Crypto Terms for Beginners Part 2

Are you interested in cryptocurrencies and the world of trading, buying low, selling high and trying to make some money in this volatile and exciting market? But maybe you’re put off and a bit scared of such terms as bearish, long position, and hold on for dear life?

Well, worry not. In Part 2 of our Crypto Terms for Beginners guide we’ll go over some of the more technical terms that even those who are clued in sometimes struggle with. Once you read this guide, however, you will be an expert in crypto terminology and you’ll have a much better understanding of what this whole market is about.

@aibcsummit Part 3! #crypto #blockchain #bitcoin #ethereum #asia #europe #america #africa #fyp ♬ Chill out jazz pop of a gentle guitar(865334) – RYU ITO

ATH: All Time High

So, when you’re judging whether or not to invest in a certain cryptocurrency, one of the important things to know is its ATH. This stands for all-time high, and it’s pretty much what it says on the tin. It’s the absolute highest exchange value the token has had, expressed in a fiat currency, most often in US dollars or euros.

ATH essentially shows you what the currency has accomplished. As crypto is an extremely volatile market, with ups and downs, ATH provides a baseline to compare any current fluctuation to. For instance, the ATH of Bitcoin was, according to CoinGecko, $69,044 in November of 2021.

Since then, Bitcoin has fallen drastically (then shot back up) but hasn’t yet reached this level. Nevertheless, it’s a historical record of what the currency can do, if the conditions are right.

ATH also helps with determining the price-innovation cycle in the crypto space. Most industry experts agree that the space evolves in cycles, alternating between high activity and the so-called “crypto winters.”

For Bitcoin, there have been three such cycles, first one peaking in 2011, the second in 2013, and the last one in 2017.

KYC: Know Your Customer

Know Your Customer (KYC) refers to a set of procedures, usually mandated by law, by which institutions that offer financial or finance-adjacent services need to verify the identity, suitability, and risks involved with doing business with a certain customer.

KYC is also part of the broader AML (Anti-Money Laundering) procedures that various service providers must follow by law in most jurisdictions.

The goal of KYC is to prevent business from being used by criminals to launder money. The procedures also allow businesses to get a better idea of their customers and their financial situation.

Another benefit is the minimization of fraud risk.

In the crypto space, KYC mostly occurs at the point of centralized exchanges such as Binance, Crypto.com, Kraken, and others. This means purchasing cryptocurrencies (such as Ethereum or any other) requires that you prove your identity to the management of the exchange.

Different legal jurisdictions set different standards but most converge around these key things: proof of identity from a government issued ID (ID card or passport) and a face picture to confirm that the identity matches. Depending on the country, and individual company, users may also be asked for proof of residence, utility bill copies and similar documents.

If you’re new to buying (and selling) crypto through exchanges, but you’ve gambled online, you can expect pretty much the same procedures.

Pump and Dump

Where there’s money to be made, and there’s a lot of money in crypto, there are also scammers. It’s regrettable, but it’s reality.

Scammers in crypto, like all others, rely on lack of information and naivete to swindle people out of their hard-earned money.

Some scammers, like the now infamous Ruja Ignatova of OneCoin, use the tried-and-true Ponzi Scheme model where old investors are paid off with money from new people coming in.

But an even more popular type of scam in the crypto world and one that takes less effort to pull is the so-called “pump and dump.”

This scam is quick and dirty, but it can bring the criminals a lot of cash and fast.

Actually, the cryptocurrency version is an adaptation of the older securities and stocks scam. Essentially, a group of scammers create false hype around a particular stock to generate interest. Once investors start buying, the price goes up.

When it reaches a certain point, the scammers sell off their stocks and make a quick buck while the prices plummet and everyone else is left holding the proverbial bag.

In the crypto world, it works basically the same. A group of people creates a new coin (this is ridiculously easy to do these days as there are essentially turn-key solutions for creating your own blockchain and token), then they hype it up getting people to buy. And when the price increases due to demand, they dump the tokens and disappear.

In crypto circles the “pump and dump” is often referred to as a “rug pull” as the creators of the coin pull the rug is pulled from under the investors.

Oftentimes, the people who run these scams rely on spreading hype through channels such as Discord, YouTube, and via various influencers that have large enough followings.

According to a 2020 study from the University of Technology Sydney and the Stockholm School of Economics in Riga, there were 355 instances of crypto pump and dump scams over the course of seven months.

A recent example is the Squid Coin rug pull. A group began selling coins based on the hit Netflix show Squid Game. Now, this coin had no actual official relation to the show, but many jumped on anyway causing the price to inflate to $2,800 and then plummet to pennies minutes later. This ended up with scammers making out with $2 million while the investors lost all their money.

There is one big difference between pump and dump with stocks and with crypto. The first one is totally illegal and results in jail time. The other is currently unregulated in most jurisdictions.

