Sections
Cryptocurrencies 101
How does blockchain work?
How can I invest in cryptocurrencies?
Cryptocurrency FAQ
Section 1 - Cryptocurrencies 101
Content
What are cryptocurrencies?
What makes cryptocurrencies unique?
Why do we call them cryptocurrencies?
What is public key cryptography?
Who invented cryptocurrencies?
What is the difference between cryptocurrencies and tokens?
What is a cryptocurrency?
What are cryptocurrencies?
A cryptocurrency (or “crypto”) is a form of digital cash that allows individuals to transfer value in a digital environment.
You may be wondering how such a system is different from PayPal or other banking apps you have on your phone. At first glance, they certainly seem to serve the same use cases – paying friends, making purchases on your favorite websites – but upon closer inspection, they couldn't be more different.
What makes cryptocurrencies unique?
Cryptocurrencies are unique for many reasons. Its primary function, however, is to act as an electronic cash system that is not owned by any party.
A good cryptocurrency will be decentralized. There will be no central bank or subset of users that can change the rules without reaching consensus. Network participants (nodes) run software that connects them to other participants, allowing them to exchange information with each other.
Centralized vs. Centralized Networks decentralized networks.
The thing on the left is what you would expect an entity like a bank to use. Users must communicate through the central server. On the right, there is no hierarchy: the nodes are interconnected and pass information to each other.
The decentralization of cryptocurrency networks makes them highly resistant to disconnection or censorship. On the contrary, to take down a centralized network, you only need to destabilize the main server. If a bank's database is deleted and there is no backup, it will be very difficult to determine the balance of users.
In the case of cryptocurrencies, the nodes maintain a copy of the database. Everyone acts, in practice, as their own servant. Individual nodes could go offline, yet their peers would still be able to obtain information from other nodes.
Cryptocurrencies are therefore operational 24 hours a day, 365 days a year. They allow the transfer of value to any part of the world without the intervention of intermediaries. That's why we often refer to them as permissionless: anyone with an Internet connection can transfer funds.
Why do we call them cryptocurrencies?
The term “cryptocurrency” is a portmanteau of cryptography and currency. This is simply because cryptocurrencies make extensive use of cryptographic techniques to protect transactions between users.
What is public key cryptography?
Public key cryptography underpins cryptocurrency networks. It is the element that users depend on to send and receive funds.
In a public key cryptography scheme, you have a public key and a private key. A private key is basically a long number that no one can guess. It is often difficult to get an idea of how long that number is.
In the case of Bitcoin, guessing a private key is approximately as likely as guessing 256 times the result of flipping a coin. With today's computers, you wouldn't even be able to crack someone's password before the heat death of the universe occurred.
Either way, as the name itself suggests, you should keep your private key secret. Still, you can generate a public key from it. The public key can be shared with anyone securely. It is technically impossible for someone to reverse engineer your private key from your public key.
You can also create digital signatures by signing data with your private key. It would be analogous to signing a document in the real world. The main difference is that anyone can determine with certainty the validity of a signature by comparing it with the corresponding public key. This way, the user will not need to reveal their private key, and will still be able to prove ownership of it.
With cryptocurrencies, you can only spend your funds if you have the corresponding private key. When you make a transaction, you are announcing to the network that you want to move your coins. This is carried out through a message (i.e. a transaction), which is signed and added to the database of the cryptocurrency in question (the blockchain). As already mentioned, you will need your private key to create this digital signature. And since everyone can see the database, they can verify that your transaction is valid by inspecting the signature.
Who invented cryptocurrencies?
Over the years, there have been a number of attempts at digital cash schemes, but the first cryptocurrency - launched in 2009 - was Bitcoin. This would be created by a person or group of people under the pseudonym Satoshi Nakamoto. To this day, his true identity remains unknown.
Bitcoin would spawn a large number of subsequent cryptocurrencies – some of which would aim to compete, while others would seek to integrate functionalities not available in it. Today, many blockchains not only allow users to send and receive funds, but also run decentralized applications using smart contracts. Ethereum is perhaps the most popular example of this type of blockchain.
