Bitcoin Glossary of Terms
Bitcoin Magazine‘s official glossary of terms provides definitions for the words and phrases you’re most likely to come across as you learn about Bitcoin, cryptocurrency and blockchain technology. As you dive deeper into the technical, cultural and investing concepts behind this new form of value creation, you’re likely to find some terms that won’t appear in any dictionary. This guide is meant to fill that gap, provide context for Bitcoin vocabulary and ensure that we’re all speaking the same language.
AML (Anti-Money Laundering): Anti-Money Laundering (AML) regulations and procedures are governmental requirements intended to stop criminals from disguising the origins of their funds. AML restrictions often apply to bitcoin exchanges and mandate the provision of personal identifying information from investors.
ASIC: Application-specific integrated circuits (ASICs) are computer chips customized for a specific use. Bitcoin mining hardware utilizes ASICs to calculate the SHA-256 algorithm as quickly and efficiently as possible, thus putting them in the best position to successfully mine Bitcoin blocks.
Atomic Swap: A smart contract-based exchange of cryptocurrencies across different blockchains.
Austrian School Of Economics: A set of economic philosophies originating in the late-19th and early-20th centuries in Vienna. Leaders from this school include Carl Menger, Ludwig von Mises and Friedrich Hayek.
In contrast to classical economics, it argues that prices are determined by subjective factors, that capital goods are heterogeneous, that interest rates are determined by the time preference of borrowers and lenders and that inflation often leads to price distortion.
Bitcoin Address: A Bitcoin address is a string of alphanumeric characters but can also be represented as a scannable QR code.
Bitcoin Client: The reference implementation, or computing standard, for Bitcoin.
Bitcoin Core: A Bitcoin client is a piece of software that handles receiving and sending bitcoins. The most popular is the standard Bitcoin client downloadable from bitcoin.org, although there are many other options with different features.
Bitcoin Network: The Bitcoin network is the network of computers through which Bitcoin transactions are broadcasted and which maintains the public blockchain.
Block: A block is an individual unit of a blockchain. Each block contains the hash of the previous block (so someone passing along the blockchain can’t take out or change any block without making some hash along the way not match), as many unconfirmed transactions as can be found in the network, and a number called a nonce. Someone creating a block must find a nonce such that the hash of the block is below a certain threshold (the target), which can only be done by trying out all the nonces one after the other until one that produces a desirable hash is found, and is harder the lower the target is. The reason why block creation is made deliberately difficult is to prevent someone from spending bitcoins and then creating and pushing his own blockchain that doesn’t contain the transaction that shows that the bitcoins are spent, effectively erasing that record and allowing him to spend them twice. When a valid block is created, it is distributed through the network and work on the next block starts.
Blockchain: The blockchain is a public list of all transactions that have ever been sent, ensuring that everyone knows which bitcoins belong to whom. All fully fledged nodes on the network keep a copy of the blockchain.
Block Height: The number of blocks in the blockchain between a given block and the genesis block, i.e., how long the blockchain is between a given block and the very first block in the chain.
Block Reward: The reward, including the mining subsidy and transaction fee, that miners receive for successfully mining a Bitcoin block.
Bubble: A bubble is when people are optimistic about the bitcoin price going up in the future, and buy bitcoin to speculate on this, causing the bitcoin price to go up and continuing the cycle until the bubble “pops” and the price crashes back down (a correction).
Confirmation: A bitcoin transaction being verified as legitimate, in order to prevent double spending.
Cryptography: Secure communication techniques based on mathematical concepts that make information difficult to decipher. In Bitcoin, cryptography is used to protect funds and blockchain data.
DCA (Dollar-Cost Averaging): An investment strategy using a fixed amount of dollars at regular intervals. For bitcoin investing, this means buying BTC with a fixed amount of dollars at regular intervals, regardless of what the price of bitcoin is in USD at any given interval.
DAO (Decentralized Autonomous Organization): An organization that is run automatically according to rules encoded as smart contracts and without the guidance of a single authority. Not to be confused with “The DAO,” which was a venture capital fund that was hacked in 2016 for one-third of its funds, totaling about $50 million.
DEX (Decentralized Exchange): A cryptocurrency exchange where people can trade cryptocurrencies without a present middleman. These are usually run by a smart contract and can ensure that nobody besides yourself holds the private keys to the funds being traded.
Difficulty: The difficulty is how difficult it it to create a new block (ie. the inverse of the target), and it is automatically adjusted to ensure that the network takes an average of 10 minutes to find a valid block.
Digital Signature: A digital signature is something which can be attached to a message to show that the sender of the message is the owner of a private key corresponding to some public key while keeping the private key secret. It works by taking the hash of the message and then encrypting the hash with the private key. Someone checking the signature will decrypt the encrypted hash with the public key and check that the result matches the hash of the message. If the message is at all changed, or the private key is wrong, the hashes will not match. Outside of the Bitcoin network, signatures are generally used to authenticate the identity of the sender of a message – people publish their public keys, and send messages signed with the corresponding private key which can then be verified against the public key.
