Ditto PRPractice Areas Blockchain & Crypto The School of Crypto Finance: Key Terminology in Crypto Investing

The School of Crypto Finance: Key Terminology in Crypto Investing

There’s finance. There’s crypto. But then there’s crypto finance. Have questions about institutional crypto finance but are too afraid to ask the sharks of the industry? We get it. That’s why Ditto has created a definitive ‘School of Crypto Finance’ guide. We’re here to make cryptocurrency understandable for everyone — from industry leaders with a question or two to beginners with a question or a hundred. Check back weekly for more content! There’s plenty more to come.



The crypto investing space is full of terminology — some new, some borrowed from traditional finance. As the space continues to evolve, terminology will change, as well. An example is ICOs; over time, the concept of crypto fundraising has shifted from ICOs to STOs to IEOs, as the regulatory environment around crypto matures.


Tokens, Coins, and Currencies, Oh My!

Digital asset

A digital asset is any asset in digital form, which can include lots of things, from digital documents to audible content to movies, to other digital data. A crypto asset is a type of digital asset powered by the technology underlying cryptocurrencies. All cryptocurrencies are crypto assets, and all crypto assets are digital assets — but not all digital assets are crypto assets! In crypto finance, the phrase “digital asset” is often used to describe cryptocurrencies, even though that’s not entirely accurate.

Security token

In layperson’s terms, a crypto asset is considered a security token if its primary use is to generate profit — sort of like corporate stock on the traditional financial markets. More specifically, a crypto asset is deemed a security if it passes the Howey Test — a series of questions that determine whether it is an investment contract similar to that of a traditional financial instrument. An investment contract implies an expectation of future profit through revenues, dividends, and/or favorable price moments. Meanwhile, if a token has a clear use case outside of generating profit (e.g. the purchase of goods or services), it might be deemed a utility token rather than a security token.



A stablecoin is a cryptocurrency that aims to reduce the price volatility of the coin relative to another, more “stable” asset. All stablecoins generally hold some type of collateral and manage the supply of that collateral to incentivize people to trade the coin for no more or less than a certain amount (like $1). To achieve price stability, a stablecoin can be pegged to a fiat currency like the U.S. dollar or a physical asset like gold or silver. Stablecoins redeemable in commodities are said to be backed, while those leveraging fiat or other cryptocurrencies are referred to as unbacked.


Utility token

A utility token is a cryptocurrency that is issued to fund the development of a project, with the expectation that it can later be used to purchase a good or service offered by the issuer of the token. In other words, the buyer pays the issuer now so that the issuer can build the product, then later the buyer will be able to redeem the token for that product. Unlike a security token, the primary purpose of a utility token is to offer a use case outside of generating profit.


Types of Fundraising


An initial coin offering (ICO) is a type of fundraising similar to an initial public offering (IPO), but instead of stocks, the issuer sells its own cryptocurrency or token. In an ICO, a new project sells its underlying token to buyers in exchange for legal tender like Bitcoin, ether, or fiat money. The project then utilizes the received funds to pay for the future development of its product. In exchange for their support, investors receive a new cryptocurrency specific to that project in the hopes that it will perform well in the future and bring them profit. Additionally, investors can expect to be able to utilize the coin to buy the product or service in the future.



An initial exchange offering (IEO) is an iteration upon the ICO, but instead of the project issuing its own token, a cryptocurrency exchange acts as the counterparty issuing the token. The project mints its tokens and issues them to the exchange, which in turn sells the tokens to investors. In exchange for conducting an IEO, the exchange receives a portion of the project’s tokens. Once the IEO ends, the token is listed on the hosting exchange. IEOs are considered preferable to ICOs because they enhance trust, as exchanges are able to do due diligence on the projects that approach them to conduct the IEO.



A security token offering (STO) is viewed as a hybrid between an ICO and an IPO because the token issued represents an investment into an underlying investment asset such as stocks, bonds, funds, or real estate investment trusts. STOs are asset-backed and comply with regulatory governance. STOs are much more difficult to conduct than ICOs because they offer an investment contract under securities law and are therefore more subject to regulation.


Trading Platforms & Services


A broker-dealer is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers. The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages because most of them act as both agents and principals. A brokerage acts as a broker (or agent) when it executes orders on behalf of its clients, whereas it acts as a dealer, or principal when it trades for its own account.



Custody solutions are third party providers of storage and security services for cryptocurrencies. Their services are mainly aimed at institutional investors, such as hedge funds, who hold large amounts of bitcoin or other cryptocurrencies. The solutions generally incorporate a combination of hot and cold storage.



A decentralized exchange (DEX) is a cryptocurrency exchange which operates in a decentralized way, i.e. without a central authority. DEXes allow peer-to-peer trading of cryptocurrencies.



Cryptocurrency exchanges are online platforms in which you can exchange one kind of digital asset for another based on the market value of the given assets. The most popular exchanges are currently Binance and GDAX. It is important not to confuse cryptocurrency exchanges for cryptocurrency wallets or wallet brokerages.


