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Introduction to cryptocurrencies
How does blockchain work?
How can I invest in cryptocurrencies?
Frequently asked questions about cryptocurrencies
Part 1 - Cryptocurrency 101
Contents
What is cryptocurrency?
What makes cryptocurrency unique?
What is the reason why it is called cryptocurrency?
What is public key cryptography?
Who created cryptocurrencies?
What is the difference between cryptocurrencies and tokens?
What is a crypto wallet?
What is cryptocurrency?
Cryptocurrency (or “crypto”) is a type of digital money that allows individuals to transfer value in a digital environment.
You may be wondering how this type of system differs from PayPal or the digital banking app on your phone. Although from the outside they seem to serve the same use cases (paying your friends, shopping from your favorite website, etc.), they are fundamentally very different from each other.
What makes cryptocurrency unique?
Cryptocurrency is unique for many reasons. Its primary function is to serve as an electronic money system that is not owned by a single party.
A good cryptocurrency would be decentralized. There is no central bank or subset of users who can change the rules without consensus. Network participants (nodes) use software that enables them to connect to other participants, thus sharing information among them.
Centralized and decentralized networks.
On the left you can see the structure you would expect an entity such as a bank to use. Users must communicate through the central server. On the right, there is no hierarchy: nodes are connected to each other and transfer information between them.
The decentralization of cryptocurrency networks makes them highly resistant to decommissioning or censorship. In contrast, to damage a centralized network you only need to disrupt the main server. If a bank's database is deleted and there is no backup, it becomes very difficult to determine users' balances.
In cryptocurrencies, nodes keep a copy of the database. Everyone effectively acts as their own server. Individual nodes may remain offline, but peers in the network continue to receive information from other nodes.
Therefore, cryptocurrencies are functional 24 hours a day, 365 days a week. They enable the transfer of value anywhere in the world without the intervention of intermediaries. This is why cryptocurrencies are referred to as permissionless: anyone with an internet connection can send funds.
What is the reason why it is called cryptocurrency?
The term “cryptocurrency” is a combination of the words cryptography and currency. This is because cryptocurrencies make extensive use of cryptographic techniques to secure transactions between users.
What is public key cryptography?
Public key cryptography forms the basis of cryptocurrency networks. Users use public key cryptography to send and receive funds.
In a public key cryptography scheme, you have a public key and a private key. Essentially, the secret key is a very large number that is impossible for anyone to guess. It is often difficult to imagine how large this number is.
For Bitcoin, the probability of guessing a private key is equivalent to guessing the outcome of a coin toss 256 times. With today's computers, it will not be possible to crack a person's key even if tried until the world ends.
As the name suggests, you need to keep your private key secret. However, you can create a public key from this key and safely share this public key with anyone you want. It is impossible for other people to access your private key by reverse engineering your public key.
You can also create digital signatures by signing data with your private key. This process is similar to signing a document in the real world. The main difference is that any person can determine with certainty whether the signature is valid or not by comparing this signature with the corresponding public key. Thus, the user can prove that he/she has this private key without having to share it.
In cryptocurrencies, you can only spend your money if you have a corresponding private key. When you make a transaction, you notify the network that you want to move your money. This notification is made through a message (i.e. transaction) that is signed and added to the cryptocurrency database (blockchain). As we mentioned before, you need your private key to create a digital signature. And since anyone can see the database, they can check whether your transaction is valid by checking the signature.
Who created cryptocurrencies?
Although there have been several digital currency system initiatives over the years, the first of the cryptocurrencies was Bitcoin, which was launched in 2009. Bitcoin was created by a person or group using the pseudonym Satoshi Nakamoto. Today, the true identity of Bitcoin's creator is still unknown.
After Bitcoin, a multitude of cryptocurrencies were created, some for competitive purposes and some seeking to integrate features not found in Bitcoin. Many blockchains today not only allow users to send and receive money, but also enable them to run decentralized applications using smart contracts. It can be said that Ethereum is the most popular example of this type of blockchain.
