The world of cryptocurrency can seem intimidating for new investors. There are hundreds of new terms to go along with the new technology, and many people find themselves wondering where to start with things like how to buy Ethereum, what the best crypto is to invest in, or even how it all works in the first place. The good news is crypto doesn’t have to be as confusing as it seems. Many of the technical terms unique to crypto are more similar in practice than you would think, and new concepts don’t have to be as complex as they appear. These terms may be useful to you whether you have a Bitcoin IRA, crypto 401k, or other forms of investing in Bitcoin.
In simple terms, a wallet holds, sends, and receives crypto. On a technical level, wallets don’t hold your coins inside them (just like your bank account doesn’t have stacks of dollars in it), but it does store all the information you need to access and interact with your coins on the blockchain. In this way, a wallet is a representation of what’s happening on the blockchain, but using a wallet is much easier than trying to interact directly with the blockchain yourself, and also provide convenient transaction records just like your bank account would. Wallets can come in the form of an app on your phone or computer, or as a special hardware device. A custodian like BitGo can also manage your wallet – and all the sensitive information it contains – for you.
If you like #Bitcoin or #crypto, then you should know about wallets. Hot wallets are connected to the internet, are convenient, but aren’t as secure as cold wallets. Cold wallets are stored physically, like on thumb drives. pic.twitter.com/TDzIU7FUxO
— Bitcoin IRA (@Bitcoin_IRA) January 13, 2021
Wallet Address/Public Key
Your wallet address functions the same as your bank account number, letting people who want to give you money know where to send it. It’s sometimes referred to as a public key, and though there are some technical differences, a public key and wallet address function in basically the same way, and as crypto becomes more mainstream the two terms are often interchanged.
Your private key is a unique code that only you have access to and is what enables you to sign off – or approve transactions. After you add your unique signature to a transaction, that transaction will be sent to the blockchain. While you don’t see your private key when signing a transaction, it’s stored in your wallet. This is why it’s very important to be careful with your wallet security since unlike a bank account that would probably require multiple levels of verification before transferring your money, crypto transactions require only the private key to send your funds.
Decentralization means that network control is distributed among individuals rather than managed by one central party. Anyone can join a decentralized network, and each person who joins helps confirm that all transactions going through the network are valid. This means decentralized networks are less prone to manipulation and are also more stable since they don’t have a single point of failure.
Staking refers to depositing coins on a network in exchange for the right to confirm transactions and earn fees from those transactions. Usually, staking also requires running a node, the technical part of the network that does the work of checking transactions. Since many people may either not be that technically savvy or not have enough capital to meet the minimum requirements for running a node, they can combine their funds with others’ in a staking pool or similar service. A pool or staking service takes responsibility for running the node along with a small commission for doing so – and investors get to reap the rewards of staking without hassle. Investing in Ethereum 2.0 is one example of an opportunity where investors can earn money by staking. Staking with Ethereum 2.0 can earn up to 18.10% annually.
The blockchain is where transaction information is stored. It’s a public ledger that anyone can view. Each block of information is connected to the one before it through advanced encryption, making transactions that are recorded on the blockchain immutable – meaning no one can go back and alter any completed transaction.
Proof of Work
Proof of work (PoW) describes a process through which cryptocurrency miners earn the right to confirm transactions on the blockchain by using computer power to solve a complex mathematical equation. Bitcoin’s network uses proof of work. The first to solve the equation is rewarded, and the block is sent to the rest of the network to be verified and added to the blockchain’s public record. Requiring work to officially confirm transactions helps secure the network since the time and energy spent makes attempting to confirm invalid transactions (which would be rejected by the rest of the network) unappealing.
Proof of Stake
Proof of stake (PoS) is an alternative to proof of work. Rather than requiring miners to spend money and energy to add transactions to the blockchain, proof of stake requires validators to put their capital on the line to officially confirm blocks. The more money a validator stakes, the greater share of the network they get the opportunity to confirm and the more fees they earn for doing so. Meanwhile, if a validator attempts to undermine the network by trying to approve invalid transactions, they can be flagged by other validators and their staked capital can be destroyed. The most popular example of proof of stake is Ethereum 2.0.
A smart contract is like any contract – what makes it smart is that the conditions of the contract are automatically executed by computer code. Any type of agreement, from a simple transaction between a buyer and seller to a more complex process like making a claim on an insurance policy – can be managed by a smart contract. Smart contracts are fast, cheap, and free of human error or manipulation. Additionally, smart contracts used together can run what are called DApps – or decentralized applications. These are the same as apps on your phone but run by themselves on a decentralized network, with transactions recorded publicly on the blockchain. The potential of DApps is almost unlimited – including everything from games to financial derivatives – which is what makes Ethereum potentially one of the best cryptos to invest in, as Ethereum was tailor-made to run smart contracts.
Cryptocurrencies stored on devices without an internet connection are said to be in cold storage. Because it is completely offline, cold storage – including the bank-grade vaults used by our custodian – is the best way to guard against hacks and is considered the gold standard in crypto storage. Hardware wallets are another form of cold storage, while software wallets – apps that run on your phone or computer – are hot wallets. Hot wallets are convenient but also more vulnerable to attack because they’re always online.
An altcoin refers to any coin that is not Bitcoin. This means coins that are on other cryptocurrency networks entirely, such as Cardano or EOS that run on their own native blockchains, as well as tokens like Chainlink that run on the Ethereum network. The most popular altcoins include Ethereum, Tether, Litecoin, and Polkadot. Coins that are built on top of Ethereum’s blockchain are often referred to as ERC-20s, and these types of tokens make up the majority of altcoins. Occasionally, Ethereum itself is referred to as an altcoin, since it fits the technical definition of a coin that is not Bitcoin, but most often Ethereum is viewed in a class of its own. You can trade several altcoins, in addition to Bitcoin and Ethereum, in our Bitcoin IRAs and crypto 401Ks.
#Bitcoin is powerful, but don’t forget about #Ethereum! There are dozens of reasons to invest in #ETH. Learn about the top 5, including diversification, staking, #DeFi, and more. #crypto https://t.co/WK6X30XWX1 #crypto pic.twitter.com/nWo2va3ohQ
— Bitcoin IRA (@Bitcoin_IRA) January 14, 2021
Fiat is traditional money, like the US dollar or Chinese yuan. Regulated by central banks, fiat is backed by the faith and credit of a government and can be minted and printed at will. Cryptocurrency, run by software, uncontrolled by a central party, and often with a hard cap on the number of coins that can ever be in circulation (such as Bitcoin), is often seen as an alternative to fiat, aiming to solve many of the problems that occur with fiat currency such as high transaction costs, limited global use, and inflation.
Cryptocurrency and the new terms it brings along with it don’t have to be intimidating. And though the technology is revolutionary, you don’t have to be a developer to use it any more than you have to be an engineer to take a flight. With an understanding of some of the basic concepts, you can be ready to jump into the brave new world of crypto. So, if you find yourself wondering how to buy or invest in Ethereum, or ready to add Bitcoin and its potential returns to your retirement portfolio, head over to our “How It Works” page and let us help you get started!
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