Liquidity aggregator

The demand for a service where users can buy or sell cryptocurrency from any trading exchange without having an account is high. A liquidity aggregator is a platform in which users have access to pricing at any major exchange through a single account, trading through a single API. Liquidity aggregation is critical for large institutions investors because the order size is much higher and might affect the price on one exchange. Liquidity aggregators can help spread out orders to not affect the price by utilizing many exchanges. Liquidity aggregation allows traders to deal with a single company and have their order automatically spread over multiple exchanges without having to deal with the exchanges directly, therefore getting the best price possible while keeping the prices stable at all of the exchanges used.



Over-the-counter is a fancy way of saying “decentralized trading.” Orders are not listed on a public order book. Clients can trade with each via broker without anyone else knowing about their transaction.


Terms of the Trade

Algorithmic trading

Algorithmic trading is a type of trading that uses powerful computers to run complex mathematical formulas for trading. An algorithm is a set of directions for solving a problem. An example of an algorithm is an algebraic equation, combined with the formal rules of algebra. With these two elements, a computer can derive the answer to that equation every time. Algorithmic trading makes use of much more complex formulas, combined with mathematical models and human oversight, to make decisions to buy or sell financial securities on an exchange. Algorithmic traders often make use of high-frequency trading technology, which can enable a firm to make tens of thousands of trades per second. Algorithmic trading can be used in a wide variety of situations including order execution, arbitrage, and trend trading strategies.



Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.


Bear market

A bear market is a period marked with falling stock prices. In a bear market, investor confidence is extremely low.


Bull market

A bull market is the condition of a market in which prices are rising or are expected to rise.


Buying the dip

Buy the dip refers to purchasing an asset after it has declined in price. Buying the dip has different contexts, and different odds of working out, depending on the situation in which it is utilized. Some traders may say they are buying the dip if an asset is in a long-term strong uptrend. They hope the uptrend continues after the dip or drop. Others may use the phrase when no uptrend is present, but they believe an uptrend may occur in the future. Therefore, they are buying when the price drops in order to profit from a potential future price rise.


Dark pools

A dark pool is a private financial forum or exchange for trading securities. Dark pools allow investors to trade without exposure until after the trade has been executed. Dark pools are a type of alternative trading system that give investors the opportunity to place orders and make trades without publicly revealing their intentions during the search for a buyer or seller.


Limit order/limit buy/limit sell

A limit order is an order to buy or sell at a specified price or better. A buy limit order (a limit order to buy) is executed at the specified limit price or lower (i.e., better). Conversely, a sell limit order (a limit order to sell) is executed at the specified limit price or higher (again, better). Unlike a market order, where you simply press “buy” and let the market choose the price, you have to specify a price when using a limit order.



Long/short equity is an investing strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. A long/short equity strategy seeks to minimize market exposure, while profiting from stock gains in the long positions, along with price declines in the short positions. Although this may not always be the case, the strategy should be profitable on a net basis.


Pump and dump

Pump-and-dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme already have an established position in the company’s stock and sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.


Whale trader

A bitcoin whale is an individual or entity that holds large amounts of bitcoin. From the point of view of blockchain and its core decentralized feature, bitcoin whales cause concern, as the situation could lead to a small number of people having controlling power over the cryptocurrency. Bitcoin whales could also have a disproportionate impact on prices, fueling speculation that some of BTC’s recent wild price swings were due to price manipulation by the whales.


Sell wall/buy wall

The concept of a buy wall or a sell wall is dependent upon the way that many cryptocurrency transactions are facilitated. In many cases, transactions are made via an order book, whereby a buyer indicates a particular price at which he or she would like to buy a given number of units of the currency. This can be done as-is, which is to say at the price that the currency trades at for the time the transaction is initiated. On the other hand, it can be stipulated for a future time: for example, if a currency trades at $10 and I want to buy 10 units for $9, I may be able to place an order that will be activated once the price reaches $9 and I can be matched with a willing seller.


Stop loss

It is an order placed with a broker to buy or sell once the stock reaches a certain price. A stop-loss is designed to limit an investor’s loss on a security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%.


Market cap

Market capitalization is a well-known metric for traditional securities, but has unique implications in crypto. Market capitalization is a measure of the value of a security. It usually consists of multiplying the amount of outstanding stock shares by the current stock price. In crypto, it’s defined as the circulating supply of tokens multiplied by current price. If a coin has 100 tokens outstanding and is trading for $10 a coin, it has a market cap of $1000. There are around 16.6 million bitcoins in existence, and the price is around $5600 at time of writing. Bitcoin’s market cap, therefore, is roughly $94 billion.


Market maker

A market maker is an individual market participant or member firm of an exchange that also buys and sells securities for its own account, at prices it displays in its exchange’s trading system, with the primary goal of profiting on the bid-ask spread, which is the amount by which the ask price exceeds the bid price a market asset. With these transactions, commonly known as “principal trades” market makers can enter and adjust quotes to buy, sell, execute and clear orders.


Market manipulation

Manipulation is the act of artificially inflating or deflating prices or otherwise influencing the behavior of the market for personal gain.


