What is market psychology?

Market psychology is the idea that the movements of a market reflect (or are influenced by) the emotional state of its participants. It is one of the main topics of behavioral economics - an interdisciplinary field that investigates the various factors that precede economic decisions.

Many believe that emotions are the main driving force behind the shifts of financial markets. And that the overall fluctuating investor sentiment is what creates the so-called psychological market cycles.

In short, market sentiment is the overall feeling that investors and traders have regarding the price action of an asset. When the market's sentiment is positive, and prices are rising continuously, there is said to be a bullish trend (often referred to as a bull market). The opposite is called a bear market, when there is an ongoing decline in prices.

So, the sentiment is made up of the individual views and feelings of all traders and investors within a financial market. Another way to look at it is as an average of the overall feeling of the market participants. 

But, just as with any group, no single opinion is completely dominant. Based on market psychology theories, an asset's price tends to change constantly in response to the overall market sentiment - which is also dynamic. Otherwise, it would be much harder to make a successful trade. 

In practice, when the market goes up, it is likely due to an improving attitude and confidence among the traders. A positive market sentiment causes demand to increase and supply to decrease. In turn, the increased demand may cause an even stronger attitude. Similarly, a strong downtrend tends to create a negative sentiment that reduces demand and increases the available supply.

 

How do emotions change during market cycles?

Uptrend

All markets go through cycles of expansion and contraction. When a market is in an expansion phase (a bull market), there is a climate of optimism, belief, and greed. Typically, these are the main emotions that lead to a strong buying activity.

It's quite common to see a sort of cyclical or retroactive effect during market cycles. For example, the sentiment gets more positive as the prices go up, which then causes the sentiment to get even more positive, driving the market even higher.

Sometimes, a strong sense of greed and belief overtakes the market in such a way that a financial bubble can form. In such a scenario, many investors become irrational, losing sight of the actual value and buying an asset only because they believe the market will continue to rise. 

They get greedy and overhyped by the market momentum, hoping to make profits. As the price gets overextended to the upside, the local top is created. In general, this is deemed as the point of maximum financial risk.

In some cases, the market will experience a sideways movement for a while as the assets are gradually sold. This is also known as the distribution stage. However, some cycles don't present a clear distribution stage, and the downtrend starts soon after the top is reached.

Downtrend

When the market starts to turn the other way, the euphoric mood can quickly turn into complacency, as many traders refuse to believe that the uptrend is over. As prices continue to decline, the market sentiment quickly moves to the negative side. It often includes feelings of anxiety, denial, and panic.

In this context, we may describe anxiety as the moment when investors start to question why the price is dropping, which soon leads to the denial stage. The denial period is marked by a sense of unacceptance. Many investors insist on holding their losing positions, either because "it's too late to sell" or because they want to believe "the market will come back soon."

But as the prices drop even further, the wave of selling gets stronger. At this point, fear and panic often lead to what is called a market capitulation (when holders give up and sell their assets close to the local bottom).

Eventually, the downtrend stops as the volatility decreases and the market stabilizes. Typically, the market experiences sideways movements before feelings of hope and optimism start arising once again. Such sideways period is also known as the accumulation stage.

 

How do investors use market psychology?

Assuming that the theory of market psychology is valid, understanding it may help a trader to enter and exit positions at more favorable times. The general attitude of the market is counterproductive: the moment of highest financial opportunity (for a buyer) usually comes when most people are hopeless, and the market is very low. In contrast, the moment of highest financial risk often arises when the majority of the market participants are euphoric and overconfident.

Thus, some traders and investors try to read the sentiment of a market to spot the different stages of its psychological cycles. Ideally, they would use this information to buy when there is panic (lower prices) and sell when there is greed (higher prices). In practice, though, recognizing these optimal points is rarely an easy task. What might seem like the local bottom (support) may fail to hold, leading to even lower lows.

 

Technical analysis and market psychology

It is easy to look back at market cycles and recognize how the overall psychology changed. Analyzing previous data makes it obvious what actions and decisions would have been the most profitable.

However, it is much harder to understand how the market is changing as it goes - and even harder to predict what comes next. Many investors use technical analysis (TA) to attempt to anticipate where the market is likely to go.