What is the difference between cryptocurrencies and tokens?
At first glance, cryptocurrencies and tokens may seem exactly the same. Both are traded on exchanges and can be sent between blockchain addresses.
Cryptocurrencies aim to serve as money in general, whether as a medium of exchange, a store of value, or both. Each unit is functionally equivalent (fungible), meaning one coin has the same value as another coin.
Bitcoin and other early cryptocurrencies were designed as currencies, but later blockchains aim to do more. For example, Ethereum doesn't just offer currency functionality. It allows developers to run codes (smart contracts) on a distributed network and create tokens for various decentralized applications.
Tokens can be used like cryptocurrencies but are more flexible. You can issue millions of identical tokens or choose a few with unique features. They can serve all kinds of purposes, from digital receipts representing a stake in a company to loyalty points.
In a smart contract-enabled protocol, the underlying currency (used to pay for transactions or applications) is separate from the tokens. For example, in Ethereum the native currency is ether (ETH) and should be used to create and transfer tokens within the Ethereum network. These tokens must be issued according to standards such as ERC-20 or ERC-721.
What is a crypto wallet?
At its most basic, a cryptocurrency wallet is where you keep your private keys. A wallet can be a device created for this purpose (a hardware wallet), an app on your PC or smartphone, or even a piece of paper.
Wallets are the interface most users use to interact with a cryptocurrency network. Different types of devices will offer different functionality – a paper wallet cannot sign transactions or display the current price of fiat currencies.
In terms of ease of use, software wallets (e.g. Trust Wallet) are considered superior for everyday payments. In terms of security, hardware wallets' ability to keep private keys safe is unmatched. Cryptocurrency users tend to keep their funds in both types of wallets.
Part 2 - How does blockchain work?
Contents
What is Blockchain?
How are blocks added to the blockchain?
How does crypto mining work?
Is cryptocurrency scalable?
Who makes decisions for cryptocurrency software?
What is Blockchain?
Blockchain is a special type of database in which data can only be added (not removed or modified). Transactions are added to the blockchain at regular intervals within blocks (consisting of transaction information and other important metadata).
Because each block's metadata contains a piece of information that links it to the previous block, the structure is called a chain. Blocks contain a hash of the previous block, and the hash can be thought of as a unique digital fingerprint.
The probability that two different pieces of data will give the same output in a hash function is extremely low. Therefore, if someone tries to modify an old block, the hash of that block will become different, and the hash of the later block will also be different, and so on. So when an old block is changed, it is immediately obvious because all subsequent blocks are also changed.
The hash of each block is included in the next block. Thus, a chain of blocks, namely blockchain, is created.
Network participants download the entire blockchain. Remember how we said anyone can verify transactions and signatures using public key cryptography? When the node receives a block, it performs a series of checks. If there is anything invalid, the block will be rejected.
When a node receives a valid block, it creates a copy of the block for itself and then shares that block with other nodes. Other nodes do the same until the block spreads to the entire network. This process is also performed for unconfirmed transactions (transactions that have been published but not yet included in the blockchain).
You can read our Blockchain Technology Comprehensive Guide article on the subject.
How are blocks added to the blockchain?
The ability to record incorrect financial information weakens a blockchain. However, in a distributed system, there is no administrator or responsible person who keeps the ledger. So how is it possible to be sure that participants will act honestly?
Satoshi has introduced a Proof of Work system that allows anyone to propose a block to be added to the blockchain. In order to create a block, users must sacrifice their computing power to guess a puzzle determined by the protocol.
Proof of Work is the most tried and tested framework for achieving consensus between users, but there are many others. Alternatives such as Proof of Stake are increasingly being considered, although they have not yet been properly implemented in their pure form (but hybrid consensus mechanisms have been around for some time).
What is Blockchain Consensus Algorithm? You can find more detailed information in our article.
How does crypto mining work?
The above mentioned process is known as mining. If the miner finds a solution, the block he created is added to the blockchain. In return, the miner earns a reward in the blockchain's platform-specific currency.