What is the difference between cryptocurrencies and tokens?
At first glance, cryptocurrencies and tokens look the same. Both are traded on exchanges and can be transferred between blockchain addresses.
Cryptocurrencies are intended to serve exclusively as money - whether as a medium of exchange, a store of value, or both. Each unit is functionally fungible, meaning that each coin will be worth the same as the others.
Bitcoin and some of the first cryptocurrencies would be designed as currencies, although later blockchains would aim to do more things. Ethereum, for example, not only provides the functionality of a currency. It also allows developers to run code (smart contracts) on a distributed network, as well as create tokens for a range of decentralized applications.
Tokens can be used like cryptocurrencies, but they are more flexible. Millions of identical units can be minted, or a select few with unique properties. And they can be used for anything, from digital receipts that represent a stake in a company, to loyalty points.
In a protocol suitable for smart contracts, the base currency (used to pay for transactions or applications) is independent of its tokens. In Ethereum, for example, the native currency is called ether (ETH), and must be used for the creation and transfer of tokens within the network. These tokens are implemented based on standards such as ERC-20 or ERC-721.
What is a cryptocurrency?
A crypto wallet, basically, is something that contains your private keys. It can be a device made for this purpose (a hardware wallet), an application on your PC or smartphone, or even a piece of paper.
Wallets are the interface that most users will depend on to interact with a cryptocurrency network. Each type of wallet will offer different types of functionality – obviously, a paper wallet will not be able to sign transactions or display the current rate in fiat currency.
Software wallets (such as Trust Wallet) are considered superior in convenience for day-to-day payments. When it comes to security, hardware wallets are virtually unbeatable in their ability to keep private keys safe from prying eyes. Cryptocurrency users tend to keep their funds in both types of wallets.
Section 2 - How does the blockchain work?
Content
What is a blockchain?
How are blocks added to a blockchain?
How does crypto mining work?
Can cryptocurrencies scale?
Who makes decisions regarding cryptocurrency software?
What is a blockchain?
A blockchain is a special type of database in which information can only be added (and not deleted or modified). Transactions are periodically added to a blockchain within what we call blocks (made up of transaction information and other important metadata).
We call the structure a "chain" because the metadata of each block includes a fragment of information that links it to the previous one. Specifically, what it includes is a hash of the previous block - which you can think of as a unique fingerprint.
The probability that two pieces of information will give you the same output from a hash function is infinitesimally low. Therefore, if someone tries to modify an old block, its hash will no longer be the same; which in turn will mean that the hash of the next block will also be different, and so on. It will therefore be obvious if a block has been modified - since all the blocks that follow it must also be modified.
The hash of each block is included in the next block. In this way the chain of blocks or blockchain is formed.
The blockchain is downloaded in its entirety by network participants. Remember how we said that with public key cryptography anyone can validate transactions and signatures? When a node receives a block, it performs a series of checks. If everything is invalid, the block will be rejected.
When a node receives a valid block, it makes its own copy of it and then propagates it to other nodes. These, in turn, will do the same, until the block has spread throughout the network. This process is also carried out for unconfirmed transactions – that is, transactions that have been broadcast, but not yet included in the blockchain.
See also: What is Blockchain Technology? Definitive Guide.
How are blocks added to a blockchain?
The integrity of a blockchain will be undermined if false financial information can be recorded. However, in a distributed system there is no administrator or leader who maintains the accounting ledger – so how do we ensure that participants are acting honestly?
Satoshi proposed a Proof of Work system, which would allow anyone to suggest adding a block to the blockchain. To propose a block, users must sacrifice computational power trying to solve a problem exposed by the protocol.
Proof of Work is the scheme for achieving consensus among users that has been tested the most, but it is by no means the only one. Alternatives like Proof of Stake are being explored more and more, although a proper implementation in its true form is still awaited - even though hybrid consensus mechanisms have existed for some time.