In a sense, we may say that TA indicators are tools that may be used when trying to measure the psychological state of the market. For instance, the Relative Strength Index (RSI) indicator may suggest when an asset is overbought due to a strong positive market sentiment (e.g., excessive greed).

The MACD is another example of an indicator that may be used to spot the different psychological stages of a market cycle. In short, the relation between its lines may indicate when market momentum is changing (e.g., buying force is getting weaker).

 

Bitcoin and market psychology

The Bitcoin bull market of 2017 is a clear example of how market psychology affects prices and vice-versa. From January to December, Bitcoin rose from roughly $900 to its all-time high of $20,000. During the rise, market sentiment became more and more positive. Thousands of new investors came on board, caught up in the excitement of the bull market. FOMO, excessive optimism, and greed quickly pushed prices up – until it didn't.

The trend reversal started taking place in late 2017 and early 2018. The following correction left many of the late joiners with significant losses. Even when the downtrend was already established, false confidence and complacency caused many people to insist on HODLing. 

A few months later, the market sentiment became very negative as investors' confidence reached an all-time low. FUD and panic caused many of those who bought close to the top to sell near the bottom, incurring in big losses. Some people became disillusioned with Bitcoin, although the technology was essentially the same. In fact, it is being improved continuously.

 

Cognitive biases

Cognitive biases are common thinking patterns that often cause humans to make irrational decisions. These patterns can affect both individual traders and the market as a whole. A few common examples are:

Confirmation bias: the tendency to overvalue information that confirms our own beliefs, while ignoring or dismissing information that runs contrary to them. For example, investors in a bull market may put a stronger focus on positive news, while ignoring bad news or signs that the market trend is about to reverse.

Loss aversion: the common tendency of humans to fear losses more than they enjoy gains, even if the gain is similar or greater. In other words, the pain of a loss is usually more painful than the joy of a gain. This may cause traders to miss good opportunities or to panic sell during periods of market capitulation.

Endowment effect: This is the tendency for people to overvalue things that they own, simply because they own it. For example, an investor that owns a bag of cryptocurrency is more likely to believe it has value than a no-coiner.

 

Closing thoughts

Most traders and investors agree that psychology has an impact on market prices and cycles. Although the psychological market cycles are well known, they are not always easy to deal with. From the Dutch Tulip Mania in the 1600s to the dotcom bubble in the 90s, even skilled traders have struggled to separate their own attitude from the overall market sentiment. Investors face the difficult task of understanding not only the market's psychology but also their own psychology and how that is affecting their decision-making process.

TL;DR

Decentralized applications (DApps) are applications that run on top of blockchain networks. There is a great variety of DApps with different use cases, such as gaming, finance, social media, and more. 

Although DApps can look similar to regular mobile apps on your phone, their backend system is different. DApps rely on smart contracts on a distributed network instead of a centralized system to function. It makes them more transparent, decentralized, and resistant to attacks, but also introduces some new challenges.


Introduction

Since the birth of Bitcoin (BTC) more than a decade ago, blockchains have evolved to unlock a host of new functionalities and use cases beyond currency. One of these new avenues is building decentralized applications (DApps) to use blockchain technology to enhance many traditional sectors and services. 


What are decentralized applications (DApps)?

Decentralized applications (DApps) are smart contract-powered digital applications or programs that run on blockchains rather than centralized servers. They look and feel similar to regular mobile apps on your smartphone and offer a wide variety of services and functions from gaming to finance, social media, and much more. 

As the name suggests, DApps run on decentralized peer-to-peer networks. One early report suggested that DApps have the following features:

Open-source: The source code of DApps is available to the public, meaning that anyone can verify, use, copy, and modify them. There is no single entity controlling the majority of its coins or tokens. Users can propose and vote on changes to the DApp too. 

Decentralized and cryptographically secure: To ensure data safety, all information of the DApp is cryptographically secured and stored on a public, decentralized blockchain, maintained by multiple users (or nodes).

A tokenized system: DApps can be accessed with a cryptographic token. They can adopt cryptocurrencies like ETH, or generate a native token using a consensus algorithm, such as Proof of Work (PoW) or Proof of Stake (PoS). The token can also be used to reward contributors like miners and stakers.

Under this broad definition, the Bitcoin blockchain can be defined as a DApp — and arguably the first DApp ever. It’s open-source, with all data live on its decentralized blockchain, relies on a crypto token, and uses the PoW consensus algorithm. The same applies to other blockchains that have the above features. 

