Some scams are easy to see, but others might look like a worthwhile investment opportunity. Here are some crypto red flags to look out for.
There are a lot of complicated ideas in the world of cryptocurrency and blockchain technology, and to add fuel to the fire of complexity the industry and market comes with niche jargon. While some ideas might remain complex at the core, we can help you understand the world of crypto a little easier by getting to grips with the terminology used in every crypto life.
A blockchain is also known as a distributed ledger, and it is basically a fully digital database that captures and records information in a way that cannot be modified or reversed. All transactions of a cryptocurrency are processed, verified, and recorded on the blockchain through a timestamp and because of the way the technology works, each transaction is encrypted, which means no one can change the transaction once it has been verified.
The blockchain is decentralised, meaning there is not one central entity (like a government or bank) that is in control of the network and no one place stores the database. Rather, it is distributed across many networks and computers (called nodes) across the world. Everyone involved in transacting using a cryptocurrency becomes a part of the blockchain and the database gets shared across people. This makes the network more secure from hacking and it means not one party can control the data on the blockchain, which results in a privacy that’s not seen in centralised networks.
An altcoin is any cryptocurrency that is not Bitcoin. It comes from “alternative coin” and there are thousands of cryptocurrencies and digital currency projects on the market.
Fiat currency is traditional, government-issued money. It’s the state-backed main currency that a country will use. The United States has the US dollar, for example, as its fiat currency.
A cryptocurrency exchange is a platform that allows people to buy, sell, and trade their cryptocurrencies. Some exchanges allow users to trade fiat-to-crypto, crypto-to-fiat or just crypto-to-crypto. There are different types of exchanges, from centralised exchanges (which often store your cryptocurrency funds for you) and decentralised exchanges (also known as DExs).
“HODL” looks like a typo of “hold” and some say that’s how it was created as a term in crypto. To “HODL” is to “hold on for dear life”; meaning to buy and store and not trade and transact. A HODLer is someone who has bought a token and will not sell.
When you start buying crypto, you are issued with two keys: The public keys and the private keys.
Your public key is kind of like your email address, you can share with with anyone. Anyone who wants to send you crypto will use your public key as an address.
A private key, which is crucial to keep safe, is like a password to get into your bank. It’s made up of a unique string of different letters and numbers and it allows you to access and manage your cryptocurrency. In the same way that you wouldn’t want to leave your banking password insecure, making sure your private key is safe means you’re making sure your cryptocurrency funds are safe.
A cryptocurrency wallet is what you use to store your private keys – you use the wallet to protect the access to your cryptocurrency funds.
There are two types of cryptocurrency storage by using a wallet:
- Hot storage, which is online and connected to the internet. This is convenient because you can connect to your funds quickly and transact online automatically, but it is less secure and there are risks of hacking.
- Cold storage, which is completely offline. Usually this is a device or a paper wallet that houses your keys without touching the internet. It means crypto transactions are slightly more of a process, but it is much more secure from hacking risk.
A wallet is typically a combination of hot and cold storage, adding layers of security to both methods.
When Bitcoin tokens are created, we say that they have been “mined”. Bitcoin mining is the process of generating new coins into the market and it’s done by using powerful, specialised computers to solve complex puzzles to algorithmically create new coins. When it was first launched, Bitcoin could be mined on a personal computer, but the more tokens that are created, the more difficult and energy-intensive it has become – a system in place to make sure all of the tokens aren’t mined too quickly. Every time a miner mines a new coin, they receive a reward. The process of mining takes work, but the incentive of receiving Bitcoin for the reward means there is a fresh supply of new Bitcoin coming into circulate. Bitcoin is capped at 21 million BTC, so once the last coin has been mined, no more will be able to exist thereafter.
Decentralised finance (DeFi)
DeFi is taking the crypto world by storm at the moment, with new DeFi projects and platforms emerging in the industry. The term decentralised finance refers to any financial that can occur without a middleman, like a centralised exchange, a bank, or a financial firm. It relies on the blockchain technology that distributes control across networks, rather than storing funds or data in one central location.
An NFT stands for a non-fungible token. “Fungible” means one unit is worth the same as another unit, like a BTC or a dollar. “Non-fungible” means each unit is unique and doesn’t have the same value, like an art piece. NFTs are prominent in the digital assets and the market has seen billions of dollars pouring in over the last two years as collectors and traders buy NFTs to add to their collections or to buy and sell for profit.