Table of contents
Cryptocurrency 101
How does blockchain work?
How to invest in cryptocurrency?
Frequently asked questions about cryptocurrency
Chapter 1 - Cryptocurrency 101
Content
What is cryptocurrency?
What makes cryptocurrency unique?
Why are this type of assets called cryptocurrencies?
What is public key cryptography?
Who created cryptocurrency?
What is the difference between cryptocurrencies and tokens?
What is a cryptocurrency wallet?
What is cryptocurrency?
Cryptocurrency is a digital form of money that allows people to transfer or exchange value in a digital environment.
You might be wondering how this is different from PayPal or the banking app on your phone. At first glance, they all certainly serve the same purpose: exchange money with friends, make purchases on your favorite website, etc. But under the outer shell of these systems lies a completely different operating principle.
What makes cryptocurrency unique?
Cryptocurrency is unique for many reasons. Its main function is to act as an electronic money system that can operate without the participation of any regulatory authority or central bank.
A good cryptocurrency must be decentralized. In such a system there will be neither a central bank nor a specific group of people influencing decision making. Network participants (nodes) communicate with each other through their software and exchange information with each other.
Centralized and decentralized networks.
The image on the left shows how participants interact in a standard banking system. You may notice that the entire operation of this mechanism is based on the need for contact with the central north. In the decentralized structure shown in the image on the right, there is no such hierarchy, since the functioning of the network is based on the work of interconnected nodes that constantly exchange information with each other.
Decentralization of cryptocurrency networks protects them from being shut down or censored. To disable the centralized network, it is enough to simply disable the main server. For example, if a bank destroys its database and all backups, it will be very difficult to recover data on user balances.
Cryptocurrency nodes store a copy of the database and each operates as a separate server. Some of the nodes may go offline, but other participants will still exchange information through them.
In addition, cryptocurrencies operate 24 hours a day all year round. They allow you to transfer funds anywhere in the world without involving intermediaries. That is why they are often called public: to transfer funds, it is enough to have access to the Internet.
Why are this type of assets called cryptocurrencies?
The term “cryptocurrency” is formed by combining the words cryptography and currency. Cryptographic methods are widely used to protect cryptocurrency transactions. Hence the name.
What is public key cryptography?
Cryptocurrency networks are based on a public key cryptography system. It is this that ensures the safety of users during transactions.
In this system, the user has a public key and a private key. The private key is a huge number that is impossible to guess. It is often difficult to even realize how big it is.
In the case of Bitcoin, guessing the private key is the same as correctly guessing the result of tossing a coin 256 times in a row. The Earth will sooner stop rotating than modern computers will be able to crack such a key.
In any case, as the name suggests, the private key must be kept secret. With its help, you will generate a public key that you can safely provide to anyone, since based on it it is almost impossible to recover information about your private key.
You can also create digital signatures using your private key. This is similar to signing documents in real life. The main difference is that the validity of a signature is easily determined by comparing it with the corresponding public key. This way, the user does not have to reveal his private key, but can prove his ownership of it.
If you want to spend your funds in cryptocurrency, you can only do so if you have the appropriate private key. When you make a transaction, you announce to everyone on the network that you are going to transfer funds. Information about the operation is contained in a message (transaction), which is signed and added to the cryptocurrency database (blockchain). As already mentioned, to create a digital signature you need your private key. And since the database is visible to all users, anyone can verify the validity of your transaction using this signature.
Who created cryptocurrency?
There have been various attempts to create digital currency systems over the years, but the first cryptocurrency appeared only in 2009, and it was Bitcoin. It was developed by a person or group of people under the pseudonym Satoshi Nakamoto, but the real identity of the creator remains unknown to this day.
Bitcoin became the progenitor of a huge number of cryptocurrencies. Some aim to surpass it, others already have their own features and advantages that Bitcoin does not have. Today, many blockchains allow users to not only exchange money, but also run decentralized applications using smart contracts. Ethereum is perhaps the most striking example of such a blockchain.
What is the difference between cryptocurrencies and tokens?
At first glance, it seems that cryptocurrencies and tokens are the same thing. Both types of assets are used for trading on exchanges and can be transferred between blockchain addresses.
Cryptocurrencies are used solely as money, whether as a medium of exchange, a store of value, or both. Each unit is functionally fungible, that is, one coin is equal in value to another.
Bitcoin and other early cryptocurrencies were designed purely as digital money, but later blockchains strive to do more. For example, Ethereum not only functions as a currency, but also allows developers to run code (smart contracts) on a distributed network and create tokens for various decentralized applications.
