Content

1. Cryptocurrency 101

2. How does blockchain work?

3. How can I invest in cryptocurrency?

4. Frequently asked questions about cryptocurrencies

Chapter 1 - Cryptocurrency 101

Content

• What is cryptocurrency?

• What makes cryptocurrency unique?

• Where did the name "cryptocurrency" come from?

• What is Public Key Cryptography?

• Who invented cryptocurrency?

• What is the difference between cryptocurrencies and tokens?

• What is a cryptocurrency wallet?

What is cryptocurrency?

Cryptocurrency is a form of digital money that allows people to transfer value in a digital environment.

You may be wondering how this system differs from PayPal or the digital banking app installed on your phone. At first glance, they seem to have the same use cases – sending friends, shopping on your favorite website. But in reality they are slightly different.

What makes cryptocurrency unique?

Cryptocurrency is unique for many reasons. However, its main function is to serve as an electronic money system that does not belong to any one party.

Cryptocurrencies are decentralized. There is no central bank or user group that can change the rules without reaching consensus. Network participants (nodes) run software that connects them to other participants so they can exchange information with each other.

Centralized and decentralized networks.

Centralized networks are networks used by banks. Users must exchange information through a central server. In decentralized networks, nodes are interconnected and transmit information to each other.

The decentralization of cryptocurrency networks makes them highly resistant to shutdown or censorship. In contrast, to take down a centralized network, you simply need to take down the main server. If the bank's database was wiped and there were no backups, it would be very difficult to determine user balances.

In cryptocurrency, nodes store a copy of the database. Each actually acts as its own server. Individual nodes can go offline, but their nodes will still be able to receive information from other nodes.

Thus, cryptocurrencies work 24 hours a day, 365 days a year. They allow you to transfer value to any point on the globe without the intervention of intermediaries. This is why we often call them inclusive (permissionless): anyone with an internet connection can transfer funds.

Where did the name "cryptocurrency" come from?

The term "cryptocurrency" is a combination of cryptography and currency. This is because cryptocurrency makes extensive use of cryptographic techniques to secure transactions between users.

What is Public Key Cryptography?

Public key cryptography is at the heart of cryptocurrency networks. It's what users rely on to send and receive funds. 

In a private key cryptography scheme, you have a public key and a private key. A private key is essentially a massive number that cannot be guessed. It is often difficult to understand how large this number is. 

For Bitcoin, guessing the private key is as likely as correctly guessing the result of flipping a coin 256 times. With today's computers, you won't even be able to crack someone's key before the "heat death of the universe".

In any case, as the name suggests, you need to keep your private key secret. But you can generate a public one from this key. The public one can be freely distributed to anyone. It is almost impossible to reengineer your public key to get your private key.

You can also create a digital signature by signing data with your private key. This is analogous to signing a document in the real world. The main difference is that anyone can tell with certainty whether a signature is valid by comparing it to the corresponding public key. In this way, the user does not have to reveal his private key, but he can prove that he has it.

In cryptocurrency, you can spend your funds only if you have the corresponding private key. When you make a transaction, you "tell" the network that you want to move currency. This is reported in a message (that is, in a transaction), which is signed and added to the database of cryptocurrencies (blockchain). As mentioned, you will need your private key to create a digital signature. And since the database can be seen by anyone, they can verify the validity of your transaction by checking the signature.

Who invented cryptocurrency?

There have been several attempts to create digital money over the years, but the first cryptocurrency was Bitcoin, which was launched in 2009. It was created by a person or group of people under the pseudonym Satoshi Nakamoto. To this day, their true identity remains unknown.

Bitcoin has spawned a huge number of cryptocurrencies – some aimed at competing and others at integrating features not available in Bitcoin. Now, 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 such a blockchain.

What is the difference between cryptocurrencies and tokens?

At first glance, cryptocurrencies and tokens seem identical. Both are traded on exchanges and can be sent between blockchain addresses.

Cryptocurrencies are intended solely for use as money, whether as a medium of exchange, a means of saving, or both. Each unit is functionally fungible, meaning that one coin is worth the same as another.

Bitcoin and other early cryptocurrencies were designed as currencies, but later blockchains sought to do more. Ethereum, for example, not only provides currency functionality. It allows developers to run code (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 mint millions of identical tokens or a select few with unique properties. They can be used for anything from digital receipts representing a stake in a company to loyalty points.

