Crypto Basics

“AltCoin” refers to pretty much any cryptocurrency that isn’t Bitcoin. Bitcoin has been such a dominant player in the world of crypto that other cryptocurrencies are “alternative coins” - which shortens to “altcoin.” Conventional wisdom suggests many of these other cryptocurrencies have made improvements in terms of computer code, blockchain management, or other features. Different coins present their initial coin offering in different ways and may establish their own cryptography for peer-to-peer transactions. At the same time, past performance suggests extreme price volatility with alternative crypto. Bitcoin has proven unpredictable as an investment, but altcoin currency has so far been even more so. Anything’s possible moving forward, but most experts recommend you steer clear of altcoin as a primary investment. As always, if you decide to roll those dice anyway, never risk more than you can afford to lose. There are simply too many other reliable financial products out there to commit your future to cryptocurrency - especially altcoin.

Have you ever worked on a document online that’s “shared” with others? You can watch their cursors moving and see what they’re typing in real-time. Anyone sharing the document can look at the history of changes as well. If someone accidentally erases something, it’s easy to find out who made the change and fix it. Now imagine that shared document is actually a financial ledger with every transaction in the world being entered into it as they occur. The record-keeping is part of the transaction itself; the funds only change hands because the terms are being recorded in the shared digital ledger. This is a very simplified version of a blockchain system. Everyone can see every transaction and every change is verified and saved by everyone involved. Everyone using the same crypto system manages the ledger along with other users. The security of the system is partly based on the transparency of it all. (Names are encoded so that users are easy to track but difficult to associate with individuals in the real world.) Further security is provided by the method of storing this information permanently. As each exchange is verified, the information is stored permanently in a “block” of data and added to the “chain” of every other transaction that’s ever occurred with that cryptocurrency. This “blockchain” is nearly impossible to alter afterward because there are thousands of exact copies made by other users around the world, over and over as things progress. High-powered computers constantly compare the blockchain with other copies so that any discrepancies are identified almost immediately. Cryptocurrency transactions are thus some of the most secure in the world.

While it’s possible to buy and sell crypto directly with other users, it’s generally considered much safer (especially at first) to utilize reputable cryptocurrency exchanges, sometimes called “trading exchanges.” Cryptocurrency exchanges are online marketplaces that allow users to buy, sell, or trade various cryptocurrencies. They are in some ways comparable to the currency exchange booths at most international airports, where you can convert your dollars to lira, francs, or yen. Some offer “hot wallet” services or even a sort of “savings account” in which you can store your cryptocurrency and possibly even earn a small bit of interest along the way. As with any online institution, it’s important to do your homework and verify the legitimacy of any organization before sending them your hard-earned money. Even among reputable services, transaction fees and other terms vary widely, so pay attention to the small print at every stage and don’t commit to anything you don’t fully understand! Expect to pay a small fee for each service rendered, but if you’re purchasing cryptocurrency as an investment, you don’t want to pay more than necessary for basic transactions.

Even though digital currency lacks a physical form, users still refer to their personal storage systems as “wallets.” At its most basic, a cryptocurrency wallet is comparable to any other method of storing information. It’s more specific than most other forms, and - hopefully - more secure. A “hot wallet” is managed online. (Think “the cloud.”) Many trading exchanges offer this service for free with your membership, although some users prefer to choose from the many third-party providers out there.

A “cold wallet” is offline. (Think “flash drive” - but with multiple levels of security.) These are small, portable devices with their own advanced encryption that allow you to “keep” your cryptocurrency with you. Any purchases or exchanges, of course, still require online interaction. 

“DeFi” is another compact bit of shorthand, this time for “decentralized finance.” In the world of cryptocurrencies, it refers to financial apps which circumvent established institutions. In other words, it allows peer-to-peer transactions without banks or governments getting involved. The term does not refer to a specific application so much as an approach to cryptography.Whereas blockchain technology was primarily designed with financial transactions in mind, DeFi takes the basic approach of blockchain and expands it for use with all sorts of interactions. Loans, crowdfunding, insurance, or gambling can all be managed without institutional control, fees, or regulations.

This is a fancy way of referring to the total value of all “coins” of a specific cryptocurrency. It’s easy enough to compute - you take the total number of coins in existence and multiply them by the current exchange value of each coin. This number can change daily, or even hourly, based on market fluctuations or the mining of new coins. 

It takes a great deal of computing power to do all the verification and comparisons described above. In order to motivate more users to take part, many cryptocurrencies offer rewards for those able to do provide these computations the fastest. The actual logistics of the system are a bit tedious, but the short version is that for each new transaction, thousands of computers race to verify and store the correct information. The computer which does this first each time earns a small amount of new cryptocurrency - a “coin,” as it were.The computing power necessary for successful crypto mining is substantial. It’s not just about speed - the system utilizes sophisticated cryptography to keep transactions secure. It’s increasingly difficult for anyone other than established organizations to profit from the effort. 

In general terms, “nodes” are any point of connection or interaction between different parts of a computer network or networks. Each node has a unique identification so it can be recognized by the rest of the system. When you get a new printer, for example, your computer has to “find” and identify it before the two can communicate effectively. Once recognized, however, you can print from your computer to the device or scan documents from the device to your computer. Your printer is a node, as is your computer, your modem, and the web server that lets you post pictures of your kids to the family blog. When talking about blockchain, a node is any device connected to that blockchain “ledger” described above. 

This is a rather elastic term that has meant different things in different settings over the years. In general, however, it refers to any arrangement which “cuts out the middle man.” If you want to sell your car, for example, you may go to your local dealer and trade it in towards a newer model. They’ll then fix it up and sell it to a different customer. Or, if you prefer, you can take out a few ads or make a few posts on social media and try to sell it directly to the person who’ll be driving it next. When you buy and sell without assistance from a specialized institution, that’s peer-to-peer. Transactions involving cryptocurrency are considered “peer-to-peer” because no central bank or other financial institution is involved. One party makes arrangements with another without requiring the approval or facilitation of a third. 

This one can be a head-spinner if you’re new to cryptocurrency. In many contexts outside of cryptocurrencies, the words “coin” and “token” can mean pretty much the same thing - a little round item that acts as currency and can be used to buy and sell, make a payment, etc. Even in the world of cryptocurrency, they’re easy to confuse. Neither exists in physical form, of course - when new coins are mined, they exist only in cyberspace. Tokens, too, are digital representations of information. Both are considered “cryptocurrency,” despite the fact that tokens in this case don’t act as currency in the traditional sense. But that’s where the similarities end. Coins are units of digital money. They are treated like dollars or yen or francs for most transactions - basic digital currency used as part of a financial exchange. These exchanges are what’s recorded in the blockchain and treated like any other buying and selling, minus a central authority running things and taking its cut. Tokens are digital assets that can be very roughly compared to having “shares” in a company. They can be traded, bought, or sold within their system, but unlike coins, they imply participation in the overall network. A hint of mutual ownership, but also more specific than coins. If you have season tickets to your city’s NBA or NHL team, you have items of value that can be exchanged with other fans, but have little inherent worth for paying your electric bill or checking out at the grocery store. On the other hand, they entitle you to attend the games and participate in events reserved for season ticket holders - you’re part of “the network” around the team.