However, today the term “DApps” generally refers to all applications that have smart contract functionalities and run on blockchain networks. The Bitcoin blockchain does not support smart contracts, so most people wouldn’t consider it a DApp. 

As of June 2022, most DApps exist on the Ethereum network. It offers a robust infrastructure for DApp developers to expand the existing use cases. But as DApps mature, developers have started building them on other blockchains, including BNB Smart Chain (BSC), Solana (SOL), Polygon (MATIC), Avalanche (AVAX), EOS, etc.


How do DApps work?

DApps are applications powered by smart contracts. Their backend code runs on distributed peer-to-peer networks. A smart contract works as a set of predefined rules enforced by computer code. When and if certain conditions are met, all network nodes will execute the tasks that the contract specifies.

Once a smart contract is deployed on the blockchain, it is hard to change the code or destroy it. Therefore, even if the team behind the DApp has disbanded, users can still access the DApp. 


Benefits of DApps

While the interfaces of DApps and traditional applications can look similar, DApps offer multiple benefits compared to their centralized counterparts. Web apps store data on centralized servers. A single compromised server may take down the entire network of the app, making it temporarily or permanently unusable. Centralized systems may also suffer from data leakages or theft, putting the companies and individual users at risk.

DApps, in contrast, are built on distributed networks with no central authority. With no single point of failure, DApps are less vulnerable to attacks, making it very difficult for malicious actors to hijack the network. The P2P network can also ensure the DApp continues to work with minimal downtime, even if individual computers or parts of the network malfunction. 

The decentralized nature of DApps also means that users can have more control over the information they share. With no companies controlling users’ personal data, they don’t need to provide real-world identity to interact with a DApp. Instead, they can use a crypto wallet to connect to DApps and fully control what information they share.  

Another benefit of DApps is that developers can easily integrate cryptocurrencies into their basic functionalities by leveraging smart contracts. For example, DApps on Ethereum can adopt ETH as payment without integrating third-party payment providers.  


Limitations of DApps

DApps hold the potential to become an important part of a censorship-free future, but every coin has two sides. Decentralized applications are still in the early stages of development, and the industry is yet to resolve limitations such as scalability, code modifications, and a low user base. 

DApps require significant computing power to operate, which could overload the networks they run on. For example, to achieve the security, integrity, transparency, and reliability that Ethereum aspires to, it requires every validator to run and store every transaction executed on the network. This could hurt the system’s transaction per second (TPS) rate and lead to network congestion and inflated gas fees. 

Making modifications to a DApp is also challenging. To enhance user experience and security, a DApp will likely need ongoing changes to fix bugs, update the user interface, and add new functionalities. However, once a DApp is deployed on the blockchain, it is hard to modify its backend code. It would require a majority consensus from the network’s nodes to approve any changes or improvements, which could take a long time to implement.

The abundance of DApps on the market makes it difficult for one to stand out and attract many users. For a DApp to operate effectively, it needs to achieve a network effect — the more users a DApp has, the more effective it is at providing services. A larger number of users can also make the DApp more secure and protect it from hackers meddling with the open-source code.


Popular DApp use cases

DApps offer a fresh approach for businesses across many industries to reach more users. Some popular DApp use cases include GameFi, decentralized finance (DeFi), entertainment, and governance.


GameFi

GameFi DApps have been growing in popularity, which is exemplified by the rise of Axie Infinity, a play-to-earn game on the Ethereum blockchain. According to DappRadar, blockchain gaming activity in 2022 Q1 saw a 2,000% increase from 2021. It also attracted 1.22 million unique active wallets (UAW) in March 2022, with over 50% of the activity coming from gaming DApps. 

Unlike traditional video games, most gaming DApps give players full control over their in-game assets. They also offer players opportunities to monetize these items outside of the game. Axie Infinity, for example, features game characters, virtual land, and gaming items in the form of NFTs. Players can store them in crypto wallets, transfer them to other Ethereum addresses, or trade with other players on NFT marketplaces. Within the ecosystem, players can compete with each other to collect ERC-20 tokens that can be traded on exchanges. Typically, the longer they play, the more in-game rewards they can earn. 