In a smart contract-enabled protocol, the underlying currency (which is used to pay for transactions or applications) is separated from its tokens. In Ethereum, for example, the native currency is ether (ETH), and it must be used to create and transfer tokens on the Ethereum network. These tokens are implemented according to standards such as ERC-20 or ERC-721.

What is a cryptocurrency wallet?

Essentially, a cryptocurrency wallet is what holds your private keys. It can be a special device (hardware wallet), an application on your PC or smartphone, or even a piece of paper.

Wallets are the interface that most users will rely on when interacting with the cryptocurrency network. Different types of wallets will offer different kinds of functionality – obviously, a paper wallet cannot sign transactions or display current prices in fiat currency. 

Software wallets (such as Trust Wallet) are considered better for everyday payments. When it comes to security, hardware wallets are virtually unmatched in their ability to store private keys away from prying eyes. Cryptocurrency users tend to store funds in both types of wallets.

Chapter 2 - How does blockchain work?

Content

• What is blockchain?

• How are blocks added to the blockchain?

• How does cryptocurrency mining work?

• Can cryptocurrencies scale?

• Who Makes Decisions About Cryptocurrency Software?

What is blockchain?

Blockchain is a special kind of database in which data can only be added (not deleted or changed). Transactions are periodically added to the blockchain in the form of blocks (consisting of transaction information and other important metadata).

We call the structure a chain because the metadata of each block includes a piece of information that links it to the previous one. In particular, it includes the hash of the previous block, which can be seen as a unique digital fingerprint. 

The probability that two pieces of data will give you the same result from a hash function is infinitesimally small. Because of this, if anyone tries to modify an old block, their hash will be different, which means the hash of the next block will also be different, and so on. Thus, it is obvious that a block has been changed, because all the blocks that follow it must also be changed.

The hash of each block is included in the next block. This creates a chain of blocks or blockchain.

The blockchain is fully loaded by network participants. Remember how we said that anyone can verify transactions and signatures using public key cryptography? When a node receives a block, a series of checks are performed. If something goes wrong, the block is rejected.

When a node receives a valid block, it makes its own copy and then distributes the block to other nodes. Then they do the same thing until the block spreads across the network. This process is also performed for unconfirmed transactions, i.e. transactions that have been broadcast but not yet included in the blockchain.

See also: What is Blockchain Technology? Complete guidance.

How are blocks added to the blockchain?

The integrity of the blockchain is undermined if false financial information can be recorded. At the same time, in a distributed system there is no administrator or leader who keeps the registry. So how do we ensure that participants are acting honestly?

Satoshi proposed a Proof of Work system that allowed anyone to propose a block to be added to the blockchain. To nominate a block, users must sacrifice computing power and complete the task set by the protocol.

Proof of Work is the most tested scheme for reaching consensus among users, but it is by no means the only one. Alternatives such as Proof of Stake are increasingly being explored, although they have yet to see proper implementation in their true form (although hybrid consensus mechanisms have been around for some time).

See also: What is Blockchain Consensus Algorithm?

How does cryptocurrency mining work?

The aforementioned process is known as mining. If a miner finds a solution, the block they built will expand the chain. As a result, he will receive a reward in the native currency of the blockchain.

The cryptographic puzzle that miners must solve involves hashing data multiple times to produce a number that falls below a certain value. Hashing with a one-way function means that it is almost impossible to guess the input data from the output data. But given the input data, it is easy to check the output data. In this way, any participant can verify that the miner has produced a "correct" block and reject those that are invalid. In this case, the miner receives no reward and wastes resources trying to create an invalid block.

The result is some interesting game theory that makes it quite expensive for a cheater to try to cheat, and therefore profitable for users to act honestly. No attacker has the resources to endlessly attack a strong network. So we expect those with the resources to recoup their investment by participating honestly.

Also see: What is cryptocurrency mining?

Can cryptocurrencies scale?

As you may have noticed, distributed networks are not very efficient. Unfortunately, cryptocurrencies can only be secure and resistant to censorship if all nodes can synchronize a copy of the blockchain. The lower the requirements for success, the easier it is for people to join. 

You can see why a blockchain that only adds a small block every ten minutes is better in this regard than one that adds a huge block every five minutes. The latter will require nodes to run on powerful computers to stay in sync, and push less powerful ones to shut down. This will lead to more centralization as there are fewer temporary nodes in the network.

