wait for prices to rise again. They would rather clear their holdings instantly rather than make a loss. These panic sellers are the first ones to cash out when the markets show even a slight fall. When panic selling happens en masse, the price falls keeps falling due to them. However, after this, there is again a period of rise as people would look forward to buy once the price falls.
Panic sellers are the exact opposite of hodlers we mentioned above.
Mining Pools are among one of the most important things when it comes to mining for any cryptocurrency. When mining alone, miners tend to have a limited hashing power and resources. Instead of setting up a big mining farm on your own, which requires massive investments, you can pool in your resources and join other miners and mine alongside them.
Pools allow you to sign up and register all your mining units so that they can track the progress of each of them and reward you with bitcoins based on your contribution to the pool. Your bitcoins go to your wallet.
In the simplest of terms, your private key is like a password that you use to log in to your wallet. This key will be verified to allow you to log in to your wallet and authenticate your transactions. Technically speaking, this private key is a 256-bit number used in the ECDSA algorithm to create transaction signatures in order to prove ownership of certain amount of bitcoins.
A Satoshi is the smallest divisible unit of a Bitcoin. It is equivalent to 0.00000001 Bitcoins. This has been named after the creator of Bitcoins, Satoshi Nakamoto. Read more about Satoshi Nakamoto here.
2FA, which stands for 2 Factor Authentication is quite critical when it comes to securing your wallet. It ensures that just your password/key isn’t enough. Even if a perpetrator gets access to the password you use to log into your exchange, they would still need to enter one more bit of information that can verify your identity.
uBTC stands for one microbitcoin, which is equal to 0.000001 BTC.
Virgin Bitcoins is the term used to describe those Bitcoins which have freshly been mined and rewarded to the miners. They are yet to be used anywhere.
In the world of Cryptocurrencies, Wallets are the real world equivalent of bank accounts. Cryptocurrency Wallets allow you to store your cryptocurrencies on them. You can have multiple accounts where your currencies can be spread across. There are different kinds of wallets. Some allow you to store only one kind of currency, some allow you to store multiple kinds of currencies. Some allow you to store your currency offline, some allow you to store it on the web, some of them belong to you as physical devices while others are a part of cryptocurrency exchanges. Read more about cryptocurrency wallets here.
Your wallet address is similar to your bank account number. It is a public address that you give to people who can pay you money using that address. This is supposed to be shared with the public while your private key is supposed to be kept private.