Glossary of Bitcoin Terms

Glossary of Bitcoin Terms

If you listen to a Bitcoin podcast or read a Bitcoin book, you will keep coming across words which just make no sense at all.

Here’s a collection of common Bitcoin terms to help you understand the various concepts and terminologies associated with Bitcoin and cryptocurrencies in general.

Found a Bitcoin-related word not listed here? Let me know and I’ll add it: winston@whatisbitcoin.global

Address

A string of alphanumeric characters that represents a destination on the Bitcoin network where Bitcoin can be sent or received. It usually appears as a long string beginning with ‘1’, ‘3’ or ‘bc1’.

Altcoin

Any cryptocurrency that is not Bitcoin. The term is short for ‘alternative coin’.

ASIC

Stands for Application-Specific Integrated Circuit. Specialised hardware designed specifically for mining Bitcoin, offering high efficiency and performance.

BIP (Bitcoin Improvement Proposal)

BIP is a formal document outlining suggestions for changes to the Bitcoin protocol. It’s a way for developers to propose improvements, including technical upgrades like SegWit or Taproot.

BIP39

The Bitcoin Improvement Proposal number 39 (BIP39) is a handy protocol that converts your long and confusing private Bitcoin key into a set of 12 or 24 normal words. If you ever lose your Bitcoin wallet, you can restore it using those words.

Bitcoin (BTC)

The first and most widely used cryptocurrency, created by an anonymous person or group known as Satoshi Nakamoto. It is both the network and the currency that operates on the network.

Bitcoin ATM

A physical kiosk where you can convert cash into Bitcoin. Some also allow you to sell Bitcoin.

Bitcoin Core

Bitcoin Core is software which runs the Bitcoin protocol. It makes Bitcoin mining, transacting and verifying possible.

Blockchain

A public, decentralised ledger that records all Bitcoin transactions in chronological order. Each block contains a list of transactions and is linked to the previous block, forming a chain.

Block

A group of transactions recorded on the blockchain. A block is created approximately every 10 minutes on the Bitcoin network.

Block Height

Block height refers to the number of blocks preceding a specific block in a blockchain. For example, if a block is at height 1,000, it means 1,000 blocks have been mined before it. At time of writing (late September 2024), the Bitcoin block height is 863,311.

Block Reward

This is the reward given to whomever mines a Bitcoin block. It comprises both an amount of Bitcoin (currently 3.125 Bitcoin) plus all of the fees associated with Bitcoin transactions in that block.

Blocksize Wars

From roughly 2015 to 1017, there was a hot debate in the Bitcoin community about how large a block should be.

Byzantine Generals Problem

The game theory problem that Bitcoin’s inventor, Satoshi Nakamoto, needed to overcome in order to create a decentralised, consensus-based communication system where participants don’t need to trust each other.

Cashu

Cashu is a privacy-focused eCash protocol for Bitcoin, allowing anonymous, off-chain transactions. It uses Chaumian blind signatures to issue Bitcoin-backed tokens, enabling fast, private micropayments without revealing user identities or transaction details.

Centralised Exchange (CEX)

An exchange where you can buy Bitcoin, and usually other cryptocurrencies as well, that is owned by one entity and requires Know Your Customer (KYC) compliance.

Coinbase

The coinbase is the first transaction in a newly mined block, awarding the miner the block reward (newly minted bitcoins) and any collected transaction fees. Confusingly, there is also a cryptocurrency exchange called Coinbase.

Confirmation

The process of verifying a Bitcoin transaction. Once a transaction is included in a block, it is considered confirmed. Multiple confirmations increase the security of the transaction.

Cold Storage

A method of storing Bitcoin offline to protect it from hacking. Cold storage options include hardware wallets, paper wallets and air-gapped computers.

Cold Wallet

The same as ‘Cold Storage’, an offline wallet where you can store your Bitcoin more securely.

CPU (Central Processing Unit)

A component of all computers that can be used to mine Bitcoin, but which is not suited to the job due to its architecture.

Cryptocurrency

A digital coin or currency, not dependent on a central authority, that is made secure by cryptography.

Cryptography

The mathematical practice of securing information. In Bitcoin, cryptography is used to secure transactions and control the creation of new coins.