Tokens, in turn, can be used like cryptocurrencies, but they are much more flexible. You can create millions of identical tokens or several special ones with unique properties. These can be anything from digital receipts representing a stake in the company to loyalty points.
In a smart contract-enabled protocol, the base currency (used to pay for transactions or applications) is separated from the tokens. For example, Ethereum's native currency is Ether (ETH), and it is used to create and transfer tokens within the Ethereum network. They are created in accordance with standards like ERC-20 or ERC-721.
What is a cryptocurrency wallet?
The crypto wallet stores your private keys. It can be a separate device (hardware wallet), an application on your PC/smartphone, or even a piece of paper.
Wallets allow users to interact with the cryptocurrency network and carry out transactions. Different types of wallets have different functionality. A paper wallet, for example, won't give you the ability to sign transactions or display current prices in fiat currency.
Software wallets (for example, Trust Wallet) are considered the most convenient for everyday payments, but from a security point of view, preference is given to hardware wallets. Cryptocurrency holders typically use 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 the decisions on cryptocurrency software?
What is blockchain?
Blockchain is a special type of database into which data can only be added and not deleted or changed. Transactions within so-called blocks (consisting of transaction information and other metadata) are periodically added to the blockchain.
This structure is called a chain because the metadata of each block includes some of the information from the previous one and links the blocks together. In particular, it includes the hash of the previous block, which works as a unique digital fingerprint.
The likelihood of two pieces of data giving you the same hash result is incredibly low. That is, if someone tries to change an old block, its hash will also change, which means the hash of the next block will also be different, and so on. Therefore, it is very easy to understand whether a block has been changed, because all the blocks following it will also be changed.
The hash of each block is used in the next block. This forms what is called a block chain or blockchain.
It is important to note the need to completely download the blockchain to the participant’s storage device. Remember when we said that anyone can validate transactions and signatures using public key cryptography? When a node receives a block, it performs a series of checks; if anything is invalid, the block is rejected.
When a node receives a valid block, it copies it and distributes this block to other nodes. They, in turn, do the same until the block spreads throughout the network. The same process is followed for unconfirmed transactions, that is, those that have been announced but not yet added to the blockchain.
See also: What is blockchain technology? Complete guide.
How are blocks added to the blockchain?
Since the system is based on interconnected blocks, the integrity of the entire blockchain network is undermined if even one false information is recorded. At the same time, in such a distributed system there is no administrator or manager who would maintain the operation of the system register or general ledger of the system. In this regard, the question arises: what acts as a guarantor of the honest work of all network participants?
Satoshi proposed the Proof of Work system, which made it possible for any user to nominate a block to be added to the blockchain. To advance a block, users must provide computing power to solve the problems set by the protocol.
Proof of Work is a proven scheme for achieving consensus among users, but it is far from the only one. Alternatives such as Proof of Stake continue to be tested, but have not yet reached the point of implementation in their true form (even though hybrid consensus mechanisms have been around for quite some time).
Read also: What is the blockchain consensus algorithm?
How does cryptocurrency mining work?
Above is a process called mining. If the miner finds a solution to the problem, the block he builds will expand the chain. As a result, he will receive a reward in the native currency of the blockchain.
The problems miners must solve require constant hashing of data to get the number below a certain value. Hashing with a one-way function means that given the output data, it is almost impossible to guess the input data. And vice versa: if you have input data, it is already very easy to check the output data. This way, any user can verify that the miner created a “valid” block and reject invalid blocks. In the latter case, the miner will not receive a reward and will waste his resources.
The result is a game concept in which cheating is very costly and honesty is rewarded. No attacker has enough resources to attack a strong network indefinitely. In this way, users with resources can earn income by participating honestly in the process.
Read also: What is cryptocurrency mining?
Can cryptocurrencies scale?
You'll probably say that distributed networks aren't very productive. Unfortunately, cryptocurrencies can only be secure and censorship-resistant if all nodes regularly synchronize a copy of the blockchain network. And the lower the requirements for synchronous activity of participants, the easier the process of joining new participants.
Thus, a blockchain that focuses on adding small blocks every ten minutes is preferable to one that adds one huge block every five minutes. The large block option involves nodes with high-performance computers to maintain regular synchronization and push low-power devices to shut down. This approach ultimately leads to greater centralization, as competition on the network becomes less and less.
But with small blocks we cannot achieve a high number of transactions per second (TPS). Additionally, during busy periods, adding blocks to the blockchain will take longer. This is inconvenient if you want to make a quick payment, but for the sake of decentralization, compromises must be made.
We call this problem the scalability dilemma. A well-scalable system can easily adapt to increased load. Blockchains do not scale well. As we've already explained, increasing throughput through larger block sizes defeats the entire purpose of a distributed network.
