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Cryptocurrency terms: A beginner’s guide to advise your clients

Thomson Reuters Tax & Accounting  

· 6 minute read

Thomson Reuters Tax & Accounting  

· 6 minute read

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.

Common Cryptocurrency terminology

  • 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.
  • 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.”
  • 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 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.
  • 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.
  • Attestation ledger: A register or account book created to provide support/ evidence of individual transactions.
  • Initial coin offering: 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.
  • 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.
  • 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.
  • Altcoin: Other cryptocurrencies launched after the success of Bitcoin.
  • Bitcoin: The world’s first and largest cryptocurrency by market cap.
  • 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 represent 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.
  • 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.

Are there other types of cryptocurrency besides Bitcoin?

Bitcoin was the first cryptocurrency, and it remains the king of cryptocurrency, with a market cap of more than $566 billion at the time of writing. But there have been new cryptocurrency variations introduced since 2008, typically called “altcoins.”

  • Altcoin: Other cryptocurrencies launched after the success of Bitcoin.
  • Utility tokens: Used for services, or units of services, that can be bought. These tokens are digital assets designed to be spent within a specific blockchain ecosystem.
  • 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.
  • Stablecoins: The latest type of cryptocurrency, this is a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. There are three types of stablecoins:
    • 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.
    • Non-collateralized tokens are pegged to precious metals such as gold or oil.

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

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