DeFi and DEXs

Traditional finance relies on financial institutions to act as middlemen. Through DApps, everyone can use financial services without any central authority and maintain full control of their assets. DeFi can also benefit low-income individuals, offering them access to a broad range of financial services at significantly lower costs. 

Borrowing and lending are the most popular types of financial services that decentralized applications provide. DeFi DApps offer instant transaction settlement, minimal-to-none credit checks, and the ability to use digital assets as collateral. Users can have more flexibility on DApp lending marketplaces. For example, lenders have more control over their loans by choosing which token to lend and on what platform. Users can also potentially earn 100% of the interest generated from the loan since they don’t have to pay any intermediary fees. 

Decentralized exchanges (DEXs) are another crucial example of financial DApps. Such platforms facilitate peer-to-peer trading by eliminating intermediaries such as centralized crypto exchanges. Users do not need to give up custody of their funds. Instead of transferring their assets into an exchange, they trade with another user directly with the help of smart contracts. Orders are executed on-chain and directly between the users’ wallets. Since DEXs require less maintenance, they typically have lower trading fees compared to centralized exchanges. Some popular DEXs include Uniswap, SushiSwap, and PancakeSwap. 


Entertainment

Entertainment is an integral part of our lives. With DApps, daily activities that people enjoy are being transformed into digital experiences that can also generate economic incentives. For example, Audius, a blockchain-based decentralized music streaming platform, removes the intermediaries that exist in the traditional music industry to connect artists and fans directly. It allows music curators to better monetize their content and produce immutable records of their work on the blockchain.

DApps are also tackling issues that social media platform users face. Centralized social media giants like Twitter and Facebook are often criticized for censoring posts and mishandling user data. With decentralized social DApps like Steemit, the community can interact freely and express their opinions with fewer restrictions and censorship while enjoying greater control of their personal information. 


Governance

DApps can empower users to play a greater role in the governance of online organizations by introducing a more community-centric decision-making mechanism. With the help of smart contracts, users that hold governance tokens of a particular blockchain project can create proposals for the community to vote on and cast their votes on others’ proposals anonymously. 

One of the decentralized governance models is Decentralized Autonomous Organizations (DAOs). DAOs can be considered fully autonomous DApps that use smart contracts to make decisions without a central authority. They have no hierarchy. Instead, it is economic mechanisms that align the interests of the organization with those of individual DAO members.


How to connect to DApps?

To interact with a DApp, you’ll first need a compatible browser extension wallet like MetaMask, Trust Wallet, or Binance Chain Wallet. They only take a few minutes to set up. Some even offer mobile versions for easy access.

Let’s use Trust Wallet as an example to see how to connect it to PancakeSwap on BNB Smart Chain (BSC). If you don’t have a Trust Wallet yet, check out this Academy article on how to install it on your smartphone. 


Depositing BNB to Trust Wallet

To use DApps on BSC, you’ll need some BNB to pay transaction fees. For example, you can withdraw BNB from your Binance Spot Wallet. 

Go to your Trust Wallet and tap [BNB Smart Chain]. Do not click [BNB Beacon Chain]. This option is for BEP-2 BNB on the BNB Beacon Chain and cannot be used to pay transaction fees on BSC.


Tap [Receive] to view your BNB deposit address. You can then copy and paste this address into your withdrawing wallet or scan the QR code to make the transfer.


After the transaction is confirmed on the blockchain, you will see the BNB amount on your Trust Wallet homepage. 


Adding CAKE to your Trust Wallet list

Trust Wallet's default list of tokens does not include DApp tokens like PancakeSwap (CAKE). To make CAKE visible in your wallet, you need to add it to the list first.

Tap [Add Tokens] and search “PancakeSwap”. You will see CAKE on different blockchains. As we’re using BSC, tap to toggle on the button next to [BEP-20 CAKE].


You should now see CAKE on your Trust Wallet token list. 


The next step is connecting your Trust Wallet to PancakeSwap. You can connect through the built-in mobile browser on Trust Wallet or a desktop. 