See also: What is the Consensus Algorithm of a Blockchain?
How does crypto mining work?
The process we have referred to above is known as mining. If the miner finds a solution, the block he built will lengthen the chain. And as a result, you will receive a reward denominated in the native currency of the blockchain.
The cryptographic puzzle that miners must solve involves repeatedly hashing data to produce a number that falls below a certain value. Hashing with a one-way function means that, starting from the output, it is virtually impossible to guess the input. Now, if you have the input, it is trivial to verify the output. In this way, any participant will be able to verify that the miner has produced a 'correct' block, and reject those that are invalid. In the latter case, having tried to forge an invalid block, the miner will not receive any reward and will have wasted resources.
This leads to some interesting game theory, which makes it costly for an actor to try to cheat, but profitable to act honestly. No malicious entity has the resources to attack a robust network indefinitely. Therefore, one will expect those with resources to participate correctly in order to obtain a return on their investment.
See also: What is Cryptocurrency Mining?
Can cryptocurrencies scale?
As you may have seen, distributed networks are not very efficient. Unfortunately, cryptocurrencies will only be secure and resistant to censorship if all nodes can synchronize a copy of the blockchain. The lower the requirements to stay current, the easier it will be for people to join.
You will then understand why a blockchain that only adds a small block every ten minutes is preferable, in this sense, to one that adds a large block every five minutes. The latter would force the nodes to run on high-power computers to stay synchronized, and would push the lower-power ones to disconnect. This would cause greater centralization, with fewer peers remaining in the network.
But with smaller blocks, we won't be able to achieve many transactions per second (TPS). This will mean, in turn, that in periods of high activity it may take a long time for transactions to be added to the blockchain. It's inconvenient if you want to make a quick payment, but it's the price you pay for decentralization.
We call this problem the scalability dilemma. A system that scales well is one that easily adapts to an increase in the transfer rate, with minimal trade-offs. Blockchains do not scale well – as we have already explained, increasing the transfer rate simply with larger blocks undermines the reason for a distributed network.
To increase TPS in a way that does not harm the decentralization of the network, a viable approach seems to be off-chain scalability. This covers a wide range of solutions – centralized and decentralized – that allow transactions to be executed without storing them in the blockchain.
Learn more about some examples of off-chain scalability: Blockchain Scalability: Sidechains and Payment Channels.
Who makes decisions regarding cryptocurrency software?
Cryptocurrency networks are opt-in. No one forces you to run software you don't want to run. In a good protocol, the code will be completely open-source, so that users can be assured of the fairness and security of the system.
In general, cryptocurrencies allow anyone to participate in their development. New features or code edits are vetted by a community of developers before they are agreed upon and released. And from there, users will be able to review the code themselves and decide to run it or not.
Some updates will be backward compatible - meaning that the updated nodes will still be able to communicate with the old ones. Others will not be backward compatible – old nodes will be “kicked” from the network if they are not updated. Take a look at Hard Forks and Soft Forks for an explanation on this topic.
Section 3 - How can I invest in cryptocurrencies?
Content
What cryptocurrency should you buy?
What should I learn before investing in cryptocurrencies?
Where to buy cryptocurrencies
Centralized exchanges (CEX)
Decentralized exchanges (DEX)
Exchanges P2P
How to buy cryptocurrencies
How to buy cryptocurrency on Binance
How to buy cryptocurrency on Binance DEX
How to buy cryptocurrencies on Binance P2P
What cryptocurrency should you buy?
That is a decision that only you can make – you should do your research (Do Your Own Research or DYOR) and decide based on your own analysis. That said, there are many tools that can help you make better decisions. For example, Binance Research offers excellent articles on market insights and analysis, along with in-depth reports on individual projects.
If you want to be able to determine which cryptocurrency to buy, it is absolutely essential to first understand how Bitcoin works. The good news is that... that's precisely why we created the guide What is Bitcoin?!
What should I learn before investing in cryptocurrencies?