To increase TPS without sacrificing decentralization, an off-chain scaling approach is used. It includes a wide range of solutions (centralized and decentralized) that allow you to make transactions without registering on the blockchain.
Examples of off-chain scalability: Blockchain scalability: sidechains and payment channels.
Who makes the decisions on cryptocurrency software?
Cryptocurrency networks operate in a voluntary consent format (opt-in). No one will force you to run software against your will. A good protocol is completely open source, which users can verify to ensure the integrity 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 developer community before approval and publication. From there, users can review the code themselves and decide whether to run it or not.
Some updates will be backwards compatible, allowing updated nodes to interact with older ones. In the case of updates without backward compatibility, old nodes will be disconnected from the network if they are not updated. To learn more, read about hard forks and soft forks.
Chapter 3 - How to invest in cryptocurrency?
Content
Which Cryptocurrency Should I Buy?
What do I need to know before investing in cryptocurrencies?
Where to buy cryptocurrency
Centralized Exchanges (CEX)
Decentralized Exchanges (DEX)
P2P exchanges
How to buy cryptocurrency
How to buy cryptocurrencies on Binance
How to Buy Cryptocurrencies on Binance DEX
How to buy cryptocurrencies on Binance P2P
Which Cryptocurrency Should I Buy?
The choice is up to you. Research the issue yourself and make a decision based on your own analysis. There are also many tools that can help you make the right decision. For example, Binance Research provides valuable market intelligence and analysis, as well as comprehensive reports on individual projects.
To better understand which cryptocurrency you need, you need to understand the specifics of how each of them works, and first of all, Bitcoin. This is why we have prepared the article “What is Bitcoin?”
What do I need to know before investing in cryptocurrencies?
Where to start? There are many types of financial market analysis and many strategies that professional investors use. But in general, experts identify two main approaches to evaluating investments: fundamental analysis (FA) and technical analysis (TA).
Fundamental analysis is a method of estimating the value of an asset based on economic and financial factors. Analysts who use this method consider both macro and microeconomic factors, as well as industry conditions or the underlying business of the asset (if any). In the case of cryptocurrency, publicly available blockchain data, sometimes called on-chain metrics, is looked at.
This includes viewing the number of transactions, addresses, main holders, network hashrate and other various information. The purpose of the analysis is to evaluate the asset and compare it with its current valuation. This approach allows you to find out whether an asset is currently undervalued or overvalued.
It is important to understand that cryptocurrencies are a new and still developing asset class. This means that there is not yet enough information for a full-fledged, comprehensive fundamental analysis. In other words, there is currently no standardized mechanism for determining the value of a cryptocurrency, and most existing methods cannot be fully trusted. The success or failure of a cryptocurrency project depends on many different factors that cannot be accurately predicted by any of the available analysis methods.
Technical analysis takes a different approach. Unlike fundamental analysis, technical analysis does not seek to determine the actual value of an asset. Instead, it evaluates trading and investment opportunities based on historical trading data, taking into account price movements, chart patterns, indicators and other tools to provide insight into market strength or weakness. According to technical analysis, previous price movements of an asset can be useful in predicting future price movements.
Since technical analysis can be used in almost any market if there is a history of trading operations, it is actively used by crypto traders.
So, which analysis should you prefer? We recommend both. Most market analysis tools are most effective when combined with other tools. In any case, it is necessary to understand financial risks, be able to manage risks and never invest more than you are willing to lose.
Where to buy cryptocurrency
There are different ways to buy cryptocurrency. The first thing you need to do is convert your fiat currency to cryptocurrency. You can then hold the cryptocurrency (or “HODL”), trade it, exchange it for other cryptocurrencies, or lend with it and earn interest. Let’s take a closer look at the types of cryptocurrency exchanges.
Centralized Exchanges (CEX)
The concept of a centralized exchange may confuse you with its name, since cryptocurrencies are most often described as decentralized. In a nutshell, centralized exchanges are online platforms that facilitate trading by connecting buyers and sellers.
It works as follows. Users deposit their fiat money or cryptocurrency into the exchange and trade using its internal systems. If you are familiar with the principle of operation of cryptocurrency wallets, then it will be clear to you that in this case the cryptocurrency is stored in the custodial wallet of the exchange. But if you wish, you can easily withdraw funds and store them in your own wallet.
Some users choose to store funds on an exchange because they regularly trade cryptocurrencies - or simply for greater convenience. However, if the platform is hacked, users' funds may be at risk.
Decentralized Exchanges (DEX)
Decentralized exchanges (DEX) are designed differently. Working on DEX does not involve any intermediaries. In fact, a more accurate name for this type of exchange is a non-custodial exchange.