Custodial

Custodial Bitcoin refers to a situation in which a third party holds and manages your private Bitcoin key. If you hold your private key, your Bitcoin is ‘non-custodial’ or ‘self-custodial’.

Cypherpunks

The Cypherpunks were a group of activists advocating for privacy and cryptography in the 1990s, aiming to use technology to protect individual freedoms online. Without them, Bitcoin probably wouldn’t exist.

Decentralisation

The distribution of power and control across a network, with no central authority. Bitcoin operates on a decentralised network of nodes that validates transactions.

Decentralised Exchange (DEX)

An exchange allowing peer-to-peer cryptocurrency trading which usually does not require Know Your Customer (KYC) compliance. Many DEXs don’t cater for Bitcoin.

Difficulty Adjustment

This refers to the automatic recalibration of the mining difficulty every 2016 blocks (roughly every two weeks) to maintain a consistent block creation time of about 10 minutes, irrespective of changes in the total mining power on the network.

Don’t Trust, Verify

This is a popular saying within the Bitcoin community that derives from the fact the Bitcoin protocol is a ‘trustless’ system. To use Bitcoin you don’t need to trust a third party. What you do need to do is ‘verify’ that Bitcoin transactions are valid, and this is achieved via the ‘proof of work’ that miners have to demonstrate when they mine a block.

Double Spend

A potential flaw in digital cash systems where the same digital currency can be spent more than once. Bitcoin prevents double spending through its blockchain.

Dust

Dust refers to a very small amount of Bitcoin that has a lower value than the transaction fee required to move it.

eCash

eCash is a form of digital currency that facilitates anonymous, peer-to-peer transactions without the need for third parties. Invented by David Chaum in the 1980s, eCash systems like Cashu and Fediment offer privacy by using cryptographic protocols such as blind signatures. eCash is basically a way of using Bitcoin, but anonymously.

Ethereum

The second largest cryptocurrency after Bitcoin, with its own blockchain and eco-system.

Exchange Traded Fund (ETF)

An investment fund you can trade on a stock exchange that usually contains a number of assets with it. The Bitcoin ETFs just hold Bitcoin.

Exchange

A platform where users can buy, sell, and trade Bitcoin and other cryptocurrencies. Examples include Coinbase, Binance and Kraken.

Fedimint

Fedimint is a Bitcoin-based eCash protocol enabling community custodianship with enhanced privacy. It uses federated multi-signature custody and Chaumian eCash, allowing groups to securely manage and transact Bitcoin while preserving user anonymity.

Fiat Currency

Government-issued currency, such as the US Dollar, Euro, Pound or Yen, that is not backed by a physical commodity like gold. Fiat currencies tend to suffer from increasing inflation over time.

Fork

A split in the blockchain where a new version of the blockchain is created. Forks can be either ‘hard’ (creating a new cryptocurrency) or ‘soft’ (updating the existing protocol).

Fork Wars

The Fork Wars were a series of conflicts over Bitcoin’s scalability, resulting in network splits that created Bitcoin Cash (BCH) and Bitcoin SV (BSV), reflecting ideological divides within the cryptocurrency community.

Fractional Reserve Banking

The system on which all banks around the world operate, whereby they only hold a fraction of their customers’ deposits.

Gas

Gas is the fee required to execute transactions or run smart contracts on blockchain platforms like Ethereum. Gas is measured in ‘gwei’ (a small fraction of Ether which is Ethereum’s native coin).

Genesis Block

The first block ever mined on the Bitcoin blockchain, created by Satoshi Nakamoto on 3 January 2009.

GPU (Graphics Processing Unit)

A type of computer hardware originally designed for rendering graphics, but also used for mining cryptocurrencies, especially before ASICs became dominant.

Halving

An event in which the reward for mining new blocks is halved, occurring approximately every four years. The most recent Bitcoin halving was in April 2024.

Hard Money

A currency that has intrinsic value or is backed by a physical commodity, like gold, making it difficult to inflate or devalue.

Hash

A fixed-length alphanumeric string generated by a hashing algorithm like SHA-256. In Bitcoin, hashing is used by miners to secure transactions and blocks.