But with smaller blocks we cannot achieve many transactions per second (TPS). This also means that during busy periods, transactions may take some time to be added to the blockchain. It's inconvenient if you want to make a quick payment, but that's the price to pay for decentralization.

We call this problem the scalability dilemma. A well-scaled system can easily adapt to increased bandwidth with minimal drawbacks. Blockchains don't scale well – as we've explained, simply increasing bandwidth through larger blocks defeats the entire purpose of a distributed network.

To increase TPS in a way that does not harm the decentralization of the network, off-chain scaling seems to be a viable approach. This includes a wide range of solutions - centralized and decentralized - that allow transactions to be carried out without registering them in the blockchain.

Learn more about some examples of off-chain scalability: Blockchain Scalability: Sidechains and Payment Channels.

Who Makes Decisions About Cryptocurrency Software?

Cryptocurrency networks have an opt-in feature. No one is forcing you to run unwanted software. In a good protocol, the code will be completely open so that users can be confident in the fairness and security of the system.

As a rule, cryptocurrencies allow anyone to participate in their development. New features or code changes are reviewed by the development community before being agreed upon and published. Users can view the code themselves and choose to run it or not. 

Some updates will be backwards compatible, which means that the updated nodes will still interact with the old ones. Others will not be backwards compatible - old nodes will be disconnected from the network if they are not updated. Read the article Hard forks and soft forks for an explanation of this phenomenon.

Chapter 3 – How can I invest in cryptocurrency?

Content

• Which cryptocurrency should I buy?

• What should I know before investing in cryptocurrency?

• Where to buy cryptocurrency

  • Centralized Exchanges (CEX)

  • Decentralized exchanges (DEX)

  • P2P exchanges

• How to buy cryptocurrency

  • How to buy cryptocurrency on Binance

  • How to buy cryptocurrency on Binance DEX

  • How to buy cryptocurrency on Binance P2P

Which cryptocurrency should I buy?

This choice should be made only by you. You should do your own research (DYOR) and make a decision based on your own analysis. With that said, there are many tools that can help you make better decisions. For example, Binance Research provides excellent market insights and analytics, as well as comprehensive project-by-project reports.

If you want to be able to evaluate which cryptocurrency to buy, you need to first understand how Bitcoin works. That's why we wrote the guide What is Bitcoin?  

What should I know before investing in cryptocurrency?

Where to even begin? There are many ways to analyze the financial markets, and generally most professional investors use a wide variety of strategies. However, there are two main philosophies for evaluating investments: fundamental analysis (FA) and technical analysis (TA).

Fundamental analysis is a method of assessing the value of an asset based mainly on economic and financial factors. Analysts using this method consider both macroeconomic and microeconomic factors, industry conditions, or the underlying business (if any) of the asset. In the case of cryptocurrencies, they can also view public blockchain data, sometimes called on-chain metrics. 

This can include viewing the number of transactions, addresses, principal holders, network hashrate, and a myriad of other information. The purpose of this analysis is to provide a valuation of the asset and compare it to the current valuation. Ultimately, this approach aims to determine whether an asset is currently undervalued or overvalued.

At the same time, it is important to remember that cryptocurrency is a new and thriving asset class. When it comes to determining their valuation, fundamental analysis has little room to shine. Simply put, there is no standardized framework for determining the value of a cryptocurrency, and most existing models cannot be fully trusted. The success or failure of a cryptocurrency project can depend on many different factors that cannot be accounted for by any current framework.

Technical analysts work with a different approach. Unlike fundamental analysis, 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 various other graphical tools to gauge market strength or weakness. Essentially, technical analysts believe that an asset's past price movements can be useful in trying to predict its future price movements.

Because technical analysis can be applied to almost any market with historical data, it is widely used by cryptocurrency traders.

So, which one should you learn? Why not both? Most market analysis tools work best when combined with other tools. In any case, it is important to fully understand financial risk and risk management and never invest more than you can afford to lose.

Where to buy cryptocurrency

There are different ways to buy cryptocurrency. However, the first thing you need to do is convert your fiat currency to cryptocurrency. Then you can choose to either hold or exchange it for other cryptocurrencies, or borrow 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, as cryptocurrencies are often referred to as decentralized. In short, centralized exchanges are online platforms that facilitate trading by connecting buyers and sellers.