Where to start? There are a lot of ways to analyze the financial markets and, generally, most professional investors will use very different strategies. On a more general level, however, there are two main schools of thought for evaluating an investment: fundamental analysis (AF) and technical analysis (TA).
Fundamental analysis is a method of evaluating the valuation of an asset based mainly on economic and financial factors. Analysts using this method analyze macroeconomic and microeconomic factors, industry conditions, or the business underlying the asset (if any). In the case of cryptocurrencies, they can also view public blockchain data, which are sometimes called on-chain metrics.
This may involve looking at the number of transactions, addresses, top holders, the network hash rate, and countless other pieces of information. The objective of this analysis is to arrive at a valuation of the asset and compare it with its current valuation. Ultimately, this approach aims to determine whether the asset is currently undervalued or overvalued.
With all that said, it is important to remember that cryptocurrencies are a new and burgeoning asset class. Fundamental analysis has little room to shine in determining its valuation. Simply put, there is no standardized framework for determining cryptocurrency valuation, and most existing models cannot be trusted to a high degree. The success or failure of a cryptocurrency project can depend on many different factors, which no current framework can take into account.
Technical analysts take a different approach. Unlike fundamental analysts, technical analysts do not attempt to determine the intrinsic value of an asset. Instead, they evaluate trading and investment opportunities based on historical trading activity. They do this by focusing on price movements, chart patterns, indicators, and other charting tools to assess the strength or weakness of a market. In essence, technical analysts believe that an asset's past price movements can be valuable in trying to predict its future price movements.
Since technical analysis can be applied to essentially any market with historical data, it is widely used by cryptocurrency traders.
So which one should you learn? Well, why not both? Most market analysis tools work best when used in combination with other tools. In any case, it is absolutely vital to understand financial risk and risk management, and never invest more than you can afford to lose.
Where to buy cryptocurrencies
There are several ways to buy cryptocurrencies. However, the first thing you will need to do is convert your fiat currency into cryptocurrency. Then, you can choose to HODL it, trade it with other cryptocurrencies, or lend it out and earn interest. Let's take a look at the different types of cryptocurrency exchanges.
Centralized exchanges (CEX)
You may find the concept of a centralized exchange a bit confusing since cryptocurrencies are often called decentralized. In short, centralized exchanges are online platforms that facilitate exchanges by connecting buyers and sellers.
The way this works is that users deposit their fiat money or cryptocurrencies into the exchange and trade within their internal systems. If you are familiar with how cryptocurrency wallets work, you will know that in this case, your cryptocurrencies are held in custody by the exchange. But it should be easy enough for you to withdraw your funds and store them in your own wallet, if you wish.
Some may prefer to keep their funds on the exchange, either because they trade regularly or for convenience. However, if the exchange is hacked, user funds could be at risk.
Decentralized exchanges (DEX)
Decentralized exchanges are different. When you use a DEX, there are no custodians involved. In fact, a more accurate way to refer to this type of exchange would be the non-custodial exchange.
This is what happens when you trade on a DEX. Instead of depositing your funds into the exchange's wallet, you are trading directly from your own wallet. When a trade is executed, funds are transferred directly to the blockchain using the magic of smart contracts.
Since there is no entity acting as a custodian, some consider this to be a safer option than CEXs. Another advantage could be that most DEXs do not require you to provide personal information other than a blockchain wallet address. At the same time, taking custody of your own funds requires a certain amount of technical expertise, and you are completely on your own responsibility.
Exchanges P2P
A peer-to-peer (P2P) exchange is also a place that connects buyers and sellers, but it is different from a CEX and a DEX. In this case, the exchange itself does nothing more than connect buyers and sellers, and they can settle the transaction in any way they agree. Therefore, buyers and sellers can decide the deposit and settlement method for each individual transaction.
How to buy cryptocurrencies
How to buy cryptocurrency on Binance
Log in to Binance or register if you don't have an account yet.
Go to the Cryptocurrency Buy and Sell portal.
Select the cryptocurrency you want to buy and the currency you want to pay with.
