Glossary Term: Cryptocurrency

In terms of economics and currency, to “peg” a currency means to tie its exchange rate to a specific value. This value can be a set rate against another currency (or multiple currencies), a basket of currencies, or a commodity such as gold. Pegging a currency can provide stability and predictability for international trade, but it also limits a country’s monetary policy options.

Here are the primary types of currency pegs:

1. Hard Pegs: This implies a firm commitment to a single fixed exchange rate. Examples include currency boards, dollarization, and monetary unions.
2. Soft Pegs: This implies a commitment to a general path of the exchange rate, which includes horizontal bands, crawling pegs, and adjustable pegs.

A country may decide to peg its currency for various reasons. It may do so to stabilize the exchange rate, reduce volatility, and create an environment that is conducive to trade. Countries with less developed financial systems often peg to the currency of a larger trading partner or to a basket of currencies of trading partners.

However, maintaining a currency peg can be challenging, especially in the face of economic crises or speculative attacks, where investors bet against the currency’s ability to maintain its peg. In such circumstances, the country’s central bank must be prepared to defend the peg by using its foreign currency reserves to buy back its own currency. If the central bank runs out of reserves, it may be forced to abandon the peg, which can result in a sharp devaluation and economic instability.

FinTech, short for financial technology, refers to the use of technology to improve and automate the delivery and use of financial services. It is primarily used by financial institutions on the back end of their businesses to streamline processes and improve their services to customers.

FinTech includes several different sectors and industries such as education, retail banking, fundraising, nonprofit, investment management, and several others. It is an emerging industry that uses technology to improve activities in finance.

In broad terms, the term “FinTech” can refer to any advancement in how people transact business, from the invention of digital money to double-entry bookkeeping. As the internet revolution took place, it became a major focus for FinTech and currently, it’s often associated with the development of financial technologies that are disrupting traditional financial methods in the delivery of financial services.

The key areas of focus within FinTech are:

1. Mobile Payments: This includes payment solutions developed for both consumers and businesses.
2. Blockchain/Cryptocurrencies: Innovations such as cryptocurrencies (like Bitcoin) and the underlying technology of blockchain, have been major disruptions in the financial sector.
3. Robo-Advisors: Robo-advisors are automated digital platforms providing algorithm-driven financial planning services with little to no human supervision.
4. Crowdfunding Platforms: Crowdfunding platforms allow internet and app users to send or receive money from others on the platform, democratizing access to funding.
5. InsurTech: This refers to the use of technology innovations designed to make the current insurance model more efficient.
6. RegTech: This stands for Regulatory Technology, a new field within FinTech that utilizes information technology to enhance regulatory processes.

The FinTech industry is growing rapidly, with new ventures and technologies popping up regularly. Its implications are far-reaching and have not only reshaped the way traditional financial businesses operate but also created new markets for financial services.

A Satoshi is the smallest unit of a Bitcoin. It is named after Satoshi Nakamoto, the pseudonymous person or group of people who created Bitcoin.

One Bitcoin is divisible into 100,000,000 units, each of which is a Satoshi. Therefore, 1 Satoshi equals 0.00000001 Bitcoin (BTC).

Satoshis offer a way for people to engage in micro-transactions or to buy smaller amounts of Bitcoin, which would be particularly useful if the value of one Bitcoin is very high.

So when someone refers to Satoshis or “Sats,” they’re usually talking about these smaller fractions of a Bitcoin.

The term “BTC” is the acronym for Bitcoin. It is similar to how USD is the abbreviation for United States Dollar, or EUR is the abbreviation for Euro. It is often used when trading or referring to the digital currency, Bitcoin. For example, when you check Bitcoin prices or trading volumes, you’ll usually see it denoted as BTC. If you see it in the context of a pair such as BTC/USD, it means the price of Bitcoin in relation to the US dollar.

“Fiat money” is a type of currency that a government has declared to be legal tender, but it is not backed by a physical commodity like gold or silver. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.

Historically, currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy. If people believe that the currency has value and they can exchange it for goods and services, then it will function as a means of exchange.

The U.S. dollar, the Euro, the Japanese Yen, and the British Pound are all examples of fiat currencies. They have value because their respective governments say they do, and people have faith in the stability of those governments.

The benefit of fiat currency is that it gives central banks greater control over the economy because they can control how much money is printed. However, it also comes with risks. If a government prints too much money, it can lead to hyperinflation, as happened in Zimbabwe in the late 2000s.

Leverage in finance refers to the strategy of using borrowed money to invest with the goal of increasing the potential return of an investment. It can refer to a variety of financial arrangements, including corporate and individual borrowing, the use of derivatives, and investing with equity.