Trading on DEX is carried out as follows. Instead of depositing funds into an exchange wallet, you trade directly from your own wallet. When a transaction is completed, funds are transferred directly to the blockchain through smart contracts.
Because there is no intermediary to hold your funds on a DEX, some users consider it a safer option than a CEX. Another benefit of this kind of platform is that most decentralized exchanges do not require you to provide any personal information other than your wallet address. On the other hand, storing funds requires you to have certain knowledge and skills - after all, only you are responsible for your savings.
P2P exchanges
A peer-to-peer (P2P) exchange is quite different from CEX and DEX. In this case, the exchanger itself does not participate in the transaction process, but is only a connecting component between the buyer and seller. They, in turn, can carry out the transaction in any way at their discretion. Thus, the payment method and deposit are determined by buyers and sellers independently for each individual transaction.
How to buy cryptocurrency
How to buy cryptocurrencies on Binance
Login to Binance or register if you don't already have an account.
Go to the section for buying and selling cryptocurrency.
Select the cryptocurrency you want to buy and the currency in which you will make the payment.
Select a Payment Method.
If necessary, enter your card or bank details and confirm your identity.
That's all! Your cryptocurrency will soon be credited to your Binance account.
How to Buy Cryptocurrencies on Binance DEX
Buying cryptocurrency on decentralized exchanges is a little more complicated than on other platforms.
What you will need before this:
wallet connected to Binance DEX (we recommend Trust Wallet);
Binance tokens (BNB) to pay transaction fees.
Next, follow our detailed instructions on how to use Binance DEX:
Binance DEX: Trading Interface
Binance DEX: Wallet Creation
Binance DEX: Access to your wallet
How to buy cryptocurrencies on Binance P2P
Login to Binance or register if you don't already have an account.
Go to Binance P2P section.
Make a choice: buy or sell cryptocurrency.
Fill in the fields in the filter: currency, payment method or other requirements for the transaction.
Choose the option that suits all your requirements or place your own order.
Chapter 4 - Frequently Asked Questions About Cryptocurrency
Content
Is cryptocurrency legit?
Is cryptocurrency dead?
Is cryptocurrency safe?
Is cryptocurrency anonymous?
Is cryptocurrency valuable?
Are all types of digital currencies cryptocurrencies?
What is the market capitalization of a cryptocurrency?
Why should I pay transaction fees?
I lost my key. Can I get my funds back?
What does the future hold for cryptocurrency?
Is cryptocurrency legit?
Only a few countries have introduced an outright ban on the purchase, sale and storage of cryptocurrency. In the vast majority of countries in the world, Bitcoin and other virtual currencies are absolutely legal. Still, before you start working with them, you should check whether the jurisdiction of your state approves it.
It is important to remember that each country has its own approach to regulating cryptocurrency. Make sure you are not breaking any rules regarding taxation, etc.
Is cryptocurrency dead?
Over the past ten years, the media has predicted the death of cryptocurrencies hundreds of times. However, since 2009 they have not disappeared anywhere. We don't want to say that they are not volatile. On the contrary, the prices of cryptocurrencies are subject to serious fluctuations. So for those hoping only to make a profit, bear markets can be a disappointment.
At the same time, it would be wrong to call cryptocurrency “dead.” It continues to attract more and more users, and its technology and infrastructure become more sophisticated.
The innovations that Bitcoin and Ethereum bring will undoubtedly play a major role in changing modern monetary systems to better fit the modern era. The immutability, censorship resistance, reliability, and near-instantaneous transactions of a public money system could completely change the way online economic activity works.
Is cryptocurrency safe?
Cryptocurrency involves some degree of risk. For example, if you forgot the password to access your bank account, then you can simply reset it through the support service, but if you forget or lose the private key that gives access to your assets, no one will be able to help you. Using a reputable exchange may be a more gentle option. Yes, it requires trust, but you don't risk losing your private keys.
No one has ever been able to break a public key cryptographic system. You are more likely to be hacked on any other online resource with the most reliable security methods than to have your cryptocurrency funds stolen. To ensure protection, it is important to be aware of common scams (such as social engineering, phishing, etc.), always store your private keys offline, and keep backup copies of them in a safe place.
Is cryptocurrency anonymous?
Your name is not tied to cryptocurrency addresses - they always look like random sequences of numbers and letters on the blockchain. However, you should not think that this achieves complete anonymity. Your nickname is used to identify you online. It's the same name, just not the same as in real life.