Connecting to PancakeSwap via the Trust Wallet browser

1. Tap [Browser] from the Trust Wallet homepage and go to the PancakeSwap website. 


2. You’ll be prompted to connect your Trust Wallet. Tap [Connect].


Connecting to PancakeSwap via a desktop browser

1. Go to the PancakeSwap website and click [Connect Wallet]. 


2. Click on the [Trust Wallet] icon and you’ll see a QR code on the screen. 


3. Open your Trust Wallet app and go to [Settings] - [WalletConnect]. 


4. Tap [New Connection] and scan the QR code. 


5. You’ll be prompted on the app to allow the connection. Tap [Connect].



Closing thoughts

DApps are expanding the functionality of the Web by enhancing conventional applications with blockchain technology. Decentralized applications could bring even more innovative use cases to the market in the future. As DappRadar reported, DApps recorded almost 2.4 million daily active users by Q1 2022, and user interest is expected to grow continuously. However, DApp developers and the blockchain networks they build on are yet to address the current limitations before reaching mass adoption. 

Key takeaways

You have likely seen these two similar-sounding terms, APY and APR, when looking into decentralized finance (DeFi) products. 

APY, or annual percentage yield, incorporates interest compounded quarterly, monthly, weekly, or daily, while APR, or annual percentage rate, doesn’t. This simple distinction can make a significant difference to the calculations for returns over a period of time. It is therefore important to understand how these two metrics are calculated and what it means for the returns that you can earn on your digital funds.

APR vs. APY  

APR and APY are both fundamental for the purposes of personal finance. Let’s start with the simpler term, annual percentage rate (APR). It is the interest rate a lender earns on their money — and that a borrower pays for using it — over one year’s time.

For example, if you put $10,000 into a bank savings account with a 20% APR, you will get $2,000 in interest after one year. Your interest is calculated by multiplying the principal amount ($10,000) and the APR (20%). So, after one year, you will have a total of $12,000. After two years, your capital will amount to $14,000. After three years, you will have $16,000, and so on.

Before getting into annual percentage yield (APY), let’s first understand what compound interest is. Put simply, it means earning interest on the previous interest. In the example above, if the financial institution pays interest to your account monthly, your balance will look different during each of the twelve months of the year. 

Instead of getting $12,000 at the end of the 12th month, you will receive some interest each month. That interest is added to the principal sum of your deposit, and the sum on which you earn interest goes up as the months go by. Each month, you will have more money earning interest. This effect is called compounding. 

Let’s say that you put $10,000 into a bank account with a 20% APR, with the interest compounding monthly. Without getting into the complicated math, you will get $12,194 at the end of one year. That is $194 more in interest earned simply by adding the effect of compound interest. How much interest you’d earn with the exact 20% APR but with interest compounded daily? That would give you $12,213. 

The power of compounding is more impressive over more extended periods. After three years, you would end up with $19,309 with the same 20% APR product with daily compounding. That’s $3,309 more interest earned than that same 20% APR product without compounding. 

By simply incorporating compound interest, you’d earn a lot more on your money. Notice also that the interest differs according to the compounding frequency. You earn more when the compounding is more frequent. Daily compounding will give you more interest than monthly compounding. 

How do you calculate how much you can earn when a financial product offers compound interest? That’s where annual percentage yield (APY) comes in. You can use a formula to convert an APR to APY depending on the frequency of compounding. A 20% APR with monthly compounding equals 21.94% in APY. With daily compounding, it would equal 22.13% APY. These APY numbers represent the annualized interest returns you earn after incorporating compound interest. 

In sum, APR (annual percentage rate) is a simpler and more static metric: It’s always quoted as a fixed yearly rate. But APY (annual percentage yield) incorporates interest earned on interest, or compound interest. It changes according to the compounding frequency. One way to memorize the difference is to remember that “yield” has five letters (one more letter than “rate”) and also represents the more complex concept (and greater earnings).

How to compare different interest rates?  

From the example above, you can see that more interest can be earned when interest is compounded. Different products may present their rates as either APR or APY. Because of this disparity, it’s essential to use the same term for comparison. Be mindful when you compare products,  as you may be comparing apples to oranges. 

Products with a higher APY will not necessarily yield more interest than those with a lower APR. You can easily convert APR and APY using online tools if you know the frequency of compounding. 

The same goes for DeFi and other kinds of crypto products. When looking at products that may advertise using crypto APY and APR, such as crypto savings and staking, make sure to convert them so that you can compare apples to apples. 

Further, when comparing two DeFi products with APY, make sure that they have the same compounding periods. If they have the same APR, but one compounds monthly and the other daily, then the one that compounds daily may earn you more crypto interest.