Hash Rate

Hash rate measures the computational power in cryptocurrency mining, indicating how many hash calculations per second are performed to secure and validate blockchain transactions.

Hodl

A slang term in the Bitcoin community that originated from misspelling the word “hold”. It encourages investors to hold onto their Bitcoin for the long term, despite market volatility.

Hot Wallet

A method of storing Bitcoin on a device connected to the internet, such as a smartphone, tablet or computer.

Ingsoc

Ingsoc is a totalitarian system enforcing absolute control through surveillance, historical manipulation and thought control. Beware, freaks.

Inscriptions

Inscriptions enable users to embed data, such as images, text, or files, into Bitcoin transactions using Taproot’s enhancements. This allows for the creation of unique digital artifacts, similar to NFTs, by inscribing content directly onto individual satoshis, making them permanently trackable and stored on the Bitcoin blockchain.

Know Your Customer (KYC)

An obligation that many exchanges have to comply with by law, which requires them to verify your identity and keep your records on file.

Laser Eyes

Laser eyes are a meme where Bitcoin supporters add red laser beams to the eyes in their profile pictures, indicating they are dedicated supporters of Bitcoin.

Layer 1 and Layer 2

Layer 1 of Bitcoin is the foundational blockchain that Bitcoin is based on. Layer 2 are any protocols built on top of Layer 1, such as Lightning, which bring more functionality to Bitcoin.

Lightning Network

A Layer 2 protocol built on top of Bitcoin that enables fast, low-cost transactions by creating payment channels between users.

Ledger

A record of financial transactions. In the context of Bitcoin, the blockchain is a public, decentralised ledger.

Medium of Exchange

An asset or instrument used to facilitate the sale, purchase or trade of goods and services, eliminating the need for a direct barter system. As a medium of exchange, Bitcoin is still in its infancy.

Meme Coins

A meme coin is a type of cryptocurrency inspired by internet memes or cultural references – often animals – with little or no intrinsic value or utility.

Mempool

The mempool, or ‘memory pool’, is a temporary storage area where unconfirmed Bitcoin transactions are held before being added to a block. Miners choose which transactions in the mempool to process based on fees and other factors.

Merkle Tree

A Merkle tree in Bitcoin organises transactions into a hierarchical structure by repeatedly hashing pairs of transactions until a single Merkle root is formed. This root allows efficient and secure verification of transactions without needing to store all the transaction data.

Miner

A miner is either a person who mines Bitcoin or the mining computer itself.

Mining

The process of validating transactions and securing the Bitcoin network. Miners are rewarded with new Bitcoin for their efforts.

Mining Pool

A group of Bitcoin miners working together who share their computational power in order to try to mine a block.

Mixing Service

A mixing service improves Bitcoin transaction privacy by pooling and redistributing coins among multiple users, breaking the direct transaction link. This makes it difficult to trace the origin and destination of funds on the blockchain.

Mnemonic Phrase

A mnemonic phrase is the same as a ‘seed phrase’. See below.

Multisig (Multisignature)

A security feature requiring multiple private keys to authorise a Bitcoin transaction, adding an extra layer of protection.

NFT (Non-Fungible Token)

An NFT is a blockchain-based digital asset that represents ownership of a unique item, such as artwork, music, or virtual collectibles. Unlike cryptocurrencies, NFTs are one-of-a-kind, indivisible, and cannot be replaced with something identical.

Node

A computer that is connected to the Bitcoin network and participates in the validation and relay of transactions.

Non-Custodial

Non-custodial Bitcoin refers to a situation in which you hold and manage your private Bitcoin key. It’s also known as ‘self-custodial’. This contrasts with ‘custodial’ Bitcoin where a third party holds your private key.

Nonce

A nonce in cryptocurrency mining is a random number added to a block’s header, adjusted repeatedly until the block’s hash meets the network’s difficulty requirement. ASIC mining machines generate billions of nonces, trying to guess the right one to mine a particular block.

Nostr

Nostr is a decentralised social network protocol allowing users to communicate directly using cryptographic keys for identity and relays for message distribution, providing a censorship-resistant alternative to traditional platforms like Twitter / X.

On-Chain

On-chain transactions are recorded directly on the blockchain, making them permanent, public, and immutable. They benefit from the security of the network’s consensus mechanism (like proof-of-work), but are often slower and more expensive than off-chain transactions (see next item).

