What is Bitcoin? Top Cryptocurrency Terms and What They Mean

• By Brandon Drenon, Joe Tidy and Liv McMahon
• BBC News

December 13, 2022

Updated April 23, 2024

Image source, Getty Images: We are

After the price of Bitcoin reached a new all-time high in March, the sensitive subject of cryptocurrencies is back in the spotlight.

And while cryptocurrency market-moving events like the Bitcoin halving or the launch of “spot ETFs” may be familiar to cryptocurrency fans, their significance is less obvious to many.

Whether you’re hearing this for the first time or just need a refresher, here are some keywords and what they mean.

Bitcoin

While many may struggle with the ins and outs of cryptography, almost everyone has heard of its most famous product: Bitcoin. But what really is this?

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

Throughout February and March 2024, its price rose rapidly and briefly reached a new all-time high. But its value can bob as quickly as it increases – a pattern that has repeated itself several times since the cryptocurrency was launched.

Bitcoin ‘Halving’

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

However, unlike some other digital currencies, there is no infinite supply of bitcoins. The amount that can be mined is limited to 21 million and most are already in circulation.

Thus, approximately every four years – or when the Bitcoin blockchain reaches a certain size – the number of bitcoins rewarded to those who successfully validate transactions is halved. Bitcoin’s most recent “halving” (or “halving”) event occurred on April 20, 2024, reducing the reward for miners from 6.25 bitcoins to 3,125.

This ensures that the supply of Bitcoin extends longer, while demand, in theory, increases over time. But with fewer rewards for miners, it may also lead some to consider whether it is financially worth it for them to continue the expensive operation of running their powerful computers.

Blockchain is the technology that underpins all cryptocurrencies and many related products such as non-fungible tokens (NFTs). In essence, it is a virtual spreadsheet in which all crypto purchases and sales are recorded. They are arranged in blocks linked together in a giant chain – hence the name.

Each cryptocurrency transaction is individually recorded on the blockchain by a huge network of volunteers who verify its authenticity using computer programs.

The incentive for doing this for the Bitcoin network is that the first person to validate transactions is rewarded in Bitcoin. This potentially lucrative process, known as mining, is also controversial due to the incredible amount of energy used as people around the world race to be the first to successfully upgrade the blockchain.

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Video caption: Are cryptocurrencies the future of money?

Crypto Exchange

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 broker where people can transfer traditional money, such as pounds or dollars, from their bank to cryptocurrencies such as Bitcoin or Ethereum. Most transactions are accompanied by fees.

Crypto wallet

A crypto wallet is a place where investors store their cryptocurrencies. It stores virtual assets in the same way a traditional wallet stores money. There are two types, a hot wallet and a cold wallet. Hot wallets are connected to the internet and therefore more accessible for quick and easily accessible transfers. Cold wallets are physical devices, such as specially designed USBs, that store crypto offline, typically for more secure, long-term storage.

Ethereum

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

Exchange Traded Funds (ETFs)

ETFs are portfolios that allow investors to bet on various assets without having to buy any. Traded on stock exchanges like stocks, their value depends on the overall performance of the portfolio in real time. They may include a combination of gold and silver bars, for example, or a combination of shares in technology and insurance companies.

A spot Bitcoin ETF buys the cryptocurrency directly, “on the spot”, at the current price, throughout the day. Although some ETFs already held Bitcoin indirectly, the U.S. 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.

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