The cryptographic puzzle that miners must solve involves repeatedly hashing data to produce a number below a certain value. Hashing with a one-way function means that it is almost impossible to predict the input from a known output. But when the input is known, it is very easy to verify the output. This way, any participant can verify that the miner has produced a 'valid' block and reject invalid blocks. In case of an invalid block, the miner does not receive any reward and wastes his resources in the process.
What makes it costly for a participant to attempt to cheat but profitable for a participant to act honestly are some interesting consequences of game theory. No malicious entity has the resources to attack a powerful network indefinitely. Therefore, people with resources are expected to participate honestly and make a profit on their investment.
What is Cryptocurrency Mining? You can find more information in our article.
Is cryptocurrency scalable?
As you can imagine, distributed networks are not very efficient. Unfortunately, cryptocurrencies can only be secure and censorship-resistant if all nodes can keep a copy of the blockchain in sync. The lower the requirements to keep up with the pace of blockchain, the easier it is for people to participate.
In this context, you can see why a blockchain that adds a small block every ten minutes is preferable to a blockchain that adds a very large block every five minutes. The second blockchain requires nodes to use high-power computers to stay in sync, and lower-power computers are forced to stay offline. As a result, there will be fewer peers in the network, resulting in greater centralization.
However, with smaller blocks, the number of transactions per second (TPS) will not be high. This also means that during busy periods it may take time for transactions to be added to the blockchain. This is inconvenient if you want to make a quick payment, but that's the price to pay for decentralization.
This problem is called the scalability dilemma. A well-scalable system is one that can adapt to increasing levels of input-output with minimal disadvantage. As we explained before, blockchains are not highly scalable, increasing efficiency with larger blocks defeats the whole purpose of distributed systems.
Scaling off-chain to increase TPS without harming the decentralization of the network seems like a feasible approach. This approach encompasses many different types of centralized and decentralized solutions that allow transactions to be made without entering the blockchain.
You can learn more about examples of off-chain scalability in our article Blockchain Scalability: Sidechains and Payment Channels.
Who makes decisions for cryptocurrency software?
Participation in cryptocurrency networks is optional. Nobody forces you to use software you don't want to use. In a good protocol, the code will be completely open source, so users can be sure that the system is fair and secure.
Generally, cryptocurrencies allow anyone to participate in the development process. New features or changes to the code are voted on by the developer community before they are agreed upon and released. At this point, users can evaluate the code and choose to use or not use this code.
Some updates are history-compatible, meaning updated nodes can continue to communicate with old nodes. Other updates will not be compatible with the history, which means old nodes will be “kicked” from the network if they do not update. You can find more information on this subject in our Hard Forks and Soft Forks article.
Part 3 - How can I invest in cryptocurrencies?
Contents
Which cryptocurrency should I buy?
What should I learn before investing in cryptocurrencies?
Where to buy cryptocurrencies?
Centralized exchanges (CEX)
Decentralized exchanges (DEX)
P2P exchanges
How to buy cryptocurrencies?
Buying cryptocurrencies on Binance
Buying cryptocurrencies on Binance DEX
Buying cryptocurrencies via Binance P2P
Which cryptocurrency should I buy?
This is a decision only you can make. You should Do Your Own Research (DYOR) and decide based on your own analysis. However, there are many tools available to help you make better decisions. For example, Binance Research offers excellent market insights and analysis, as well as comprehensive reports on individual projects.
In order to evaluate which cryptocurrencies to buy, it is important that you first know how Bitcoin works. The good news is that this is exactly why we have What is Bitcoin? The fact that we did not create the guide!
What should I learn before investing in cryptocurrencies?
Where to start? There are many different ways to analyze financial markets, and generally most professional investors use many different strategies. But at its most basic, there are two approaches to evaluating an investment: fundamental analysis (FA) and technical analysis (TA).
