What is Bitcoin? Key cryptocurrency terms and what they mean

• By Brandon Drenon, Joe Tidy and Liv McMahon
• BBC news

December 13, 2022

Updated April 23, 2024

Image source, Getty Images: We Are

After the price of Bitcoin reached a new all-time high in March, the thorny topic of cryptocurrencies is back in the spotlight.

And while events that move the cryptocurrency market, such as the Bitcoin halving or the launch of “spot ETFs,” may be familiar to cryptocurrency fans, their significance is less obvious to many.

If you’re hearing them for the first time or just need a refresher, here are some key words and what they mean.

Bitcoin

While many may struggle with the finer points of cryptocurrency, virtually everyone has heard of its most famous product: Bitcoin. But what is it actually about?

Bitcoin is a cryptocurrency, i.e. a type of digital currency. Unlike traditional currencies, such as the dollar or the pound, Bitcoin is not controlled by centralized financial institutions. This makes it popular among people who think decentralization can bring financial freedom, but it also makes it extremely volatile, rising and falling in value at the whim of Bitcoin buyers and sellers.

During February and March 2024, its price increased rapidly and briefly reached a new all-time high. But its value can fall just as quickly as it increases, a pattern that has repeated itself several times since the cryptocurrency was launched.

Bitcoin “halved”

The blockchain, the system on which Bitcoin is based, is supported by rewarding the so-called “miners” – whose job is to validate transactions – by paying them with cryptocurrency.

However, unlike other digital currencies, there is no infinite supply of bitcoin. The amount that can be mined is limited to 21 million and most of it is already in circulation.

Then, roughly every four years – or when the Bitcoin blockchain reaches a certain size – the number of bitcoins rewarded to those who successfully validate transactions is halved. The last Bitcoin “halving” event took place on April 20, 2024, reducing the reward for miners from 6.25 bitcoins to 3.125.

This ensures that the supply of Bitcoin is extended longer while demand, in theory, increases over time. But with fewer rewards for miners, this may also lead some to consider whether it is financially advantageous for them to continue the expensive operation of running their powerful computers.

Blockchain is the technology behind all cryptocurrencies and many related products such as non-fungible tokens (NFTs). Essentially, it is a virtual spreadsheet on which all cryptocurrency purchases and sales are recorded. They are arranged in blocks linked together in a giant chain, hence the name.

Each cryptocurrency transaction is individually recorded on the blockchain by a huge network of volunteers who verify its authenticity using computer programs.

The incentive for the Bitcoin network to do this is that the first person to validate transactions is rewarded in Bitcoin. This potentially profitable process, known as mining, is also controversial due to the incredible amount of energy used as people around the world race to be the first to successfully upgrade the blockchain.

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Video caption, Are cryptocurrencies the future of money?

Cryptocurrency exchange

A cryptocurrency exchange is the digital platform where investors can buy, sell and trade cryptocurrencies. Similar to traditional investments, a cryptocurrency exchange acts as an intermediary where people can transfer traditional money, such as pounds or dollars, from their banks to cryptocurrencies such as Bitcoin or Ethereum. Most transactions are accompanied by fees.

Crypto wallet

A crypto wallet is a place where investors store their cryptocurrency. It stores virtual assets just like a traditional wallet stores cash. There are two types, a hot wallet and a cold wallet. Hot wallets are connected to the internet and therefore more accessible for quick transfers and easy access. Cold wallets are specially designed physical devices such as USBs that store cryptocurrencies offline, typically for more secure, long-term storage.

Ethereum

Ethereum is used to describe both the second largest cryptocurrency after Bitcoin, represented by the Ether token, and the blockchain on which it is based. This supports a number of different applications and digital assets, such as non-fungible tokens.

Exchange Traded Funds (ETFs)

ETFs are portfolios that allow investors to bet on multiple assets without having to purchase any of them. Traded on stock exchanges like stocks, their value depends on the performance of the overall portfolio in real time. They may include a combination of gold and silver bullion, for example, or a mix of shares of technology and insurance companies.

A spot Bitcoin ETF buys the cryptocurrency directly, “on the spot”, at its current price, during the day. While some ETFs already contained Bitcoin indirectly, the US has approved several spot Bitcoin ETFs in January 2024. This allowed new investors, such as investment management firms like Blackrock and Fidelity, to enter the speculative world of Bitcoin without having to worry about digital wallets or navigating cryptocurrency exchanges.

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