Another important point to note is what APY means in relation to the specific crypto product you are reviewing. Some product collaterals use the term “APY” to refer to the rewards that one can earn in cryptocurrency over the selected timeframe, and not the actual or predicted returns/yield in any fiat currency. This is an important distinction to appreciate because crypto asset prices can be volatile, and the value of your investment (in fiat terms) may go down or up. If the crypto asset prices fall drastically, the value of your investment (in fiat terms) may still be lower than the original fiat amount you had invested, even if you continue to earn an APY in crypto assets. It is therefore important that you review the relevant product terms and conditions carefully, and do your own research, to fully understand the investment risks involved and what APY means in that specific context.

Closing thoughts

APR and APY may seem confusing initially, but it’s easy to tell one from another by remembering that annual percentage yield (APY) is the more complex metric incorporating compound interest. Because of the effect of earning interest on interest, APY is always a higher number when interest is compounded more frequently than once a year. The bottom line is always to check which rate you are looking at when calculating the interest you’d earn.    

Disclaimer: This content is presented to you for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Not financial advice. For more information, see our Terms of Use and Risk Warning.

Key Takeaways

The Binance Wallet is an innovative wallet for digital assets that combines convenience, security, and utility.

The wallet offers enhanced security through Multi-Party Computation (MPC) technology and a seamless user experience with access to Binance Bridge and other service providers, facilitating token swaps across different blockchain networks.

Users can explore the world of decentralized finance (DeFi) and decentralized applications (DApps) while also counting on dedicated 24/7 customer support.

What Is the Binance Wallet?

The Binance Wallet, an integral part of the Binance app, is a user-focused cryptocurrency wallet that empowers users in the realm of decentralized finance (DeFi). 

With the Binance Wallet, users can easily access the world of blockchain and decentralized applications (DApps). The wallet provides a safe and efficient way for users to manage their digital assets, perform token swaps across different blockchain networks, earn yields, and much more.

How Does It Work?

Binance Wallet uses Multi-Party Computation (MPC) technology, which is an enhanced cryptographic security system that eliminates the need to store your private keys in a single location. The wallet uses MPC to create three “key-shares”, which are stored separately in your Wallet, cloud storage, and your device. The key-shares are also protected by your recovery password, which is solely known to you.

Key Features of the Binance Wallet

Easy to use

You can create a Binance Wallet in just a few seconds through the Binance app. Unlike other crypto wallets, with the Binance Wallet setup you don’t have to worry about seed phrases or private keys, making it much easier to use.

Convenience

Seamlessly connected to Binance Bridge and other service providers, the Binance Wallet facilitates easy token swaps across different blockchain networks while also ensuring the best rates and prices. Users can also explore DApps and generate yield with just a few clicks.

Security

The Binance Wallet offers important security features, including wrong address protection, and identification of potentially malicious smart contracts. When making transactions, the wallet will notify users when a token or blockchain carries a potential security risk. In addition, every transaction is controlled by Multi-Party Computation (MPC) technology, reducing the risk of single points of failure and ensuring the safety of your assets.

Self-custody

Encrypted by three “key-shares” and a recovery password exclusively known to the user, the Wallet allows complete autonomy over your assets.

Customer Support

Users can count on a 24/7 customer support service to ensure a safe and smooth experience.

How to Use the Binance Wallet

1. Log in to your Binance account in the Binance app and go to [Wallets].

2. Next, tap [Web3] and choose [Create Wallet] or [Import Wallet] to get started.

3. Note that before you can start using the Binance Wallet, you will have to back it up and set a recovery password.

How to Backup Your Binance Wallet

1. On the Homepage, tap [Back Up Now].

2. Choose the backup method and start backing up your Binance Wallet.

3. Set a backup password and keep it safe. Binance cannot access or reset this password, so make sure you don’t lose it. 

4. Back up your key on your cloud storage.

5. Done. Your wallet is ready to use.

Further Reading

How to Set Up a Crypto Wallet

What Are Web3 Wallets?

How to Send and Receive Tokens on the Binance Wallet

Disclaimer: The Binance Wallet is an optional product. It is your responsibility to determine if this product is suitable for you. Binance is not responsible for your access or use of third-party applications (including functionality embedded within the Binance Wallet) and shall have no liability whatsoever in connection with your use of such third-party applications, including, without limitation, any transactions you dispute. Please carefully review the Binance Wallet Terms of Use and always do your own research.