Fundamental analysis is a method to evaluate the valuation of an asset by considering mainly economic and financial factors. Analysts using this method look at both macroeconomic and microeconomic factors, industry conditions or the underlying business of the asset (if any). In cryptocurrencies, public blockchain data, sometimes called on-chain metrics, can also be examined.
This review may include evaluating the number of transactions, addresses, people with the highest balances, the hash rate of the network, and many other information. The purpose of fundamental analysis is to determine a valuation for the asset and compare it to the current valuation. Ultimately, this approach aims to determine whether the asset is currently underpriced or overpriced.
However, it is important to remember that cryptocurrencies are a new and emerging asset class. Fundamental analysis does not have a high ability to determine the valuations of cryptocurrencies. In short, there is no standard framework for determining the valuation of cryptocurrencies and most existing models do not have high reliability in this regard. The success or failure of a cryptocurrency project can depend on many different factors that no existing framework can cover.
Technical analysts take a different approach. Unlike fundamental analysts, technical analysts do not attempt to determine the true value of an asset. Instead, it evaluates trading and investment opportunities based on past trading activity. This evaluation is done by focusing on price movements, chart formations, indicators and various other charting tools to assess the strength or weakness of the market. Fundamentally, technical analysts believe that previous price movements of an asset can be useful when trying to predict future price movements.
Technical analysis is widely used by cryptocurrency investors because it can be applied to any market with historical data.
So which one should you learn? Why not both? Most market analysis tools work best when used in conjunction with other tools. In any case, it is absolutely vital to understand financial risk and risk management and not to invest more than you can afford to lose.
Where to buy cryptocurrencies?
There are various ways to buy cryptocurrencies. But the first thing you need to do is to convert your fiat money into cryptocurrency. You can then choose to HODL (hold your cryptos), trade them for other cryptocurrencies, or earn interest by lending your cryptos. You can use different types of exchanges for crypto currencies, which we will talk about below.
Centralized exchanges (CEX)
Since cryptocurrencies are often referred to as decentralized, you may find the concept of a centralized exchange a bit confusing. In summary, centralized exchanges are online platforms that allow buying and selling by connecting buyers and sellers.
In centralized exchanges, users deposit fiat or cryptocurrencies to the exchange to exchange or trade within the exchange's internal system. If you are familiar with how cryptocurrency wallets work, then you know that cryptocurrencies are entrusted to exchanges. However, if you wish, you can easily withdraw your money and keep it in your own wallet.
Some people prefer to keep their funds in exchanges because they trade frequently or for ease of use. However, if the exchange is hacked, the user's funds may be at risk.
Decentralized exchanges (DEX)
Decentralized exchanges are different. When using a DEX, you have no one to trust with your funds. In fact, it may be more accurate to refer to this type of exchange as a non-custodial exchange.
Here's what happens when you trade on DEX: Instead of depositing your funds into the exchange's wallet, you trade directly from your own wallet. When a transaction occurs, funds are transferred directly to the blockchain through smart contracts.
Some people consider DEXs to be a safer choice compared to CEXs because there is no entity that acts as a custodian. Another advantage of DEXs is that most of them do not request any of your personal information other than a blockchain wallet address. However, you will need some technical expertise to keep control of your funds and the responsibility will be entirely yours.
P2P exchanges
A peer-to-peer (P2P) exchange is a place that connects buyers and sellers, but it is different from both CEX and DEX. In P2P, the exchange has no function other than connecting buyers and sellers, and the parties can agree on the transaction as they wish. This means that the funds deposit and settlement method for each transaction can be determined by buyers and sellers.
How to buy cryptocurrencies?
Buying cryptocurrencies on Binance
Log in to Binance or sign up if you don't have an account yet.
Go to the Crypto Money Buy and Sell portal.
Select the cryptocurrency you want to purchase and the currency you want to use for payment.
Choose your payment method.
If you are directed this way, enter your card or bank information and complete the identity verification.
That's it! Your cryptocurrencies will be deposited into your Binance account.
