Cryptocurrency 101 - Understanding the Terminologies & Underlying Technology - Part I

Initial Coin Offerings are for the most part, scams. Bitcoin is at its all time high despite the correction. And scammers who rely on the technical nature of cryptocurrency are very much borrowing the financial market's terminologies and intimidating decent and hard-working people to "invest" into it while they can afford it.

There will be technical terms in this post and I'll try to use analogies that'll make them easier to understand. So, technical and semi-technical friends, do not chime-in correcting the analogies, we can do that over coffee or beer if you prefer - your treat if we do.

Readers, the analogies is meant to be simple not because I think you will not be able to understand the technical aspects of it. I simply didn't see enough post using simple and real world analogies with all the buzz going around about cryptocurrency.

Cryptocurrency - it is a "currency" based on a crypto. Crypto means secret or hidden. Currency is a system of money. Putting it together gives us a rough definition, "A system of money based on a secret." Well, that makes sense? No, not yet. Let's make it clearer, money is used to exchange goods or services right? So, to make a much clear sense of the previous derived definition, we have: "A system to exchange goods or services based on a secret."

By now, you may have said already "Well, thanks, but that's not clear. What's the secret?" Well, the crypto part of the name means it uses a secret. The secret part is what is generated for us when we create a Wallet. So lets's talk about wallet.

Wallet - our physical representation of something that holds our money. Coin is the substitute term of money in the cryptocurrency "industry". Moving forward, we will be using Coin, coin, or coins to refer to money. When we create a wallet; the software, app, or hardware wallet chooses for us or we choose 12 to 24 words to write-down in paper in a very specific order - this is called mnemonic phrase or Mnemonic Seed. The mnemonic seed is part of the secret. The mnemonic seed are used together with a mathematical formula (algorithm) to generate a Key-Pair, the Private Key and Public Keys.

The Private Key needs to be secure, hence, the random words and the order that it was given or displayed is also very important to remember - it allows us to access the coins we have. The Private Key may or may not be protected with a PIN. IT SHOULD BE PROTECTED WITH A PIN. In case we forgot our PIN, the mnemonic seed allows us to recreate the Private Key which in turn has full access to the Public Keys. Anyone who has access to your Private Key has access to everything that Private Key has access to. It is important that only trusted people have access to this information - Private Key & Mnemonic Seed.

The Public Keys - yes, keys - with an s. A Public Key is what is known as Wallet Address. This Public Key is a key that is created from the data using the Private Key. In a sense, the Public Key has the DNA of the Private Key. It is a derived key. This derived key is what is then known as the Wallet Address. The formula to generate a Public Key from the Private Key is not battery or power intensive, hence, it is easy to generate a new Public Key for each exchange of goods or service, or for each transaction. As a Public Key is continually used, say over hundreds of times, a portion of the DNA passed unto the public key from the private key can be calculated or inferred. This is why it is advised not to use the same wallet key over and over. Since it is computationally and (battery) power-wise to create a new-and-derived Public Key, a decent software, app, or hardware wallet will simply generate a new one for us. As mentioned, this is what is called the Wallet Address or Bitcoin Address. If you haven't noticed yet, check your software, app, or hardware wallet. You will see that the Wallet Address changes each time you open it. If it doesn't, find a better wallet.

That's the brief overview of the Private Key & Public Keys, and a general sense of how they work together, we can begin calling them together as the Wallet.

This post is getting longer than initially planned. In the mean time, here are few questions for you to research to understand more or think about before investing in any ICO or cryptocurrency.

• What makes the value of a cryptocurrency rise?
• If it's called Wallet Address, and since addresses do change, where is the value of the cryptocurrency being stored?
• The Wallet I have did not provide me random words or the Mnemonic Seed, what happens to me in this case?
• The ICO I "invested" in did not provide me any form of Wallet and I have no Mnemonic Seed for use to restore/recover a Private Key in a software, app, or hardware wallet.
• I created my wallet using a web service, and I do not remember getting 12 to 24 random words to write on a paper, do I have control of my Wallet?
• I created my wallet using a web service, I have the Mnemonic Seed, PIN, password protected, and I manage my cryptocurrency using their website, What happens to me if their server is hacked?

I hope you’ll read-up and research more using the guide questions above. If you have more questions, please post them as comments and I’ll try to address them in another post.