There are three main forms of financial leverage:

1. Operating Leverage: This refers to a company’s fixed costs of production. The more fixed costs a company has, the more of its income that goes towards covering these fixed costs, and the more sensitive its net income is to changes in sales. A company with high operating leverage will see a larger increase in profits from a small increase in sales than a company with low operating leverage.
2. Financial Leverage: This refers to the use of debt to finance an investment. If a company or individual borrows money to invest and the investment returns more than the cost of the borrowing, then they will have made a profit. However, if the investment returns less than the cost of borrowing, they will be left with a loss.
3. Combined Leverage: This takes into account both operating and financial leverage. It reflects the total risk of the firm.

While leverage can amplify potential profits, it also increases potential losses and financial risk. If an investment financed with leverage goes poorly, the investor could end up losing more money than they initially invested. For this reason, leveraging should be used wisely and with a good understanding of the risks involved.

Collateral is an asset or property that a borrower offers to a lender as security for a loan. It serves as a form of protection for the lender. If the borrower fails to pay back the loan, the lender has the right to take possession of the collateral and sell it to recover some or all of their losses.

The type of collateral required depends on the nature of the loan. For example, for a mortgage, the house being purchased often serves as the collateral. For a car loan, the car is the collateral. In business loans, collateral could include inventory, equipment, accounts receivable, or other company assets.

If the value of the collateral falls below the balance of the loan, the borrower may be required to provide additional collateral, known as a margin call in the case of some investments. This can happen, for example, if a borrower’s home significantly decreases in value and the mortgage loan is now greater than the property’s worth.

Similarly, in the case of unsecured loans like a personal loan or a credit card, there’s no collateral involved, but the interest rates are usually higher due to the increased risk to the lender.

A margin call is a demand from a broker to a client to deposit additional money or securities into a margin account to bring it up to the minimum maintenance margin. Margin calls occur when the value of the account falls below this minimum level. This can happen because of a decline in the value of the securities held in the account.

Margin accounts are used by investors to borrow money from their broker to buy securities. This is known as buying on margin. The investor uses the securities in their account as collateral for the loan. The minimum maintenance margin is typically set by regulation, but the broker can require a higher margin level.

If a margin call is not met by the investor depositing more money or securities into their account, the broker has the right to sell the securities in the account to meet the margin requirement. The broker can do this without the investor’s approval and can choose which securities to sell. This can result in significant losses for the investor.

In other words, margin calls are mechanisms designed to reduce the risk exposure of the broker if the market moves against the investor’s position.

This term “Margin Call” is also the title of a 2011 movie which depicts the early stages of the 2008 financial crisis from the perspective of an investment bank.

A block trade is a high-volume transaction in the stock market, usually conducted between institutional investors, such as mutual funds, hedge funds, and pension funds. Block trades are often managed outside the open markets to avoid impacting the share price.

The minimum number of shares in a block trade varies, but a common benchmark is 10,000 shares, or a total market value of at least $200,000.

Block trades are generally handled by brokerage firms through their block trade desks, which specialize in serving institutional clients. These desks negotiate terms of purchase and sale, manage risk, and work to minimize the market impact of large transactions.

The pricing of block trades can be tricky, as they often involve securities worth millions of dollars. A large block of shares being sold can drive the price down, and a large block being purchased can drive the price up, if done in the open market. Therefore, block trades are often executed at a negotiated price, which can be different from the market price. This way, institutions can transfer large amounts of securities without disturbing the market prices significantly.

As a result of their size, block trades can sometimes lead to significant market movements if they are made public or if the information about the trade is leaked. For this reason, they are often kept confidential and conducted through private arrangements.

A 51% attack refers to a potential attack on a blockchain network, where a single entity or group of entities control more than 50% of the network’s mining hashrate, or computing power. This control could potentially allow them to disrupt the network.

Theoretically, with such control, these entities could carry out a number of disruptive activities, such as:

1. Double spending: The attacker could spend the same digital coins more than once. Because they control most of the network’s hashrate, they could reverse transactions they’ve made after they’ve been confirmed, allowing them to ‘double-spend’ their digital currency.
2. Block withholding: They could prevent other miners from finding blocks, effectively monopolizing the rewards from mining new blocks.
3. Transaction Censorship: They could prevent certain transactions from gaining any confirmations, effectively blocking those transactions.

Despite the potential for such an attack, executing a 51% attack is not straightforward and requires a significant amount of resources. The design of most blockchain networks inherently discourages such an attack by making it more profitable for entities with significant computational power to use it for mining rather than attacking the network.

Also, even if an entity were successful in a 51% attack, the attack would likely erode trust in the currency, devaluing it. This makes the attack not just costly to execute, but potentially self-defeating. This factor acts as another deterrent for such attacks.