Buying cryptocurrencies on Binance DEX
Using DEX is a little more complicated than other methods.
Before you start you need to have:
A wallet that can connect to Binance DEX (we recommend Trust Wallet).
An amount of BNB that will be used to pay transaction fees.
Once you have these in hand, you can trade by following the instructions in our comprehensive Binance DEX guides:
Binance DEX: Interface Guide
Binance DEX: Creating a wallet
Binance DEX: Wallet access
Buying cryptocurrencies via Binance P2P
Log in to Binance or sign up if you don't have an account yet.
Go to the Binance P2P portal.
Choose whether you want to buy or sell.
Filter by currency, payment method and other trading conditions.
Choose an offer that suits your terms or post your own.
Part 4 - Frequently Asked Questions About Cryptocurrencies
Contents
Is cryptocurrency legal?
Is crypto dead?
Is cryptocurrency safe?
Is cryptocurrency anonymous?
Is cryptocurrency valuable?
Are all digital currencies cryptocurrencies?
What is the market value of cryptocurrencies?
Why do I have to pay commission for transactions?
I lost my keys. Can I get my funds back?
What is the future of cryptocurrency?
Is cryptocurrency legal?
Very few countries directly prohibit buying, selling and holding cryptocurrencies. In the vast majority of the world, Bitcoin and other virtual currencies are completely legal. But before you start using cryptocurrencies, you need to check whether your country's laws allow it.
It is important to remember that each country has a different approach to regulating cryptocurrency activities. You need to make sure that you are not breaking any rules regarding taxation or legal compliance.
Is crypto dead?
The news of the death of cryptocurrencies has been published hundreds of times by the media in the last decade. But despite this, cryptocurrencies continue to work as they did in 2009. Of course, this does not mean that there is no volatility, on the contrary, prices fluctuate greatly. For those who are just trying to make a profit, bear markets can be discouraging.
However, it would be wrong to describe cryptocurrencies as “dead”. As new users continue to be added, technology and infrastructure become increasingly sophisticated.
The significant innovations offered by Bitcoin and Ethereum will undoubtedly play a significant role in reshaping our current monetary systems to be more suitable for today's age. Immutability, resistance to censorship, lack of trust, or the near-instant execution of transactions using a public monetary system could radically change the way economic activities work on the Internet.
Is cryptocurrency safe?
There is a degree of risk involved with cryptocurrencies. If you forget your password to access your bank account, you can have your password reset by calling customer support. However, if you forget or lose your private keys that allow you to access your cryptocurrencies, there is no one who can help you. Using a trusted exchange may be a less risky option, in which case you need to trust the other party but you don't run the risk of losing your private keys.
Public key cryptography has not yet been cracked. If you use strong security measures, the risk of your other online accounts being hacked is likely to be higher than the risk of your funds being stolen. Best protection practices include being aware of common scams (social engineering, phishing, etc.), keeping private keys offline at all times, and storing them in a safe place.
Is cryptocurrency anonymous?
Your name is not linked to your cryptocurrency addresses. Addresses appear as a random string of numbers and letters on the blockchain. But you need to be careful when assuming that this makes you anonymous. Your name is hidden, but you still have a sort of on-chain identity, even if it's not the one you use in real life.
There are some methods that allow others to link your IP addresses and activity. Other techniques that will eliminate your anonymity, such as dusting attacks and other analysis techniques, can also be used for this purpose. Remember that blockchains are essentially very large databases that are publicly available. If you are concerned about your privacy, you should try to make it as difficult as possible to link your name with your transactions. Cryptocurrencies such as Bitcoin are not private by default, but methods such as coin mixing and CoinJoin can make analysis parameters unreliable.
A small subset of cryptocurrencies (known as privacy coins) can hide the source, destination, and amount of funds of transactions using methods such as Hidden Transactions. The privacy they offer is higher by default, but they are not completely resistant to attempts to break anonymity.
Is cryptocurrency valuable?