Select your payment method.
If prompted, insert your card or bank details and complete the identity verification.
You're done! Your cryptocurrency will be credited to your Binance account.
How to buy cryptocurrency on Binance DEX
Using a DEX is a little more complicated than the other options available.
Here's what you need before you start:
A wallet that can connect to Binance DEX (we recommend Trust Wallet).
Some BNB to pay transaction fees.
Once you have them, follow the instructions in our detailed Binance DEX guides:
Binance DEX: Interface Guide
Binance DEX: Creating a wallet
Binance DEX: Accessing your wallet
How to buy cryptocurrencies on Binance P2P
Log in to Binance, or register if you don't have an account yet.
And get portal Binance P2P.
Select what you want to buy or sell.
Filter by currency, payment method or other trading requirements.
Select a listing that meets your requirements or publish your own listing.
Chapter 4 – Cryptocurrency FAQs
Content
Are cryptocurrencies legal?
Are cryptos dead?
Are cryptocurrencies safe?
Are cryptocurrencies anonymous?
Do cryptocurrencies have value?
Are all digital currencies cryptocurrencies?
What is the market capitalization of a cryptocurrency?
Why do I have to pay a transaction fee?
I lost my password. Can I get my funds back?
What is the future of cryptocurrency?
Are cryptocurrencies legal?
Very few countries directly prohibit the purchase, sale and storage of cryptocurrencies. In the vast majority of the world, Bitcoin and other virtual currencies are perfectly legal. But before you start with them, you should check if your jurisdiction allows them.
It is important to remember that each country has a different approach to regulating cryptocurrency activities. Make sure you don't violate any rules related to taxation or compliance.
Are cryptos dead?
The media has declared that cryptocurrencies have died hundreds of times in the last decade. And yet it continues to function just as it did in 2009. That's not to say it's not volatile: the price fluctuates wildly. For those just trying to make profits, bear markets can be discouraging.
However, it would be a mistake to describe cryptocurrencies as "dead." They continue to attract new users, and the technology and infrastructure are only becoming more sophisticated.
The major innovations of Bitcoin and Ethereum will undoubtedly play an important role in reshaping our existing monetary systems to make them more suitable for the current era. Immutability, censorship resistance, lack of trust, or near-instant transactions using a public monetary system could completely renew the mechanics of economic activity on the Internet.
Are cryptocurrencies safe?
There is a degree of risk assumed with cryptocurrencies. If you forget your password to access your bank account, you can reset it through customer service. But, if you forget or lose the private keys that give you access to your crypto, there is no one who can help you. Using a reputable exchange may be a more forgiving option: it requires trust, but you don't risk losing your private keys.
Public key cryptography has not yet been broken. With good security measures, you are more likely to have any of your other online accounts hacked than have your funds stolen. Best practices include being aware of common scams (social engineering, phishing, etc.), keeping your private keys offline at all times, and making backup copies in a secure location.
Are cryptocurrencies anonymous?
Your name is not connected to your cryptocurrency addresses: they look like random strings of numbers and letters on the blockchain. However, be careful about assuming this makes you anonymous. You're pseudonymous: you still have some kind of chain identity, it's just not the one you use in real life.
There are certain methods that can allow people to link IP addresses to their activities. On this front, things like dusting attacks and other analysis techniques can be used to deanonymize it. Remember that blockchains are essentially massive public databases. If you are concerned about your privacy, you should try to make it as difficult as possible for others to link your transactions to your name. Cryptocurrencies like Bitcoin are not private by default, but methods like coin mixing and CoinJoins can make the analysis heuristics unreliable.
A small subset of cryptocurrencies (known as privacy coins) can obfuscate the source, destination, and amount of funds in transactions, using methods such as Confidential Transactions. They have stronger privacy by default, but are not fully resistant to deanonymization.
Do cryptocurrencies have value?
