April is Financial Literacy Month, so let’s talk cryptocurrency. Cryptocurrency, bitcoin, and NFTs have become increasingly popular terms in the world of personal finance. So if you are trying to keep yourself financially savvy, here’s how to speak crypto.
What is cryptocurrency?
The term cryptocurrency is a portmanteau of the words cryptography and currency, and refers to any form of digital currency that is backed by cryptography. Backing digital currency with cryptography makes one’s holdings in cryptocurrency secure and anonymous.
When you own a cryptocurrency coin, you don’t actually own a physical asset. Instead, you keep your cryptocurrency in a digital wallet. And since cryptocurrency is decentralized, meaning it’s unregulated by a bank or government, it’s very difficult to recover your assets if your wallet gets lost or stolen. Make sure to keep your digital wallet safe!
How do cryptocurrency and bitcoin work?
Let’s go over the difference between cryptocurrency and bitcoin. Cryptocurrency is a blanket term. It refers to any form of digital currency backed by cryptography. Bitcoin is one form of cryptocurrency. Bitcoin is the original and most popular form of cryptocurrency. Other popular “altcoins,” or other types of cryptocurrency, include Ethereum, Dogecoin, Litecoin, Tether, Binance and Monero.
A blockchain refers to the computer science concept that is central to how cryptocurrencies work. Blockchains record transactions in a secure, unchangeable way. Most cryptocurrencies store all of their historical transaction information in the blockchain. Part of the process to mine new bitcoins or other forms of cryptocurrency involves verifying the transactions in the blockchain database with intense calculations done by powerful computers.
What is an NFT?
A non-fungible token or NFT is a term used to refer to a one-of-a-kind digital asset backed by a particular form of blockchain cryptocurrency. One way to think of an NFT is as a way to determine that a particular piece of digital art is an original. Most digital art, like pictures or videos, can be easily and completely reproduced, so there isn’t a way to determine which of the many copies is the original. NFTs are a way to “prove” that the version that you have is the original.
How to Speak Crypto
Here’s a brief list of cryptocurrency-related terms that you should have on your radar:
- Blockchain — a type of record-keeping that records the result of sequential blocks that all build upon one another. Blockchain is the technology that backs cryptocurrencies like Bitcoin.
- Coinbase — a popular cryptocurrency exchange where people can buy and sell various forms of cryptocurrency.
- DAO — A Decentralized Autonomous Organization or DAO is a type of loose organizational structure built on blockchain technology.
- DeFi — Decentralized Finance or DeFi refers to financial transactions (like cryptocurrency) that are done outside of the traditional banking structure
- Mining — How new cryptocurrency coins are formed and transactions on the blockchain are verified
- Stablecoins — Stablecoins are cryptocurrencies that are backed by a non-digital currency or asset
- Wallet — Like your physical wallet that holds your physical currency, your cryptocurrency wallet holds the digital information that represents your cryptocurrency coins.
The Bottom Line
If you’re thinking about buying an NFT or getting paid in cryptocurrency, you might want to tread carefully. Most financial experts recommend that you keep only a small portion of your overall portfolio in cryptocurrency. Because the cryptocurrency market is relatively new, it can be extremely volatile. If you want to invest some of your money in cryptocurrency or NFTs, it’s best to only invest an amount that you would feel comfortable losing.
Do you know how to speak crypto? What other terms to you want to learn? Let us know in the comments below.
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.