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Crypto Explained

Breaking down the jargon

There are many terms and acronyms used in the crypto world. Let’s start with some of the most common words.

For more definitions, check out the crypto asset glossary.

View Glossary

Crypto asset

An umbrella term for all digital assets that use cryptography (a method of securing data), a peer-to-peer network and a digital ledger system to record transactions.

Cryptocurrency

The most common type of crypto asset. It is intended to work like a digital or virtual currency and facilitate the sale, purchase or trade of goods between two parties. It can also be saved, retrieved and exchanged at a later time. Unlike traditional currencies, cryptocurrencies are not issued or backed by a government or a central bank.

Bitcoin is the most popular cryptocurrency on the market but there are many others with different specifications and functions. At this time, most cryptocurrencies are not primarily used for purchasing or trading goods or services. Investors hold cryptocurrencies because they hope their cryptocurrencies will increase in value.

Blockchain

The digital ledger system behind most crypto assets. Unlike a centralized system like a bank account, blockchain is distributed and maintained at multiple points through a network of computers. Learn how blockchains work.

For more definitions, check out the crypto asset glossary.

View Glossary

Other types of crypto assets

Bitcoin was the first crypto asset to gain widespread popularity and the first Bitcoin was created in 2009. However, the market is evolving quickly, with new types of crypto assets gaining traction with investors.

Here are some of the crypto assets available today:

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Other types of crypto assets

Here are some of the crypto assets available today:

Digital tokens

Digital tokens are crypto assets that can be traded and tracked on a ledger. They have specific functionality, permissions and terms associated with them. For example, utility tokens confer the ability to use a given service, similar to a voucher or gift card balance being used to purchase goods and services.

There are many types of digital tokens.

Utility tokens

are used to access a service or product.

Governance tokens

are a type of utility token that grants voting and management power to users on a blockchain project.

Security tokens

are also used by start-ups and businesses to raise money to develop a blockchain product. Generally, investors who buy security tokens expect they will grow in value. The tokens are usually created in a token-generating event such as an initial coin offering or an initial token offering. They have similar characteristics to traditional securities such as stocks or bonds.

Non-fungible tokens (NFTs)

allow investors to have ownership of a unique asset, often digital artwork. The asset can be one-of-a-kind or one of many in a limited series, and the ownership rights can vary as the artist may retain copyright over the original work.

The first major sale of purely digital non-fungible token (NFT) artwork sold for $69 million in 2021.

Despite the names used; utility tokens, security tokens and non-fungible tokens may be subject to Ontario securities laws depending on the specific facts and circumstances.

Investors are encouraged to check with their provincial or territorial securities regulator, such as the Ontario Securities Commission, to see if the individuals or companies have followed the necessary rules and regulations.

Emerging trend: Stable coins are a type of crypto asset meant to maintain a stable value and be used as a means to transact with other crypto assets and services. Some claim to be backed by reserves of a single asset, such as the U.S. dollar or gold, or a basket of assets, though these claims are not verifiable in all instances and others are algorithmic stable coins. Stable coins seek to offer the mobility and accessibility of other cryptocurrencies (e.g., a form of payment), but they are generally less volatile.

Crypto funds

Crypto funds allow you to access crypto assets without directly buying, owning or trading them. These funds may appeal to investors who see the potential of the technology but don’t want the complexity of owning the assets themselves.

Crypto exchange traded funds (ETFs)

are similar to regular ETFs, but instead of tracking an index or sector, they track crypto assets.

Blockchain funds

are similar to other investment funds that invest in a particular industry or sector of the economy. In this case, blockchain funds invest only in companies that have operations related to blockchain technology.

How do you buy crypto assets?

There are many ways to buy crypto assets:

Crypto asset trading platforms

Online trading services that allow investors to buy and sell crypto assets. There are few crypto asset trading platforms registered in Ontario. Others may join the list as the OSC continues its discussions and review of applications.

Initial coin offerings (ICO)

Involve businesses seeking to raise funds by issuing crypto assets.

Kiosks

Enable investors to buy crypto assets through physical ATMs or online services.

The keys to cryptocurrency

Public and private key pairs allow you to send and receive cryptocurrency.

Public key: you can share it to receive transactions. It identifies your account on the network and can be searched in a ledger.

Private key: you must keep it a secret. It is used by you to unlock transactions. It proves you are the owner of the transaction.

How does it
all work?

Crypto assets only exist on the blockchain. The only way they can be accessed and used is by knowing the private key associated with the address that the blockchain says is the owner of the assets.

When you buy crypto assets, you don’t download or hold them as a file on your own device — you hold the assets in a digital address on a blockchain. Wallets are technologies or products that help you manage the keys associated with your assets on the blockchain.

Your digital wallet comes with an assigned public key and a private key, which are comprised of a string of letters and numbers.

IMPORTANT: Always keep your private key in a secure place; if it gets lost or stolen, you can’t regain access to the crypto assets in your digital wallet. Digital crypto wallets can be hot or cold. A hot wallet connects to the internet compared to a cold wallet which stays offline.

Depending on how you bought the crypto assets, you may hold the private key directly or the crypto asset trading platform may hold the private key on your behalf. The crypto asset trading
platform may hold the private key or they may work with a third-party service known as a custodian. Anyone who knows the private key associated with your crypto assets can access and trade them on the blockchain.

If you don’t have sole possession of your private key, you’ll need to rely on the crypto asset trading platform or any custodian it works with to keep the key safe and make transactions on your behalf.

How does blockchain work?

A blockchain exists as a digital ledger system that is distributed through a network of computers and manages the entire chain of custody of the crypto asset. Think of it as a digital accounting journal that is replicated across multiple computers rather than stored in a single place. Blockchain transactions are viewable by the public using a blockchain explorer service.

See how it works button

Here’s how it works. Let’s say you purchase some Bitcoin.

Here’s how it works. Let’s say you purchase some Bitcoin.

Your transaction request to buy 10 bitcoins is authenticated

A block is created — it represents the 10 coins transaction

That block is sent to a network of computers around the world

People operating the computers validate your purchase

The person who successfully validates your purchase receives a reward (usually crypto assets)

The block that represents your 10 coins gets added to the existing blockchain

The update is distributed across the network

Your transaction is complete — 10 bitcoins go into your wallet

Learn about the risks

Be aware of crypto fraud

Crypto asset prices can be very volatile and can increase or decrease by small or large amounts many times during the day. It is often not clear as to what caused the value to go up or down. You risk losing some or all of your money.

As you can see, there are many types of crypto assets with very different characteristics and risks, and new assets are being invented all the time. In addition to being highly volatile, crypto assets can be vulnerable to fraud, manipulation and cyberattacks.

It’s important to understand that some crypto assets fall under Ontario securities law, while others may not.

If you plan to invest in crypto assets, understand how they work — and what that means when it comes to risks and regulations.

See Rules and regulations for details.

Key takeaways

  • Crypto assets can be complicated to understand for a new investor — before you get involved, learn about the different types, how they work and their potential risks.
  • Regulations can help in some cases but not all so get to know what protections exist in Ontario.

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02 TRADING CRYPTO Go to next page link