In financial systems, value is a shared belief. As with anything valuable, value is not inherent to the cryptocurrency itself, it is assigned by people. In other words, something has value if people believe it has value. This is true regardless of whether the valuable object is a precious metal, a piece of paper, or a few bits in a database.
With all that said, some consider cryptocurrencies and Bitcoin, something similar to a scarce digital product. Due to its predictable issuance rate and monetary policy, some argue that Bitcoin can act as a store of value in the future, similar to gold. Given that Bitcoin has only been around for a little over a decade, it remains to be seen whether it will stand the test of time in this regard.
Are all digital currencies cryptocurrencies?
No. You may have heard that many nation-states and central banks are working on creating their own versions of digital currency. However, these are just that: digital currencies. In fact, they are often collectively referred to as central bank digital currencies (CBDCs). These are essentially digital versions of fiat money, and do not enjoy most of the benefits of cryptocurrencies. They are issued and declared legal tender by a central government and generally do not use a distributed ledger, such as a blockchain, to keep a record of transactions.
You may also have heard of Facebook Libra, another type of digital currency. On the positive side, it is planned to build on an open source blockchain system. However, it wouldn't be permissionless, like Bitcoin or Ethereum, meaning participants would need more than a simple internet connection to use it. Furthermore, the project and the activity therein would be managed and administered by an association consisting of a few selected members.
So even though CBDCs and other forms of digital money that use blockchain or cryptography, they are quite different from cryptocurrencies like Bitcoin.
What is the market capitalization of a cryptocurrency?
When you look at the price of a cryptocurrency, you only see part of the picture. An equally important metric is how many individual units of that cryptocurrency exist, i.e. the supply.
More specifically, to evaluate the valuation of a cryptocurrency network, you need to know how many individual units currently exist. This is called circulating supply. Different cryptocurrencies can adopt different issuance schedules, so it is important to understand how issuance works with each network.
Market capitalization (or market cap) is the price of an individual unit multiplied by the circulating supply.
Market Capitalization = Circulating Supply * PriceAs you can imagine, the market capitalization of a cryptocurrency network is a more accurate representation of the value on the network than the price of an individual unit. A network with a lower price coin but higher circulating supply could have a higher total valuation (market capitalization) than one with a higher price coin but lower circulating supply. And the opposite could also be true in certain cases.
However, it is worth noting that market capitalization does not represent how much money entered a particular market. For example, it is a common misconception among newcomers that the market capitalization of Bitcoin represents the total amount of money invested in Bitcoin. But that doesn't make sense because market capitalization depends on price and supply.
Why do I have to pay a transaction fee?
If you send a bitcoin to another address, you will notice that the address receives a little less than what you sent. This is because you pay a small fee to reward miners for adding your transaction to the blockchain.
Many cryptocurrencies use a similar mechanism to incentivize users to secure the network. In Proof of Work systems, transaction fees are typically included with newly minted coins (the block subsidy) to form the block reward.
You can adjust the fee based on the urgency of your transaction. Rational miners will always seek to earn as much revenue as possible, so they will prioritize transactions with higher fees. You can view current pending transactions to get an idea of the average fee and set yours accordingly.
I lost my password. Can I recover my funds?
If you are sure you have lost your keys, you will probably never get them back. The great benefit of cryptocurrencies is the elimination of custodians and intermediaries from the management of financial transactions. The downside to that, however, is that the responsibility is now completely in your hands. Therefore, you must be very careful not to lose your private keys, as they are what give you ownership of your funds.
What is the future of cryptocurrency?
What the future of cryptocurrency looks like depends entirely on who you ask. Some believe that Bitcoin will rise to replace gold in the digital age and disrupt the existing financial system. Others argue that cryptocurrencies will always be a secondary system, existing as a niche market. We also have those who believe that Ethereum will become a distributed computer, which will serve as the backbone of a new Internet.
Skeptics predict that the industry will eventually collapse, while enthusiasts are content with cryptocurrencies remaining niche monetary systems. There are many possible outcomes: it is too early to say with certainty what will happen even a year from now. But we cannot deny that there is enormous growth potential.