Market order/market buy/market sell

A market order is a request by an investor to buy or sell at the best available price in the current market. It is widely considered the fastest and most reliable way to enter or exit a trade and provides the most likely method of getting in or out of a trade quickly. For many large-cap liquid stocks, market orders fill nearly instantaneously.


Margin trading

Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.


Wash trading

Wash trading is a process in which a trader buys and sells a cryptocurrency for the express purpose of feeding misleading information to the market. A wash trade is a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments with the intent to mislead and manipulate trade volume through artificial activity.


Investment Terms

Accredited investor

Accredited investors meet standards defined by the US Securities and Exchange Commission which allow them to invest in certain private securities offerings. Most startups raising money do so from accredited investors only.


The SEC web site contains the full definition. In general, any of the following would meet the standard:

  • Individuals with annual income over $200K (individually) or $300K (with spouse) over the last 2 years and an expectation of the same this year
  • Individuals with net assets over $1 million, excluding the primary residence (unless more is owed on the mortgage than the residence is worth)
  • An institution with over $5 million in assets, such as a venture fund or a trust
  • An entity made up entirely of accredited investors


Howey Test

The “Howey Test” is a test created by the Supreme Court for determining whether certain transactions qualify as “investment contracts.” If so, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and therefore subject to certain disclosure and registration requirements.


The SEC sued the defendants over these transactions, claiming that they broke the law by not filing a securities registration statement. The Supreme Court, in issuing its decision finding that the defendants’ leaseback agreement is a form of security, developed a landmark test for determining whether certain transactions are investment contracts (and thus subject to securities registration requirements). Under the Howey Test, a transaction is an investment contract if:

  • It is an investment of money
  • There is an expectation of profits from the investment
  • The investment of money is in a common enterprise
  • Any profit comes from the efforts of a promoter or third party


Institutional investor

An institutional investor is an organization that invests on behalf of its members. Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves. An institutional investor is a person or organization that trades securities in large enough quantities that it qualifies for preferential treatment and lower fees.


Retail investor

Retail investors invest much smaller amounts than large institutional investors.


Institutional Investors


The crypto ecosystem is maturing. For years, the community was focused on building awareness among cypherpunks, computer geeks, and retail investors. Bitcoin’s decentralized protocol was made for individuals, not organizations.


The landscape is changing. Big investors and financial institutions have emerged as power brokers. The incumbents want to leverage cryptocurrencies and distributed technologies to innovate, enter new industries, and compete with the big tech platforms.


The flow of institutional capital to crypto funds is already sizeable, but has considerable runway for further growth. A recent survey from Fidelity Investments shows that nearly half (47%) of institutional investors believe digital assets have a place in their portfolio, while 22% already own digital assets. The private investment firm Cambridge Associates is encouraging institutional investors to “begin exploring” the crypto industry via moderate allocation into digital assets. The tide is turning – not away from retail investors, but towards greater involvement from institutions.


While the investment management and financial services industries comprise a diverse ecosystem of interconnected and overlapping parts, for the purposes of conceptualizing how this ecosystem is entering the crypto space, we can define six distinct types of financial institutions engaging with crypto.


  • VCs: Traditional venture capital firms like Andreessen Horowitz were early investors in Bitcoin and now-prominent  crypto startups. VCs continue to exert a dominant role as a gatekeeper for crypto and blockchain startups.


    1. Crypto VCs: The rapid growth of the crypto ecosystem brought with it a new type of VC fund that is solely focused on early-stage investment opportunities with crypto and blockchain companies. These investors specialize in distributed technologies.


  • Crypto Hedge Funds: The volatility of cryptocurrency markets has created new money-making opportunities for professional traders and quants. Many of these  funds also have VC strategies.


  • Traditional Investors: The underperformance of active management in the last twenty years is spurring investors to gain financial exposure to cryptocurrencies and blockchain technologies, whether through buying and holding cryptocurrencies, taking direct stakes in startups, or by allocating institutional capital to crypto-focused funds. These actors include pension funds, endowments, financial advisors, family offices, HNW individuals, private equity funds, hedge funds, and asset management firms.
  • Banks & Brokerages: The technological complexity, stringent security requirements, and diverse use-cases of digital assets and blockchain technology  are creating opportunities for established banks and brokerages to build service-based businesses for institutions investing in cryptocurrencies. From Fidelity Digital Assets to JP Morgan Coin, blue-chip banks and broker-dealers are working to provide critical infrastructure services for the emerging digital asset economy.
  • Exchanges: Since its beginnings, the crypto ecosystem has relied on liquidity and ease of trading to reach new customers and encourage active participation in crypto markets and on blockchains. With more institutional investors seeking exposure to cryptocurrencies and participation in PoS/PoW blockchains, the demand grows for regulated and secure exchanges.




Why it Matters: The founding ethos of Bitcoin was all about decentralization and wresting power away from powerful institutions. As institutions deploy their capital into Bitcoin, altcoins, and blockchain use-cases, the character of the crypto ecosystem will change.


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