If you want to invest in cryptocurrencies make sure to pick the ones with an established reputation.

Whitepaper

A paper that is also white? What could that be all about, and aren’t most papers white anyway?

Well, in crypto terms, a whitepaper serves to explain the purpose and technology behind a project. Whitepapers are not just a cryptocurrency thing, most projects in the IT world explain themselves using this.

In the context of a cryptocurrency project, a whitepaper is considered a key step for the developers to be thought of as legitimate and professional. Investors rely on these papers to understand how the business will be different from competitors in the space.

In addition, there are also litepapers which are shorter and less technical and intended to give a quick overview that a layperson can understand easily.

Another thing whitepapers are useful for is judging whether or not the project has a legitimate aim or is intended to be yet another scam that will result in a rug pull. Projects that intend to mislead typically do not spend too much time on this. So, it’s a good filter for prospective investors.

If a new crypto project cannot explain itself in technical terms and say how what they do is different and better than what everyone else is doing, there is a high chance you’re dealing either with incompetence or a scam.

Either case, best avoided.

Arguably the most famous crypto whitepaper is of course the Bitcoin one. In 2008, Satoshi Nakamoto published his vision for a “peer to peer electronic cash system” that would later become the world’s preeminent and most valuable cryptocurrency.

This whitepaper proposed what would become the defining features of nearly all crypto tokens: peer to peer payments through an online network, removing third parties and using decentralized verification instead, irreversible transactions, and mathematical proof of transactions.

Proof of Work

Proof of work, often abbreviated as PoW, is a system that maintains consensus of the different participants on the blockchain network.

Since transactions on the blockchain are both irreversible and anonymous, there has to be a way to make sure that all those transactions actually happened. Blockchains are so-called “permissionless networks” and that means anyone can write in the public ledger.

So, how do you prevent someone from just assigning a bunch of tokens to themselves?

Here’s how: by the “longest chain wins” rule. Participants in the blockchain network accept the longest chain as being the only correct and valid one. This prevents multiple versions of chains with different conflicting data from existing.

For this to function securely, adding new blocks to the chain is designed to be difficult, costly and time-consuming. Participants in the network essentially compete to solve complicated cryptographic puzzles and become the first to validate each new block. This is the process that is called “mining.”

The first person to successfully mine a block gets a reward; this is the incentive system for them to use their computing power.

Essentially, proof of work is the system that makes Bitcoin and crypto in general safe and valid. This is the guarantee that your tokens will remain your own and your transactions will actually go through successfully.

Proof of work is not the only way to validate blocks, as there are other ways such as proof of stake that the Polygon network uses.

Bearish

Bears and bulls. No, we’re not staging some weird production of Animal Farm. We’re talking about crypto markets.

Bearish and bullish refer to two types of markets of crypto but also stocks and others. They also refer to two types of traders and their positions.

A bull market is one of continued and sustained expansion where the majority of investors are buying. Demand is outstripping supply so prices are rising.

Since both the stock and the crypto market are famously volatile, these terms refer only to sustained movements on the market. Not every dip and rise represent a bull or bear market.

In the crypto world, bearish markets are especially significant. In a bearish market, investors believe that the prices will keep going down, so they keep selling. This can trigger a downward spiral of price deflation.

Given the volatility of the crypto market, it’s important to know how to determine if the market is bullish or bearish.

You might think that a bearish market is bad, but that’s not necessarily true if your investment strategy is sound. Long-term traders can buy during a bear market at low prices and then benefit if and when the trend reverses and prices start going up again.

Some advanced traders use the dollar-cost average strategy, where they invest a set amount in specific time increments such as weeks or months regardless of the price level. Over time, if the market is sound, they should stand to profit.

The takeaway is this: a bearish market is one in which prices are falling and investors are convinced that the prices will keep falling. While this may negatively affect portfolios by reducing their value, it also opens up opportunities for traders willing to bear the risks involved.

Arbitrage

The high volatility of the crypto market is infamous. A lot of the time people talk about it in terms of risk, and there is risk, of course. And yet, there’s also opportunity.

Arbitrage is a type of crypto trading that takes advantage of this high volatility in an attempt to profit from the slight variations in price that occur in the price of a cryptocurrency during a short time period.

Traders who use this strategy trade with crypto assets across a variety of exchanges, taking advantage of the already mentioned price discrepancies.

An arbitrage trader buys a digital asset such as an NFT on one exchange at a lower price and then immediately sells on the other where the price is higher thus making a profit. While the price differential is often minuscule, the edge makes a tidy profit at higher volumes.

In recent times, arbitrage trading has been generating a lot of buzz in the crypto investment circles as it is seen as a very safe trading strategy. Arbitrage trading is very fast with positions cleared within minutes or even seconds.