Distributed Ledger: A type of data structure that is spread across multiple sites, countries or institutions. Distributed-ledger data can be either “permissioned” or “unpermissioned” to control who can read and write to the ledger.
Don’t Trust, Verify: An idiom used to emphasize that security, particularly over bitcoin funds, can only be guaranteed through independent verification.
Double Spend: A double spend is an attempt to send the same bitcoins twice. Miners generally prevent this, but such an attack is possible against users who accept unconfirmed transactions and in conjunction with a 51 percent attack.
Dust: An unspent bitcoin transaction output with such little value that spending it would cost more in fees than it would be worth.
DYOR (Do Your Own Research): A recommendation used in the cryptocurrency space to encourage potential investors to undertake due diligence before buying into a project.
Encryption Algorithm: A traditional encryption algorithm is a function that transforms a message into an unreadable, random-seeming string using an encryption key, which cannot be reversed (ie. getting the original message back) except by someone who also knows the key. Encryption is the way that private data is sent over the public internet without serious risk of outsiders finding out what is being said.
Exchange: An exchange is a service which allows people to buy and sell bitcoins to each other. The most popular at the time of this writing are MtGox, CryptoXChange, Cavirtex (Bitcoin to Canadian dollars) and Intersango (Bitcoin to UK pounds).
Exchange Volume: The volume of an exchange is the number of bitcoins traded during a given time period.
Fiat: A fiat currency is a traditional currency like the U.S. dollar and the euro, which ultimately derives its value from its use being mandated by a government for payment of taxes and as legal tender.
Flippening: Used to describe the potential moment when Ethereum would overtake Bitcoin in market capitalization, though it now appears that this moment will never occur.
FOMO (Fear Of Missing Out): A feeling attributed to those who invest in cryptocurrencies based on a fear of missing out on easy profits or technology that is changing the world’s economic dynamics.
Fork: A change to the Bitcoin protocol that can come as a codebase fork, blockchain fork, hard fork or soft fork, with one version of the protocol “forking” off from another.
FUD (Fear, Uncertainly And Doubt): Traditionally a disinformation strategy used to sow doubt about a rival project group or project and lower its value, FUD is a term used in the Bitcoin space to describe negative media or other.
Genesis Block: The genesis block is the first block of the blockchain released on January 4, 2009.
GPU: Graphics processing units (GPUs) are electronic circuits designed to quickly create images for personal computers and game consoles, among other devices. At one point in Bitcoin’s history, GPUs were the most efficient tool used for mining.
The Halving (Or “Halvening”): A preprogrammed halving of the bitcoin block subsidy, which occurs every 210,000 blocks.
Hash: A hash is a function which transforms any number or string into a fixed size output which is impossible to do in reverse without trying all possible inputs. As an example of a simple hash function, consider the square root: the square root of 17202 is easy to calculate – it’s about 131.15639519291463, so a simple hash function might be the later digits of this, 9291463. However, given just 9291463 it’s much harder to figure out what number it came from, and you basically have to go through all the possibilities. Modern cryptographic hashes like SHA-256 are a much more complex and secure version of this. The word is also used to refer to the output of such a function.
Hashing: Calculating a function that takes an arbitrary amount of input data and deterministically produces a fixed-length output, known as the data’s “hash.” It can be used to easily verify that data has not been altered because if any part of the input data is changed and the hash algorithm is run again, the hash will change.
Hash Rate: A measurement of the processing power of the Bitcoin network. The higher the hash rate on the network, the more difficult it would be to commit a 51 percent attack.
HODL: A term stemming from a 2013 post in the Bitcointalk.org Bitcoin forum titled “I AM HODLING” (an apparent misspelling of “I AM HOLDING”) that has come to define the philosophy of those bitcoin or other cryptocurrency investors who choose to keep their coins, rather than buy, sell and trade them for short-term profits or losses.
Hyperbitcoinization: The inflection point at which bitcoin become the world’s preferred medium of exchange.
Immutable: Unchangeable over time.
Inflation: In economic terms, inflation is a general increase in prices and decline in the purchasing power of money.
Intrinsic Value: The measure of a given asset’s worth based on the value it provides it in and of itself, independent of other factors.
KYC (Know Your Customer): Financial services guidelines that require providers to make an effort to verify the identity of their customers and potential risks associated with facilitating their financial activity. Closely associated with AML (Anti-Money Laundering) regulations.
Layer 2: In Bitcoin, Layer 2 refers to a secondary framework or protocol built upon the existing Bitcoin network, generally to improve scaling, transaction speed or add new functionality while leveraging some of the unique properties of Bitcoin.
Lightning Network: The Lightning Network is a Layer 2 protocol for Bitcoin, specifically designed for cheap, fast and private payments. As an overlay network consisting of payment channels, Lightning payments are not recorded on Bitcoin’s blockchain — only channel-funding transactions and channel-closing transactions are. This effectively means that many Lightning transactions can be settled with much fewer on-chain Bitcoin transactions.