In financial systems, value is a common belief. Like anything of value, cryptocurrencies do not have value internally, it is assigned to them by people. In other words, something has value only if people believe it. This is true regardless of whether the object of value is a precious metal, a piece of paper, or data in a database.
However, some people view cryptocurrencies and Bitcoin as rare digital commodities. There are those who argue that Bitcoin could act as a store of value in the future, similar to gold, due to its predictable issuance speed and monetary policies. Since Bitcoin has only been around for a little over a decade, only time can tell what will happen with it.
Are all digital currencies cryptocurrencies?
No. You may have heard that many countries and central banks are trying to create their own digital currencies. However, these are just digital currencies. In fact, they are often called central bank digital currencies (CBDCs). These digital currencies are essentially digital versions of fiat currencies and do not have many of the benefits offered by cryptocurrencies. They are issued by a central government and are considered legal tender, and they generally do not use a distributed ledger like blockchain to keep track of transactions.
You may have also heard of Facebook's Libra, another type of digital currency. The upside is that Libra is planned to be built on an open-source blockchain system. However, it will not be permissionless like Bitcoin or Ethereum, meaning participants will need more than a simple internet connection to use this currency. Moreover, the project and its activities will be implemented and managed by a unit consisting of a few selected members.
In conclusion, although CBDCs and other types of digital currencies make use of blockchain or cryptography, they are quite different from cryptocurrencies such as Bitcoin.
What is the market value of cryptocurrencies?
When you look at the price of a cryptocurrency, you see only a small part of the overall picture. Another equally important criterion is its supply, that is, how many individual units there are of this cryptocurrency.
To determine the valuation of a cryptocurrency network, you need to know how many units are currently available. This is called circulating supply. Different cryptocurrencies may follow different issuance schedules, so it is important to understand how the issuance process works for each network.
Market value is the price of an individual unit multiplied by the circulating supply.
Market Value = Circulating Supply*PriceAs you can imagine, the market cap of a cryptocurrency network is a more accurate representation of the value of the network than the price of an individual unit. A network with a lower priced coin but a higher circulating supply may have a higher valuation (market cap) than a network with a higher priced coin but a lower circulating supply. And in some cases the opposite can also be true.
However, market cap does not represent how much money is entering a particular market. For example, a common misperception among new users is that the Bitcoin market cap represents the total amount of money invested in Bitcoin. But this is not a logical conclusion because market value depends on price and supply.
Why do I need to pay commission for transactions?
If you send a bitcoin to another address, you will find that slightly less than what you sent reaches the receiving account. This is because you pay a small commission, which is used to reward miners for adding your transaction to the blockchain.
Most cryptocurrencies use a similar mechanism to incentivize their users to keep the network safe. In Proof of Work systems, transaction fees are often combined with newly mined coins to form the block reward (block allowance).
You can adjust the transaction fee you will pay according to the urgency of the transaction. Rational miners will always strive to make the most profit, so they prioritize transactions with high transaction fees. You can obtain information about the average transaction fee by looking at the current pending transactions and determine the amount you will pay accordingly.
I lost my keys. Can I get my funds back?
If you're sure you've lost your keys, you'll probably never be able to access your funds. The biggest benefit of cryptocurrencies is that custodians and intermediaries are not involved in the management of financial transactions. But the downside is that the responsibility is now entirely in your hands. Therefore, you need to be extremely careful not to lose your private keys because you retain ownership of your money with your private keys.
What is the future of cryptocurrency?
What the future of cryptocurrencies will be like depends entirely on who you ask this question. Some believe that Bitcoin will replace gold in the digital age and disrupt the current financial system. Others argue that cryptocurrencies will always be a secondary system that will continue to exist as a niche market. There are also those who believe that Ethereum will be a distributed computer serving as the backbone of the new internet.
While skeptics predict that this industry will eventually collapse, some users are happy for crypto to remain a niche monetary system. Many different outcomes could occur, and it is too early to say for sure what will happen even a year from now. However, it cannot be denied that there is huge potential for growth.