Off-Chain

By contrast, off-chain transactions occur outside the blockchain, offering faster and cheaper alternatives, often with greater privacy. These transactions don’t immediately rely on the blockchain’s consensus, but can eventually settle on-chain through mechanisms like the Lightning Network.

Open Source

Open source refers to software for which the code is publicly accessible, allowing anyone to inspect, modify, and contribute. This promotes transparency, security, and community-driven development, ensuring trust and decentralisation. Bitcoin Core software is open source.

Orange Pill

If you take the orange pill – or have been orange-pilled – it means you have become a true believer in Bitcoin. The concept derives from the film ‘The Matrix’ in which characters choose between taking a red pill or a blue pill.

Ordinals

Ordinals refer to a protocol that assigns unique serial numbers to individual satoshis, allowing users to ‘inscribe’ data like images or text onto them, effectively turning them into unique digital collectibles, similar to NFTs. The Bitcoin community is split as to whether Ordinals are a good idea.

Orphan Block

An orphan block is a valid Bitcoin block that is not included in the main blockchain because another competing block at the same height was accepted instead. This happens when two miners solve a block at roughly the same time. The network eventually resolves the conflict by accepting the chain with the most accumulated proof of work, causing the rejected block to become an orphan.

Peer-to-Peer (P2P)

Peer-to-peer refers to a decentralised network model where participants interact directly with each other, without intermediaries, to exchange data, assets or services.

Plebs

In the Bitcoin world, plebs are everyday Bitcoin enthusiasts. Normal people who believe wholeheartedly in Bitcoin and the values associated with it.

Proof of Stake (PoS)

Proof of Stake is a blockchain consensus mechanism where validators are selected to create new blocks and validate transactions based on their staked cryptocurrency. Validators are rewarded with transaction fees or newly minted coins. Bitcoin is not Proof of Stake, but Ethereum is.

Proof of Work (PoW)

Proof of Work is a consensus mechanism where miners try to guess a particular number to validate transactions and add blocks to the blockchain. PoW ensures network security by making it computationally expensive to alter the blockchain, thus protecting against attacks. Bitcoin is a Proof of Work blockchain.

Private Key

A secret alphanumeric string that allows the owner to access and control their Bitcoin. It must be kept secure, as losing it means losing access to the associated Bitcoin.

Public Key

An alphanumeric string derived from the private key, used to generate a Bitcoin address. It can be shared publicly.

Rabbit Hole

In the context of Bitcoin, if you ‘go down the rabbit hole’, it means you have started trying to understand Bitcoin properly. This requires hours of effort and there is no short cut.

Satoshi (Sat)

The smallest unit of Bitcoin, equivalent to 0.00000001 Bitcoin. Named after Bitcoin’s pseudonymous creator, Satoshi Nakamoto.

Satoshi Nakamoto

The pseudonymous creator of Bitcoin, whose true identity remains unknown. Is it a man? Is it a woman? Is it a group of people? Nobody knows – not even HBO.

sats/vB

sats/vB (satoshis per virtual byte) represents the fee rate in Bitcoin transactions. A satoshi is the smallest unit of Bitcoin, and a vByte measures transaction size. Higher sats/vB means higher fees, ensuring faster transaction confirmations.

Schnorr Signatures

Schnorr signatures are a cryptographic signature scheme used in Bitcoin to improve efficiency and security. They allow multiple signatures to be aggregated into one, reducing transaction size, increasing privacy, and lowering fees.

Seed Phrase

A seed phrase is a series of words – typically 12 to 24 words – generated by a cryptocurrency wallet that provides access to the wallet’s funds. It serves as a backup key, allowing you to restore your wallet and recover your funds if the wallet is lost or compromised.

SegWit (Segregated Witness)

SegWit is a Bitcoin protocol upgrade implemented in 2017 that separates signature data from transaction data, increasing block capacity and reducing transaction fees. It also fixes something obscure called ‘transaction malleability’, enabling second-layer solutions like the Lightning Network.

SHA-256

SHA-256 (Secure Hash Algorithm 256-bit) is a cryptographic hash function that produces a 256-bit (32-byte) fixed-size output from any input. It’s widely used for securing data, including in Bitcoin mining.

