Definitions of common terms, alternative currencies, and next steps for accountants.
As the acceptance of cryptocurrency continues to grow, more and more clients are seeking guidance in navigating the intricate complexities of virtual money. To ensure your firm can meet the needs of these clients, it is essential for your staff to be equipped with a basic understanding of digital currency.
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| Common cryptocurrency terminology |
| Alternative cryptocurrencies to Bitcoin |
| Taking the next step in your cryptocurrency journey |
Common cryptocurrency terminology
- Altcoin: Other cryptocurrencies launched after the success of Bitcoin.
- Attestation ledger: A register or account book created to provide support/ evidence of individual transactions.
- Bitcoin: The world’s first and largest cryptocurrency by market cap.
- Block: Files where data pertaining to the cryptocurrency network are permanently recorded. A block records some or all the most recent cryptocurrency transactions that have not yet entered any prior blocks. Thus, a block is like a page of a ledger or record book.
- Blockchain: A digital, public ledger that records online transactions. Blockchain is the core technology for cryptocurrencies.
- Block explorer: A tool people use to view all cryptocurrency transactions online.
- Block reward: The number of cryptocurrency coins a person gets if they successfully mine a block of the currency.
- Cryptography: The mathematical and computational practice of encoding and decoding data. Bitcoin uses three different cryptographic methods, including one dedicated to generating its public-private key pairs and another for “mining.”
- Cryptocurrency mining: A process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. Also known as cryptomining, cryptocoin mining, altcoin mining, or Bitcoin mining.
- Crypto token: Special kinds of virtual currency tokens that reside on their own blockchains and represent an asset or utility. They are often used to fundraise for crowd sales, but they can also be used as a substitute for other things. Also called crypto assets.
- Equity token: A subcategory of security tokens that represents ownership of an asset, such as debt or company stock. By employing blockchain technology and smart contracts, a startup could forgo a traditional initial public offering and instead issue shares and voting rights over the blockchain.
- Initial coin offering (ICO): The cryptocurrency industry’s equivalent to an initial public offering. A company looking to raise money to create a new coin, app, or service launches an ICO to raise funds. Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company.
- Mining rig: One or more computers specially designed to maintain the blockchain via mining.
- Node: A computer that connects to a cryptocurrency network. The node or computer supports the network through validation and relaying transactions. The network of nodes stores information about prior transactions and helps verify their authenticity.
- Proof of stake: A concept that states a person can mine or validate block transactions according to how many coins they hold. The more Bitcoin or altcoin owned by a miner, the more mining power they have.
- Proof of work: A system that requires a not-insignificant but feasible amount of effort to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial-of-service attacks. Proof of work is one of the consensus mechanisms for achieving agreement on the blockchain network to confirm transactions and produce new blocks to the chain. With proof of work, miners compete against each other to validate transactions and get rewarded.
- Security tokens: Presented to investors in an ICO in exchange for their money. Security tokens represent an investment in the company itself. These are not designed to be used for transactions. They’re a digital representation of a share of ownership into an underlying asset.
- Utility token: Provides users with future access to a product or service. Through utility token ICOs, startups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price. Also called app coins or user tokens.
- Zero confirmation transaction: An exchange that has not yet been recorded and verified on the blockchain. Instead, the seller immediately assumes they received their money and delivers what was sold.
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Alternative cryptocurrencies to Bitcoin
Bitcoin was the first cryptocurrency, and it remains the king of cryptocurrency, with a market cap of more than $1.21 trillion at the time of writing. But there have been new cryptocurrency variations introduced since 2008, typically called “altcoins.”
There are numerous types of cryptocurrencies other than Bitcoin, each with its own unique features and purposes. Here are some of the most prominent ones:
- Ethereum (ETH): Known for its smart contract functionality, Ethereum is a platform that enables the creation of decentralized applications (dApps).
- Ripple (XRP): Designed for fast and low-cost money transfers, Ripple is often used by financial institutions for cross-border payments.
- Litecoin (LTC): Often referred to as the “silver to Bitcoin’s gold,” Litecoin is faster and has lower transaction fees compared to Bitcoin.
- Cardano (ADA): Aiming to provide a more scalable and secure platform for smart contracts, Cardano uses a proof-of-stake consensus mechanism.
- Polkadot (DOT): Focuses on interoperability between different blockchains, allowing them to work together seamlessly.
- Chainlink (LINK): Provides a decentralized oracle network that connects smart contracts to real-world data.
- Stellar (XLM): Similar to Ripple, Stellar is designed for fast and low-cost cross-border payments but is more focused on individual users.
- Binance Coin (BNB): The native token of the Binance exchange, used for trading fees and other utilities within the Binance ecosystem.
- Tether (USDT): A stablecoin pegged to the value of the US dollar, used to provide stability in the volatile cryptocurrency market.
- Solana (SOL): Known for its high transaction speed and low fees, Solana is a platform for decentralized applications and smart contracts.
- Dogecoin (DOGE): Originally created as a joke, Dogecoin has gained significant popularity and is often used for tipping and small transactions.
- Monero (XMR): Focuses on privacy and anonymity, making transactions untraceable and unlinkable.
These are just a few of the current cryptocurrencies in use today. The cryptocurrency landscape is constantly evolving with new coins and tokens being introduced regularly.
What are stablecoins?
Stablecoins are a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. There are three types of stablecoins:
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- Fiat-collateralized stablecoins are pegged to real-world assets such as the U.S. dollar, the euro, the pound, or the yen. The most well-known stablecoin is Tether.
- Crypto-collateralized stablecoins are linked to the reserves of other cryptocurrencies. They maintain their one-to-one ratio through over-collateralization. MakerDAO is one cryptocurrency that is backed up by another. It is pegged to the U.S. dollar and backed by Ethereum.
- Algorithmic stablecoins use algorithms and smart contracts to manage the supply and maintain the coin’s value. They do not rely on collateral but instead use a mechanism that adjusts the supply based on demand. An example is TerraUSD (UST), which uses a dual-token system with Luna to maintain its peg.
Taking the next step in your cryptocurrency journey
Firms looking to build out their cryptocurrency capabilities need to start by getting educated in the space. This is the critical first step to equipping staff with the knowledge and skills they’ll need to help clients harness the opportunity while always keeping an eye on risk. There’s a lot of confusion in the space, and it’s important for firms to understand the risks and opportunities that come with it.
Ready to continue your cryptocurrency journey? Explore more insights to expand your knowledge by visiting our topic overview page on cryptocurrency and our news coverage hub from Checkpoint editors.
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