This means traders do not have to worry about long-term market movements and do not enter into high-risk positions that take hours or even days before profit is generated.

Arbitrage traders therefore do not have to predict longer or medium-term future prices of Bitcoin, Ethereum, and other cryptocurrencies. When they spot an arbitrage opportunity and capitalize on it, they can expect fixed profit within using predictive pricing strategies.

Cryptography

It’s called cryptocurrency or just crypto for short. But where does this come from? It comes from cryptography, if you didn’t know already.

And what is this cryptography, exactly? Well, for one thing, it’s way older than either cryptocurrencies or the blockchain.

In brief, cryptography is the study and practice of secure communication in an “adversarial environment.”

Meet Alice and Bob. Alice wants to send a message to Bob, but there’s a catch. An eavesdropper, Eve, is after their secrets.

How can Alice pull off sending the message without Even getting wind of it? Through cryptography. For most of its existence, this field of study has been essentially synonymous with encryption. In our example Alice and Bob would agree on a secret code, and then send their messages using it.

To Eve, the message appears unintelligible, because she does not have the proper code to decode it.

In modern times, however, cryptography exists at an intersection of mathematical theory, computer science, electrical engineering, communication science, and physics.

With the advent of computers after the Second World War, cryptography was essentially turbocharged with algorithms and computer science. Today, it’s about to go quantum with quantum computers that are just around the corner.

How does all this relate to cryptocurrencies?

Well, it’s all in the blockchain and the proof of work that we talked about before. Modern cryptographic codes are extremely complex and take a long while to solve. So, what better mechanism to ensure the veracity of the blockchain?

By requiring Bitcoin miners to solve these complex puzzles and giving out rewards for the first one to do so, cryptocurrency ecosystems create both incentive and crypto security.

Really, there would be no blockchain without cryptography. There are other uses for cryptography in the context of Ethereum, Solana, and other cryptos: wallets that store these tokens have both public and private keys. In order to connect one to the other, cryptographic techniques are used.

Hold On For Dear Life (HODL)

What if you’re not all that good with trading strategy? All the charts giving you vertigo? Got burned on a short sale attempt?

Well, there’s an easy and sometimes effective trading strategy known as “hodling.” That’s not a typo, it’s what they call it in the crypto world.

Sometimes, it is said that it means “Hold on for Dear Life” but this is an example of a retroactive acronym.

The true origin of hodling comes from a 2013 post to the Bitcointalk. A user by the name GameKyubbi posted a drunk and barely coherent rant about his own poor trading skills. As a result, he had become determined to simply hold on to his Bitcoins from then onwards.

“WHY AM I HOLDING? I’LL TELL YOU WHY,” he said in the forum post. “It’s because I’m a bad trader and I KNOW I’M A BAD TRADER. Yeah you good traders can spot the highs and the lows pit pat piffy wing wong wang just like that and make a millino bucks sure no problem bro. [sic]”

Within an hour this post had become a meme shared widely by crypto enthusiasts.

But was GameKyubbi actually, right? Could holding on for dear life be the right strategy for many people?

Depends on who you ask. But in the case of Bitcoin those who have held on since 2013 have seen massive gains as the currency became stronger and stronger.

Over time HODL has come to denote a certain long-term approach to cryptocurrency investing

For cryptocurrency maximalists it’s not really about investing to make a profit in the short or medium term from the price differentials in the exchange rates of crypto to fiat money. Instead, their belief is that one day in the future, crypto, blockchains, and smart contracts will replace fiat money completely and revolutionize the financial sector at the same time.

And if that happens, then they won’t need to trade crypto for anything else. Their amassed digital assets will make them the movers and shakers of the new cryptocurrency world order.

Will that ever happen? Time will tell.

Long Position

Briefly explained, long and short positions represent the two probable orientations of a price that must be followed in order to create a profit.

A long position is one in which the crypto trader anticipates that the price will rise from a certain point. In this situation, the trader “goes long,” which means that he or she purchases the cryptocurrency.

A short position is one where the crypto trader anticipates that the price will decrease from a certain point — i.e., the trader “sells” the cryptocurrency or “goes short” the cryptocurrency.

In a bullish market long positions are more common because traders expect the price to rise. Opposite of that, in a bearish market short positions are more common.

Long and short positions are most typically in so-called spot trading. This is trading with the actual crypto assets where positions are executed immediately.

There is also the derivatives market. This is where futures, options, contracts for difference (CFDs) and other derivates can be found. They allow exposure to cryptocurrencies (and stocks too) without actually owning or handling them.

In essence, and to put it in a nutshell, you go long when you think the price will increase, you go short when you think the price will go down. It’s really not much more complicated than that.

As to how the determine if the price will go up or down, that’s both an art and science of its own and such knowledge comes after immersing yourself in the crypto world, reading, and listening to what trusted experts have to say.

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