Sidechain

A sidechain is a separate blockchain running parallel to the main Bitcoin chain, allowing assets to be transferred between them. Sidechains enable experimentation with new features and scalability without affecting Bitcoin’s core blockchain.

Smart Contract

A self-executing contract with the terms directly written into code. While primarily associated with Ethereum, Bitcoin also supports simpler smart contracts.

Sound Money

A stable currency that maintains its value over time, typically due to limited supply and resistance to inflation.

Stable Coin

A cryptocurrency that is pegged to the value of a fiat currency or other asset to reduce volatility. Tether and Circle are examples.

Staking

Staking involves locking up cryptocurrency to support a blockchain network’s operations, earning rewards in return. It’s essential in Proof of Stake (PoS) systems like Ethereum, but not Bitcoin.

Stay Humble, Stack Sats

A popular creed by which many Bitcoiners live. It means you should just keep buying satoshis – or any amount of Bitcoin you can afford – on a regular basis, and don’t brag about it.

Store of Value

An asset that maintains its value over time, without depreciating significantly. Common examples include gold, silver, real estate and Bitcoin, which are considered good stores of value due to their ability to resist inflation and preserve wealth.

Taproot

Taproot is a Bitcoin upgrade introduced in November 2021 that enhances privacy, scalability, and smart contract flexibility. It combines different transaction types using Schnorr signatures, reducing transaction data size while enabling more complex and efficient transactions without revealing details.

Target

In Bitcoin mining, the target is a numerical value that determines the difficulty of finding a valid block hash. Miners must generate a hash below this target to successfully mine a block.

Token

A digital asset issued on a blockchain, often representing a specific use case or value. Tokens can be used in various ways, such as representing ownership, accessing services, or as a currency within a specific ecosystem.

Tor (The Onion Router)

Tor is a privacy network that anonymises internet traffic by routing it through multiple volunteer-operated nodes, encrypting data at each step. It helps users hide their location and protect their identity online. Bitcoin users will sometimes route transactions via Tor to maintain their privacy.

Transaction Fee

A fee paid to miners for processing and confirming a Bitcoin transaction. Higher fees typically result in faster confirmation times.

Unit of Account

A unit of account is a standard measure used to price and compare the value of goods, services and assets, enabling consistent financial transactions and record-keeping within an economy. The common units of account are currencies like the US Dollar and Euro. Bitcoin is still very rarely use as a unit of account, but, interestingly, if you do, things priced in Bitcoin generally get cheaper and cheaper over time.

Utility Coins

Utility coins are cryptocurrencies that grant access to services or products within a blockchain ecosystem, such as paying fees, accessing features or participating in governance.

UTXO (Unspent Transaction Output)

The output of a Bitcoin transaction that can be used as input for a new transaction. UTXOs represent the balance of Bitcoin that is spendable by the owner.

Validator

A validator is a node that verifies and confirms transactions and blocks according to the Bitcoin protocol. These nodes ensure that the network follows consensus rules, maintaining the blockchain’s security and integrity.

Verified Block

A verified block is a validated collection of transactions added to a blockchain, ensuring integrity and authenticity through consensus mechanisms, making the transactions permanent and preventing fraud or double-spending.

Wallet

Software or hardware that stores your Bitcoin private key and allows you to send, receive, and manage your Bitcoin. Wallets can be hot (connected to the internet) or cold (offline).

Whale

A Bitcoin ‘whale’ is someone who holds a very large quantity of Bitcoin.

White Paper

The Bitcoin white paper – ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ – published by Satoshi Nakamoto on 31 October 2008, outlines Bitcoin’s decentralised, peer-to-peer digital currency system using blockchain and cryptography to enable secure, trustless transactions without intermediaries.

xPub (Extended Public Key)

An xPub is a key in hierarchical deterministic (HD) Bitcoin wallets that allows the generation of an unlimited number of receiving addresses without exposing private keys. It’s often used in watch-only wallets for monitoring funds.

Zaps

A way for Nostr users to send Bitcoin payments to each other, often used to acknowledge excellent content. You can think of it as ‘liking’ a post, but putting money where your mouth is.