If you’re new to the world of cryptocurrency investing, you could find it easy to get lost in the jargon thrown around. However, the experience doesn’t have to be overwhelming. You can more easily navigate the investment waters by getting to know these often used terms.
1. Average annual return (AAR): Average percentage increase/decrease of an investment over a given period of time, usually reported for years 3, 5, and 10.
2. Borrowed asset: Also known as borrowed capital. This is an item of value, such as money, borrowed to make an investment.
3. [Digital] Coins: Digital objects of value. Coins act like money and can be used as a method of payment and to purchase things.They can be mined, sent, and received. Their only function is to act like money. They can be used outside the network they reside in. Often confused with tokens. Coins can buy tokens, but tokens cannot buy coins.
4. Collateral: Pledged items of value, like money or property, that a borrower can use to protect the lender by guaranteeing a return on a loan. If the borrower does not repay the loan, the lender may claim the collateral as payment instead.
5. Crypto/cryptocurrency: a currency that exists only in digital form and uses a decentralized system instead of a regulating authority to issue new units and manage transactions while applying cryptography to prevent fraudulent transactions and counterfeiting. Examples of cryptocurrency include Bitcoin, Litecoin, and Ethereum.
6. Crypto asset: A digital currency resource with economic value that can generate cash in the future.
7. Exchange platform: Platforms where you can buy or sell cryptocurrencies. Some popular platforms include Coinbase, Binance, Bittrex, Kraken, and Bitfinex.
8. Fiat: Government issued currency, like coins and paper. In general, cryptocurrency is not considered fiat yet because most governments don’t recognize it as a national currency.
9. Forced Liquidity: The involuntary selling of assets to make funds immediately available in the case of an unforeseen situation that would require quick access to funds.
10. Historical rate of return: This is associated with the past performance of an investment (such as the stock market, a security, or an index) and is measured in percentage of growth or loss. Depending on a person’s membership status, WhaleLend provides various historical rates of return for each currency available for investing.
11. Interest: Profit from invested capital like cash or cryptocurrency.
12. Leverage: An investment strategy that uses borrowed assets to potentially increase return on an investment. Not the same as margin. Borrowers are responsible for repaying the loan plus interest. This is a risky strategy because investors take on debt in the process of investing. However, the more assets that are borrowed, the higher the potential return.
13. Margin lender: A margin lender is a brokerage that loans investors money to make trades with borrowed funds using the investor’s own collateral. Be careful not to confuse this with marginal lender.
14. Margin lending: A loan secured by an asset, such as cash or cryptocurrency, used to increase the total possible return for an investment.
15. Margin trading: A risky form of trading that offers flexibility and potentially high earnings by allowing crypto investors to borrow coins against their total assets to trade on margin in an exchange platform.
16. Moving average (MA): A commonly used benchmark used to analyze and predict trends in trading prices. It is calculated by summing all closing prices over a certain period, then divided by that period. Volume is not factored in.
17. Portfolio: In traditional finance, this is a group of assets that includes investments such as stocks, bonds, and commodities. A cryptocurrency portfolio includes all the investor’s coins and tokens.
18. Principal: The amount of money borrowed in a loan.
19. Security: A tradable asset that holds a negotiable value. In traditional finance, securities are generally categorized as stock shares or bonds. There are two types of securities: equities and debts. Bonds are debt securities; while, stocks are equity securities.
20. Short or (short position): This happens when traders sell securities first with the intention of repurchasing them later, hopefully, at a lower price in order to make profit.
21. Tax-favorable: Any kind of investment or account that offers a tax advantage, like an exemption, a discount, or a deferment. Taxes on crypto gains are generally considered to be tax favorable because taxation is delayed; until cryptocurrency is removed from a wallet and converted to cash, most taxing authorities do not recognize gains as income.
22. Tokens: Many people confuse tokens and coins. Although tokens and coins can act as payment, tokens only have value in the network they are used in. One characteristic that distinguishes coins from tokens is that coins can buy tokens but not vise versa. Tokens are issued by their network and cannot be mined as coins can. They act as a company’s or project’s share. To use a real-world token as an example, think of a bus pass as a token. You can buy a pass with money but you can’t buy money with bus passes. Also, you can only use the bus pass for going places on a bus route. You can’t use the bus pass to buy groceries and you probably can’t use that bus pass in a different city.
There are two different tokens: security and utility tokens. Owning security tokens of a company means owning a share of that company, while owning utility tokens brings you profits when demand for that product or service increase. (Note: you don’t own shares of the company when you buy utility tokens)
23. Trader: Someone who buys and sells with the intent to profit.
24. Volume weighted average price (VWAP): This is a security’s average trading price throughout the day and is based on volume and price. VWAP is a benchmark used by traders to determine the trend and value of a security. VWAP is different from moving average (MA) because VWAP considers volume while MA does not.
25. Whale: An individual or institution that owns an absurd amount of money.
Bonpay, 13 March 2018, What Is the Difference Between Coins and Tokens? Available from: https://medium.com/@bonpay/what-is-the-difference-between-coins-and-tokens-6cedff311c31 [Accessed 19 May 2019].
CryptoCurrency Facts, 2019, The Basics of Margin Trading With Cryptocurrency. Available from: https://cryptocurrencyfacts.com/basics-margin-trading-cryptocurrency/ [Accessed 19 May 2019].
Cryptominded, n.d., A Glossary of all the Cryptocurrency Terms you need to know. Available from: https://cryptominded.com/glossary-cryptocurrency-terms-need-know/ [Accessed 19 May 2019].
Leveraged Equities Limited, August 2018, Introduction to Margin Lending. Available from: https://www.leveraged.com.au/public/__data/assets/pdf_file/0017/267200/55982-Margin-Lending-101-workbook.pdf [Accessed 19 May 2019].