The world of cryptocurrency can be bewildering for the uninitiated, and its confusing word salad of terms doesn’t help. Here’s a primer with some basic vocabulary to get you started:
Private key: A critical code that allows access to a digital currency wallet. Think of it as a password that can’t be changed or reset, and if you lose it, there’s nowhere to turn for help. Crypto investors frequently store their private keys in several secure locations—in several formats, online and offline—to guard against loss. You can give out the public key associated with your crypto wallet (that’s how you receive funds), but if you ever share your private key, assume that the funds in that wallet will be compromised forever. And if you die without leaving your private key with your heirs, they’ll be out of luck.
Multi-sig wallet: A cryptocurrency account that requires more than one key to authorize a transaction. These keys can be divided among several people, so sending funds would require some or all of their approvals. A single person might use a multi-sig wallet simply for enhanced security, somewhat like two-factor authentication for a Google account.
Hash function: A one-way, mathematical process that turns input data (e.g., a word, a phrase, a number) into an output of a fixed length. Any modification to the input data drastically changes the output of the function. Adding even a single letter to an entire book would change its hash.
Here’s an example of a hash: 0000000000000000002ebd8756d68a4c281e78fc18844eae8deb55edae750218.
Hash functions have their origins in cryptography and are a key element in making cryptocurrencies secure. For bitcoin, new transactions—records of people sending the cryptocurrency to one another—go through a hash function to produce an output. There’s a little more fancy math along the way, but if the output is below a certain value (defined by difficulty, more on that below), then the person who found the hash is rewarded with 12.5 new bitcoins. This “block reward” is scheduled to decrease over time. “Hash power” is a measure of how many calculations a computer can perform per second in the race to find the next block to add to the bitcoin blockchain.
Difficulty: The measure of how tough it is for miners to find the blocks that add transactions to the bitcoin blockchain. By examining the time stamps of previously-produced blocks, the bitcoin network automatically adjusts its difficulty up or down to correspond to the amount of computing power mining or securing the network. The more miners there are, and the more hash power there is, the harder the network makes it to find a block. The fewer miners there are, and the less hash power there is, the easier the network makes it to find a block.
The bitcoin network updates its difficulty every 2,016 blocks, or roughly every two weeks, and automatically targets an average block production time of 10 minutes.
Mining Pool: A formally organized group of cryptocurrency miners who join their computing resources to confirm transactions on a cryptocurrency network. They choose to do this to increase the likelihood of earning a block reward (the more hash power you have, the higher the chance that you’ll confirm a block and thereby earn more units of the associated cryptocurrency). Miners in mining pools agree to split block rewards among themselves, and usually pay a small fee to the organizer of the pool. A mining pool is like joining an office lottery pool. You sacrifice a share of the potential share of the rewards, but significantly increase your odds of winning.
51% Attack: In the cryptocurrency world, majority rules. That means if one miner or group of miners collectively controls more than 50% of a blockchain’s mining power (hashrate), they can disrupt the network. They can stall payments by preventing the confirmation of new transactions (not unlike the majority party in the US Senate preventing a confirmation hearing for a president’s Supreme Court nominee).
Miners who control more than 50% of hashpower can also spend coins and unilaterally reverse that spending after they receive their goods or services—defrauding the vendor in a dubious practice known as “double spending.” If one party has all that power, it leaves the affected cryptocurrency vulnerable to a “51% attack” and undermines the credibility of the network, thus defeating the ostensible purpose of a blockchain.
Ethereum: A programmable blockchain that its creators say is a “decentralized world computer.” While bitcoin is compared to a calculator, ethereum is sometimes compared to an iPhone because of the versatility of its smart-contract platform. Ethereum held one of the first major crowdfunding events (a “pre-sale” of its tokens) in crypto history during 2014, collecting what was then $18 million of bitcoin. Ethereum launched in July 2015.
Today, the network’s currency—ether—trades for about $120 per unit, down from an all-time high of $1,400 in Dec. 2017. Many developers have attempted to build decentralized applications, or “dapps,” using ethereum, and the platform was used by many entrepreneurs to issue new tokens during the initial coin offering craze.
Alt-coin: Any cryptocurrency that is not bitcoin. Bitcoin is the original cryptocurrency, so blockchain enthusiasts have taken to calling all subsequent cryptocurrencies alternatives. Many altcoins have modified parameters to improve upon bitcoin’s speed and block size (how many transactions it can accommodate). Thousands of altcoins have been created, but only about a dozen seem legitimately novel or useful.
HODL: A misspelling of the word “hold.” The term originated from a Dec. 2013 post on a bitcoin forum and cryptocurrency enthusiasts readily embraced it. Now, they say, it stands for “hold on (for) dear life,” which is a rallying cry to remain invested in bitcoin and other cryptocurrencies during the wild gyrations of the market.
No coiner: A person who doesn’t own any cryptocurrencies, and believes the prices of cryptocurrencies are unjustifiably high and they have little purpose beyond speculation. In the crypto world, nocoiner has become a pejorative term, meant to signal that somebody is either willfully ignorant or maybe just plain stupid. But some nocoiners wear the label with pride, as an acknowledgment of their passion and contrarianism within the already deeply contrarian crypto sector. Indeed, it takes conviction to engage with the crypto community and yet continuously proclaim that bitcoin isn’t the seed of a financial revolution.
Some famous nocoiners include economist Paul Krugman, NYU professor Nouriel “Dr. Doom” Roubini, and vice chairman of Berkshire Hathaway Charlie Munger.