Key cryptocurrency terms and what they mean

After Bitcoin’s price rose to a new all time high in November, the sticky subject of cryptocurrencies is back in the spotlight.

From blockchains to “ETFs”, the crypto market is full of terms that can be as bewildering as the sudden price fluctuations of its digital currencies.

But worry not.

If you’re hearing these for the first time, or just need a refresher, here are a few key words and what they mean.

While many may struggle with the finer points of crypto, pretty much everyone has heard of its most famous product: Bitcoin. But what actually is it?

Bitcoin is a cryptocurrency, which is to say a type of digital currency. Unlike traditional currencies – the dollar or pound, for example – Bitcoin is not controlled by centralised financial institutions. This makes it popular for people who think decentralisation can bring financial freedom, but it also makes it extremely volatile with it rising and falling in value at the whim of Bitcoin buyers and sellers.

Its price climbed in value in 2024, particularly in November when Donald Trump won the US Election. Investors have long been hoping Bitcoin will reach $100,000 (£78,900) in value, and the digital currency reached more than $99,000 in late November.

But Bitcoin’s price has been known to plummet just as quickly as it spikes.

The blockchain, the system that underpins Bitcoin, is sustained by rewarding so-called “miners” – whose job it is to validate transactions – by paying them with the cryptocurrency.

However, unlike some other digital currencies, there is not an infinite supply of bitcoins. The amount that can be mined is capped at 21 million, and most are already in circulation.

So roughly every four years – or when the Bitcoin blockchain reaches a certain size – the number of bitcoins rewarded to those who successfully validate transactions is cut in half. The most recent Bitcoin “halving” (or “halvening”) event took place on 20 April 2024, reducing the reward for miners from 6.25 bitcoins to 3.125.

This ensures Bitcoin’s supply is drawn out for longer while demand, in theory, goes up over time. But with fewer rewards for miners, it can also lead some to consider whether it is financially worthwhile for them to continue the costly operation of running their powerful computers.

Blockchain is the technology underpinning all cryptocurrencies, and many related products like non fungible tokens (NFTs). In essence, it is a virtual spreadsheet on which all the buying and selling of crypto is recorded. They are arranged in blocks linked together in a giant chain – hence the name.

Every cryptocurrency transaction is individually recorded onto the blockchain by a huge network of volunteers verifying its authenticity by using computer programmes.

The incentive to do this for Bitcoin’s network is that the first person to validate transactions is rewarded in Bitcoin. This potentially lucrative process, known as mining, is also controversial because of the incredible amount of energy used as people the world over race to be the first to successfully update the blockchain.

A crypto exchange is the digital platform where investors can buy, sell and trade cryptocurrencies. Similar to traditional investing, a crypto exchange acts as a brokerage where people can transfer traditional money, like pounds or dollars, from their banks into cryptocurrencies like Bitcoin or Ethereum. Most transactions are accompanied by fees.

A crypto wallet is a place where investors hold their cryptocurrency. It stores the virtual assets much like a traditional wallet holds cash. There are two types, a hot wallet and a cold wallet. Hot wallets are connected to the internet, and thus more accessible for quick transfers and easy access. Cold wallets are physical devices like specially designed USBs that store crypto offline typically for safer and longer term storage.

Ethereum is used to describe both the second largest cryptocurrency after Bitcoin, represented by the Ether token, and the blockchain underpinning it. This supports an array of different applications and digital assets, such as non-fungible tokens.

It functions in a similar way to Bitcoin and other cryptocurrencies, but in 2022 switched to a greener operating system requiring less computers and energy.

ETFs are portfolios that let investors bet on multiple assets without having to buy any themselves. Traded on stock exchanges like shares, their value depends on how the overall portfolio performs in real time. They can comprise a combination of gold and silver bullion, for example, or a mix of shares in both technology and insurance companies.

A spot Bitcoin ETF buys the cryptocurrency directly, “on the spot”, at its current price, throughout the day. While some ETFs already contained Bitcoin indirectly, the US approved several spot Bitcoin ETFs in January 2024. This allowed new investors, such as investment management firms like Blackrock and Fidelity, to enter the speculative world of Bitcoin without having to worry about digital wallets or navigating crypto exchanges.

“Stable” is the key word here – this cryptocurrency differs from others as it is intends to be less volatile in value.

This typically works by the price being linked to an existing asset, for instance currencies like the US dollar or Pound Sterling, which in theory should make them more stable in price than cryptocurrencies that are not backed by assets.

Stablecoins themselves are usually controlled by companies that provide them, with transactions recorded on digital ledgers. While held up by some as the future of finance, high profile price collapses of stablecoins have alerted regulators to risks for investors and prompted scrutiny over their supposed stability.

XRP is a cryptocurrency used by a platform called the XRP Ledger. It was created by the co-founders of financial services company Ripple Labs in 2012 as a cheaper, faster alternative to Bitcoin.

The cryptocurrency has a fixed supply of 100 billion coins, which were created when it launched. Much of it is held by Ripple and periodically released into circulation.

Unlike cryptocurrencies like Bitcoin, transactions made using XRP are verified through consensus – whereby the majority of validators on its peer-to-peer network must agree whether or not a transaction is valid before it is added to its blockchain.

This has been credited with allowing many transactions to take place simultaneously, at high speed and low cost – making it appealing to financial institutions or for processes like cross-border payments. But as with other cryptocurrencies, XRP has received regulatory scrutiny and seen sudden, sharp declines in value.