The way it works is that users deposit their fiat money or cryptocurrency into the exchange and trade within its internal systems. If you are familiar with the principles of cryptocurrency wallets, you should know that in this case, your cryptocurrency is in the custody of the exchange. But you can easily withdraw your funds and keep them in your own wallet if you want.

Some users may prefer to keep their funds on the exchange because they trade regularly or for convenience. However, if the exchange is hacked, users' funds may be at risk.

Decentralized exchanges (DEX)

Decentralized exchanges are different. When you use DEX, custodians are not involved. In fact, a more accurate way to refer to this type of exchange is as a non-custodial exchange.

This is what happens when you trade on DEX. Instead of depositing your funds into an exchange wallet, you trade directly from your own wallet. When a deal is executed, the funds are transferred directly to the blockchain using the magic of smart contracts.

Since there is no organization as a custodian, some consider it a safer choice than CEX. Another positive point might be that most DEXs do not require you to provide any personal information other than your blockchain wallet address. At the same time, keeping your own funds requires some technical knowledge and you are fully responsible. 

P2P exchanges

Peer-to-peer (P2P) exchanges are also a place that connects buyers and sellers, but it is different from both CEX and DEX. Buyers and sellers cooperate directly, and conduct transactions in a way that they have agreed on. Thus, sellers and buyers can choose the method of deposit and settlement for each individual transaction. 

How to buy cryptocurrency

How to buy cryptocurrency on Binance

1. Log in to Binance or register if you don't have an account yet.

2. Go to the Buy and Sell Cryptocurrency portal. 

3. Select the cryptocurrency you want to buy and the currency you want to pay with.

4. Choose a payment method.

5. If necessary, enter your card or bank details and confirm your identity.

6. Everything is ready! Your cryptocurrency will be credited to your Binance account.

How to buy cryptocurrency on Binance DEX

Using DEX is a bit more complicated than the other options available.

Here's what you need before you start:

1. A wallet that can connect to Binance DEX (we recommend Trust Wallet). 

2. Some BNB to pay the transaction fee.

Once you have them, follow the instructions in our detailed Binance DEX guides:

• Binance DEX: Interface Guide

• Binance DEX: Creating a wallet

• Binance DEX: Wallet Access

How to buy cryptocurrency on Binance P2P

1. Log in to Binance or register if you don't have an account yet.

2. Go to the Binance P2P portal.

3. Choose whether you want to buy or sell. 

4. Filter by currency, payment method or other trading requirements. 

5. Choose an ad that meets your requirements or post your own ad.

Chapter 4 – Cryptocurrencies FAQ

Content

• Are cryptocurrencies legal?

• Can cryptocurrencies disappear?

• Are cryptocurrencies safe?

• Are cryptocurrencies anonymous?

• Are cryptocurrencies valuable?

• Are all digital currencies cryptocurrencies?

• What is the market capitalization of cryptocurrencies?

• Why do I need to pay transaction fees?

• I lost my key. Can I get my money back?

• What is the future of cryptocurrency?

Are cryptocurrencies legal?

Not all countries impose a direct ban on the purchase, sale and storage of cryptocurrencies. In the vast majority of countries around the world, Bitcoin and other virtual currencies are completely legal. But before you start with them, you should check if your jurisdiction allows it.

It is important to remember that each country has its own approach to regulating cryptocurrency activity. Make sure you don't break any rules related to taxation or regulatory compliance.

Can cryptocurrencies disappear?

The media has said hundreds of times that cryptocurrencies will disappear over the last decade. And yet they continue to work the same as in 2009. It cannot be said that this is not a volatile asset - the price fluctuates a lot. Bear markets can frustrate those looking to profit.

However, it would be a mistake to call cryptocurrency "dead". It continues to attract new users, and the technology and infrastructure are only getting more complicated.

The key innovations of Bitcoin and Ethereum will undoubtedly play an important role in changing our existing monetary systems to be more suitable for the current era. The immutability, resistance to censorship, lack of trust and almost instantaneous transactions using a public money system can completely change the mechanism of economic activity on the Internet.

Are cryptocurrencies safe?

Cryptocurrencies are associated with a certain risk. If you have forgotten your bank account access password, you can simply reset it through support. But if you forget or lose the private keys that give you access to your cryptocurrency, no one can help you. Using a trusted exchange can be an easier option - it requires trust, but you don't risk losing your private keys.

Private key cryptography has not yet been broken. With good security measures in place, your other online accounts are more likely to be hacked than your funds to be stolen. Best practices include being aware of common types of fraud (social engineering, phishing, etc.), and always keeping your private keys offline and backing them up to a safe location.