Key Takeaways

Bitcoin is the first cryptocurrency to be ever created. It was created in 2008 and launched in 2009 by pseudonymous Satoshi Nakamoto.

Bitcoin runs on blockchain technology, which works like a public ledger. All Bitcoin transactions are verified by a network of nodes spread around the world.

Bitcoin is decentralized, transparent, and open source, making it a popular alternative to traditional financial systems.

What Is Bitcoin?

Bitcoin is essentially digital money. It is the first cryptocurrency ever created, announced in 2008 (and launched in 2009). Bitcoin allows users to send and receive digital money called bitcoins (with a lowercase b, or BTC for short).

Unlike traditional fiat currencies issued by governments (like dollars or euros), Bitcoin is decentralized, meaning no single institution, government, or entity controls it. Transactions are conducted peer-to-peer, removing the need for banks or financial institutions to act as intermediaries.

What makes Bitcoin highly appealing is its inherent resistance to censorship, the impossibility of double-spending funds, and the ability to conduct transactions anytime and anywhere.

How Does Bitcoin Work?

Bitcoin operates on blockchain technology, a public ledger that records all transactions. This means every Bitcoin transaction is transparent, verifiable, and secure.

Imagine blockchain as a chain of blocks, where each block holds information about transactions. Every time someone uses Bitcoin, their transaction is added to the blockchain, and this record is stored across a global network of computers (called nodes).

This distributed network ensures that no single party can manipulate the data. Anyone can participate in the ecosystem by downloading Bitcoin's open-source software.

Decentralization: Bitcoin's blockchain is maintained by a distributed network of computers, ensuring no central authority controls the ledger.

Immutability: Once a transaction is added to the blockchain, it cannot be altered or deleted.

Security: Transactions are encrypted using cryptography, and verifying each block requires solving complex mathematical puzzles, a process known as mining.

BTC transaction example

When Alice sends a BTC transaction to Bob, the blockchain database updates their balances (e.g., removing 1 BTC from Alice and adding 1 BTC to Bob’s balance). It's like Alice is writing on a piece of paper (that everyone can see) that she's giving Bob 1 BTC.

When Bob goes to send the same funds to Carol, the network can easily check if he has enough BTC balance. The blockchain acts like a digital ledger that tracks all Bitcoin transactions and keeps the users’ balances up-to-date.

Since the network is decentralized, all participants (nodes) have an identical copy of the database (blockchain ledger) stored on their devices. So, they have to communicate constantly to synchronize new information.

Bitcoin mining

Bitcoin mining is the process that secures the Bitcoin network and confirms transactions. When a user makes a BTC transaction, they broadcast it to the network, where it is verified by other nodes known as "miners".

In other words, mining refers to the process of verifying transactions and recording them into the blockchain database (ledger). To do so, miners compete to solve a complex math problem, which requires a lot of computing power.

The first miner to solve the puzzle gets to add a new block of transactions to the blockchain. In return, they are rewarded with new bitcoins. The high cost of mining is one of the things that keep the network secure, and the block rewards given to miners are the only source of “fresh” bitcoins. Each block mined adds a certain amount of coins to the total supply.

Proof of Work (PoW)

To maintain the security and integrity of the blockchain, Bitcoin uses a consensus mechanism known as Proof of Work (PoW). It’s an essential part of the mining process described above.

PoW is a mechanism created along with Bitcoin to prevent double-spending in digital payment systems. Besides Bitcoin, many cryptocurrencies use PoW as a method for securing their blockchain network.

When we talk about a “complex math problem” that miners have to solve, we are basically talking about PoW. It was designed to make it expensive to create a block, but cheap to verify that it's valid. Suppose someone tries to cheat with an invalid block. In that case, the network immediately rejects it and the miner is unable to recoup the cost of mining.

What Is Bitcoin Used For?

Bitcoin is primarily used as a digital currency and store of value. It can be used to make purchases online or in person, similar to traditional currencies. More and more businesses are accepting Bitcoin as a payment method. From online retailers to brick-and-mortar stores. 

You can also use Bitcoin to send money to anyone across the globe quickly and with relatively low transaction fees compared to traditional banks and remittance services.