There are certain methods you can use to associate IP addresses with your activities. For example, dust attacks and other analysis methods can be used to identify you. Remember: blockchains are, at their core, huge public databases. If you are concerned about your privacy, try to make it difficult for others to associate your transactions with your name. Cryptocurrencies like Bitcoin are not private by default, but methods such as coin mixing or CoinJoins can make heuristic analysis unreliable.
A small subset of cryptocurrencies (known as privacy coins) can hide the source, destination, and amount of funds in transactions using confidential transactions. Such cryptocurrencies are more private by default, but they do not guarantee complete protection from de-anonymization.
Is cryptocurrency valuable?
In traditional financial systems, the value of a currency is a generally accepted concept. In the case of cryptocurrency, its value is determined by the community, similar to valuable things. In other words, an item has value if people believe it. This statement is true whether the object of value is a precious metal, a piece of paper, or a file in a database.
Some also view cryptocurrencies and Bitcoin as a kind of scarce digital commodity. Due to the predictability of its issuance and monetary policy, it is believed that Bitcoin could be used as a store of value, similar to gold, in the future. But since Bitcoin has only been around for a little over a decade, we have yet to see whether it will stand the test of time.
Are all types of digital currencies cryptocurrencies?
Not at all. You probably already know that many state-owned banks are working on creating their own digital currencies. But this is nothing more than a digital version of regular money. They are also often referred to as central bank digital currencies (CBDCs). They are essentially digital versions of fiat money without most of the benefits of cryptocurrencies. They are issued and declared legal tender by the central government, and typically do not use a distributed ledger such as a blockchain to record transactions.
You may also have heard of Facebook Libra, another type of digital currency. Its advantage is that it will be built on an open source blockchain system. However, it will not be publicly available (like Bitcoin or Ethereum), which means that users will not only need an Internet connection to use it. Moreover, the activities of the project will be regulated by an association consisting of several selected participants.
Thus, while CBDCs and other digital currencies that use blockchain or cryptography exist, they are significantly different from Bitcoin and other cryptocurrencies.
What is the market capitalization of a cryptocurrency?
The current price of a cryptocurrency is only part of the overall picture. An equally important indicator is the number of existing units of this cryptocurrency, that is, the total volume of coins.
Specifically, to estimate the value of a cryptocurrency network, you need to know how many individual units currently exist. This is called the quantity in circulation, or circulating supply. Different cryptocurrencies may have different coin release schedules, so it is important to consider how issuance works with each network.
Market capitalization (from the English market capitalization, market cap) is the price of an individual unit multiplied by the circulating supply.
market capitalization = circulating supply * asset priceThus, the market capitalization of a cryptocurrency network is a more accurate representation of its value than the price of an individual crypto unit. A network with a cheap coin but a high circulating supply may have a higher total value (market capitalization) than a network with an expensive coin but a lower circulating supply. In some cases, the completely opposite situation is possible.
However, it is worth considering that market capitalization does not reflect the total amount of money flowing into a particular market. For example, a common misconception among newcomers is that Bitcoin's market capitalization represents the total amount of money invested in the first cryptocurrency, but this statement does not make sense because market capitalization depends on price and supply.
Why should I pay transaction fees?
If you send bitcoins to another address, the recipient will receive slightly less funds than you sent. A small fee is charged upon transfer as a reward for miners for adding your transaction to the blockchain.
Many cryptocurrencies use a similar mechanism to incentivize users to protect the network. In Proof of Work systems, transaction fees are typically combined with newly minted coins (block rewards) that form the reward.
You can adjust the fee amount depending on the urgency of your transaction. But keep in mind that rational people always strive to get the highest possible profit, so they give preference to transactions with a higher commission. You should study current standby transactions to get a general idea of the average fees and adjust your own accordingly.
I lost my key. Can I get my funds back?
If you are absolutely sure that you have lost your keys, then most likely you will never get them back. The big advantage of cryptocurrency is the elimination of intermediaries from the process of managing financial transactions. However, one of the disadvantages of this system is that all responsibility for managing funds lies with the user himself. So you must be extremely careful not to lose your private keys, since they are what give you ownership of your funds.
What does the future hold for cryptocurrency?
Everyone will answer the question about the future of cryptocurrencies differently. Some believe that Bitcoin will replace gold in the digital age, displacing the existing financial system. Some argue that cryptocurrencies will always be a secondary system, existing as a niche market. There are also those who believe that Ethereum will become a distributed computer - the future basis of the new Internet.
Skeptics argue that the industry will eventually collapse. Enthusiasts would be happy to keep cryptocurrency at the level of a niche monetary system. There are so many discussions about the future today that it is not yet possible to give accurate forecasts for at least a year. But we certainly cannot deny the exceptional potential of the crypto industry and the prospects for its further growth.