Are cryptocurrencies anonymous?

Your name is not associated with the addresses of your cryptocurrency - they look like random sequences of numbers and letters in the blockchain. However, be careful assuming this makes you anonymous. With your nickname, you still have a sort of online 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 your activities. On this front, things like Dust attacks and other analysis techniques can be used to de-anonymize you. Remember that blockchains are essentially massive public databases. If you are concerned about your privacy, you should make it as difficult as possible for others to link your transactions to your name. Cryptocurrencies like Bitcoin are not private by default, but techniques like coin mixing and CoinJoins can make heuristics unreliable.

A small number of cryptocurrencies (known as private coins) can hide the source, destination and amount of funds in transactions using methods such as Confidential Transactions. By default, they have a higher level of privacy, but they are not completely resistant to de-anonymization.

Are cryptocurrencies valuable?

In financial systems, value is a shared belief. As with anything of value, the value is not inherent in the cryptocurrency itself – it is assigned by people. In other words, something has value if people believe in it. This is true whether the valuable item is precious metal, a piece of paper, or some bits in a database.

With all of the above in mind, some users believe that cryptocurrency and Bitcoin are something like a scarce digital commodity. Because of its predictable rate of issuance and monetary policy, some argue that Bitcoin could be used as a future savings vehicle, similar to gold. Since 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 state and central banks are working on creating their own versions of digital currencies. However, these are only digital currencies. In fact, they are often referred to collectively as Central Bank Digital Currencies (CBDCs). They are essentially digital versions of fiat money and lack most of the advantages of cryptocurrencies. They are issued and declared legal tender by a central government and typically do not use a distributed ledger, such as a blockchain, to record transactions.

You may also have heard of Facebook's Libra, another type of digital currency. On the plus side, it will be built on an open source blockchain system. However, it will not be permissionless like Bitcoin or Ethereum, which means that participants need more than just an internet connection to use it. Moreover, the project and its activities will be launched and managed by an association consisting of several elected members.

So, despite CBDC and other forms of digital money using blockchain or cryptography, they are very different from cryptocurrencies like Bitcoin.

What is the market capitalization of cryptocurrencies?

When you look at the price of a cryptocurrency, you only see part of the picture. An equally important indicator is the number of existing individual units of this cryptocurrency, that is, the supply. 

In particular, to estimate the value of a cryptocurrency network, you need to know how many individual units exist right now. This is called a circulating supply. Different cryptocurrencies can have different release schedules, so it is important to understand how the release works with each network.

Market capitalization is the price of an individual unit multiplied by the circulating supply.

Market Cap = Circulating Supply * Price

As you can imagine, the market cap of a cryptocurrency network is a more accurate representation of the value in the network than the price of an individual unit. A network with a cheaper coin but a higher circulating supply may have a higher overall valuation (market cap) than a network with a more expensive coin but a lower circulating supply. In some cases, it may be the other way around.

However, it is worth noting that market capitalization does not reflect how much money has flowed into a particular market. For example, a common misconception among beginners is that the market cap of Bitcoin reflects the amount of money invested in Bitcoin. But that doesn't make sense because market capitalization depends on price and supply.

Why do I need to pay transaction fees?

If you send one Bitcoin to another address, you will notice that that address receives slightly 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 encourage users to secure the network. In Proof of Work systems, transaction fees are usually combined with newly minted coins (block subsidy) to form the block reward.

You can adjust the fee depending 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 your own accordingly.

I lost my key. Can I get my money back?

If you're sure you've lost your keys, chances are you'll never get them back. A great advantage of cryptocurrencies is the removal of custodians and intermediaries from the management of financial transactions. However, the flip side of this is that the responsibility is now completely in your hands. Therefore, you need to 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?

The idea of ​​what the future of cryptocurrencies will look like depends entirely on who you ask. Some believe that Bitcoin will replace gold in the digital age and disrupt the existing financial system. Others argue that cryptocurrencies will always be a secondary system that exists as a niche market. There are also those who believe that Ethereum will become a distributed computer and the basis of the new Internet.

Skeptics predict that the industry will eventually disappear, while enthusiasts are content that cryptocurrencies remain niche monetary systems. There are many possible outcomes - it's just too early to say with certainty what will happen in at least a year. But we cannot deny that there is huge potential for growth.