As an investment, many people buy Bitcoin, hoping its value will continue to rise. While the price of BTC can be volatile, some investors see it as a way to diversify their portfolios and hedge against inflation in the long term.

Who Created Bitcoin?

Bitcoin was first introduced in 2008 when Satoshi Nakamoto published a whitepaper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System". This paper introduced a new digital currency that would operate on a decentralized system without relying on governments or the banking system.

In January 2009, the Bitcoin protocol was released, and the first bitcoin transaction took place between Satoshi Nakamoto and a programmer named Hal Finney. The transaction involved sending ten bitcoins from Nakamoto to Finney.

After the first transaction, more people began to discover Bitcoin and join the network. The digital currency gained popularity among a small community of tech enthusiasts by demonstrating that Bitcoin could function without a central authority or intermediary.

Bitcoin Pizza is another important milestone in the history of Bitcoin, as it marked the first time bitcoins were used as a medium of exchange for a real-world transaction. On May 22, 2010, a programmer named Laszlo Hanyecz made history by using 10,000 bitcoins to buy two pizzas. The transaction became known as "Bitcoin Pizza Day" and is now commemorated every year on May 22.

Who Is Satoshi Nakamoto?

Satoshi Nakamoto's identity remains a mystery. Satoshi could be a person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi's mastery of English has led many to believe that he or she is from an English-speaking country.

Did Satoshi invent blockchain technology?

Bitcoin combines a number of existing technologies that have been around for a long time, and this includes blockchain technology. The use of such immutable data structures can be traced back to the early 1990s when Stuart Haber and W. Scott Stornetta proposed a system for time-stamping documents. Much like today's blockchains, it relied on cryptographic techniques to secure data and prevent it from being tampered with. But Bitcoin was revolutionary in solving the double-spending issue that plagued other digital payment systems at the time.

How Many Bitcoins Are There?

The protocol sets the maximum supply of bitcoins at 21 million coins. As of September 2024, just over 94% of these have been mined, but it will take over a hundred years to produce the rest. This is due to periodic events known as Bitcoin halving, which reduce the mining rewards roughly every four years.

What Is Bitcoin Halving?

Bitcoin halving refers to the periodic halving events that reduce the block rewards offered to miners. The next Bitcoin halving is expected to happen in 2028, roughly four years after the last halving, which took place on April 19, 2024.

Bitcoin halving is at the core of its economic model as it ensures that coins are issued at a steady pace, getting increasingly difficult at a predictable rate. Such a controlled rate of monetary inflation is one of the key differences between Bitcoin and traditional fiat currencies, which have an essentially infinite supply.

Is Bitcoin Safe?

One of the main risks associated with Bitcoin is the potential for hacking and theft. For example, in phishing scams, hackers use social engineering techniques to trick users into revealing their login credentials or private keys. Once the hacker has access to the user's account or crypto wallet, they can transfer the victim's bitcoins to their own wallet.

Another way hackers can steal bitcoins is through malware or ransomware attacks. Hackers can infect a user's computer or mobile device with malware that allows them to access the user's Bitcoin wallet. In some cases, hackers can also use ransomware to encrypt a user's files and demand payment in bitcoins to unlock them.

Because bitcoin transactions are irreversible and not insured by any government agency, users must take precautions to protect their bitcoin holdings. This includes using strong passwords, two-factor authentication, and storing bitcoins in a secure crypto wallet that is inaccessible to hackers. It's also important to only download Bitcoin-related software from trusted sources.

Another risk associated with bitcoin is price volatility. The value of bitcoin can fluctuate highly over short periods of time, making it a risky investment for those who are not prepared for the price fluctuations and potential losses.

Closing Thoughts

Bitcoin has come a long way from its humble beginnings, growing into a globally recognized cryptocurrency with numerous use cases. Whether you’re considering using Bitcoin for everyday transactions, investing for the future, or simply interested in the technology behind it, understanding how Bitcoin works is essential.

The future of Bitcoin is still being written, but it’s clear that it’s here to stay. With more companies accepting it and more people using it for investment, Bitcoin continues to revolutionize the way people think about money.

Further Reading

What Is Blockchain and How Does It Work?

What Is Proof of Work (PoW)?

What Is Cryptocurrency Mining and How Does It Work?

Who Is Satoshi Nakamoto?


Disclaimer and Risk Warning: This content is presented to you for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.