Margin Trading: Margin trading is a form of speculation where you trade bitcoin using borrowed money in addition to your own (the ratio of total money to your own money being the leverage), allowing much higher profits but risking liquidation (losing all your money) if the price falls by, for example, 20 percent at a 5-to-1 leverage. It’s also possible to use margin trading to bet against bitcoin (shorting), in which case you’re buying dollars with borrowed bitcoin, so you earn a profit if the bitcoin price goes down and you get liquidated if the bitcoin price goes up too much. The first margin trading service available was Bitcoinica, which is now no longer operational.
Market Depth: The market depth is the number of bitcoin that people have put up for sale on an exchange and haven’t been sold yet (since no one is yet willing to accept their price) at a given time.
Miner: A miner is someone who tries to create blocks to add to the blockchain (the term also refers to a piece of software that does this). Miners are rewarded for their work by the Bitcoin protocol, which automatically assigns 50 new bitcoins to the miner who creates a valid block. This is how all bitcoins come into existence.
Mining: The process by which transactions are verified and added to a proof-of-work blockchain. This process of solving cryptographic problems using high-powered, specialized computing hardware also triggers the generation of cryptocurrencies.
Mining Pool: A mining pool is a service that allows miners to work together on creating blocks and split the profits evenly, providing miners with a reliable income rather than a small chance of a larger mining subsidy.
Mixer: A mixer, tumbler or bitcoin laundry is a service that allows people to put their bitcoin in and then randomly hands them back and equal (perhaps minus a small fee) amount of bitcoin from someone else. These new bitcoin cannot be traced back to the old ones through the blockchain except by the mixer operator themselves.
Multisignature: A multisignature (multisig) address allows the address creator to require multiple parties using different cryptographic keys to authorize a transaction. The needed number of signatures is agreed upon at the creation of the address. Multisignature addresses are typically used for increased security and theft resistance.
Node: A data point or device within a larger network. Any computer that is connected to the Bitcoin network is referred to as a node, and those that fully enforce all of Bitcoin’s rules (or protocols; see below) are referred to as “full nodes.”
Private Key: A private key in the context of Bitcoin is a key connected to an address (technically, the address is the hash of the public key corresponding to the private key) that is stored behind the scenes and allows you to send bitcoins that have been previously sent to that address. Note that because of the way the encryption algorithm that Bitcoin uses (ECDSA) works it is possible to generate the public key and the address from just the private key.
Proof Of Work: A cryptocurrency protocol, enforced by an algorithm, that seeks to achieve consensus among distributed users by choosing the creator of the blockchain’s next block based on their ability to complete a difficult computation that can be verified by the network.
Protocol: A system of rules run by the nodes that constitute a given network. For instance, Bitcoin Core is a protocol and Bitcoin Unlimited is a protocol, but both cannot be run by a single node as they have conflicting rules.
Public Key Cryptography: Public key cryptography is a method of encryption where every private key has a corresponding public key, from which it is impossible to determine the private key, and data encrypted with one key can be decrypted with the other. This lets you publish a key that lets anyone send encrypted messages to you without having to exchange a secret key first.
Sat (BTC Denomination): A satoshi, or sat, named after Bitcoin creator Satoshi Nakamoto, is one hundred-millionth of a bitcoin, or the smallest unit of the currency that can possibly be sent.
Smart Contracts: Contracts whose terms are recorded in computer languages and programs instead of in legal documents. Smart contracts can be automatically executed by a distributed computing system, such as a blockchain like Ethereum. These contracts are designed to be tamper-proof and settle contract breaches automatically.
To The Moon: A phrase evoked by cryptocurrency enthusiasts when speculating as to where the profits and/or technological advances behind the digital economy will take them..
Transaction: A transaction is a message that informs the Bitcoin network that a transfer of ownership of bitcoins has taken place, allowing the recipient to spend them and preventing the sender from spending them again once the transaction becomes public.
Unconfirmed Transaction: An unconfirmed transaction is a transaction which is not yet part of a block. A confirmation is when a transaction is put into a block to permanently become part of the blockchain. “6 confirmations” means that the transaction is in a block and there are 5 blocks after it in the chain, which provides added assurance that the transaction is legitimate.
Wallet: The term wallet can have two meanings: it can either be a synonym for a Bitcoin client (although the terms are in practice used slightly differently, “client” referring more to fully fledged desktop clients and “wallet” more to lightweight browser-based and online managed services) or it can refer to a file which stores bitcoin addresses and the private keys needed to use them.
51 Percent Attack: A 51 percent attack is an attempt to gain the power to block and reverse Bitcoin transactions by obtaining and using a sufficiently strong pool of computing power to overpower the rest of the Bitcoin network combined (ie., controlling at least 51 percent of the network).