BITCOIN: The Mother of all Cryptocurrencies

Though initially devised as a means of peer-to-peer payment, it has slowly evolved into an attractive object of investment. Named the “mother of all digital currencies”, bitcoin is based on a white paper published under the pseudonym Satoshi Nakamoto in 2008. The paper described a payment system that would permit transfers from one party to another free of the need for banking infrastructure and free of control by the authorities. To achieve this, a decentralised infrastructure consisting of a network of private software clients was created. Together they form the backbone of the system and they also ensure that transactions are processed and verified.



B itcoin mining: building the chain, block by block

Together, the bitcoin clients forming the decentralised infrastructure create the Blockchain: all transactions are saved in a text file, and so - in principle - on any computer on which a client is in operation. Using special mining software, the members record the transactions initiated in the network, verify them, and write them into the file, block by block. This blockchain (blocks linked together) becomes the main, centralised, history of all payments made in the global network. Due to the high number of permanently saved transactions, it is no longer possible to change the ones that have already been recorded - which is the special charm of this technology.

The issue of security is always of primary importance: two digital signatures are required to enable any transaction to be carried out at all - one for anonymous publication and one for encrypting the transfer. While the other members of the network can detect and verify the account balance and the planned transfer, the names of the actors remain unknown. In addition to single SPV clients, which as a rule are operated by users and need not store the complete blockchain in memory, clients can also function as nodes. Nodes are centralised communication hubs that record transactions and, upon verification, distribute them to other nodes within the global bitcoin network.



B itcoin - more than an alternative payment system

To understand why this implied distinction is important, take a look at the current size of the blockchain, which encompasses at least 55 gigabytes now and is growing rapidly. The creation of bitcoins, so-called mining, is limited by a cleverly designed system. Miners that process transactions make available to the bitcoin network a certain computer capacity and receive for each block added to the chain a certain number bitcoin credits. To be able to create an artificial scarcity, a specific level of difficulty is to be overcome in the mining process. Namely, miners must solve mathematical problems that, in conjunction with verifying the transactions, are “proof of work”.

This consciously created scarcity ensures a high price per bitcoin in comparison to other cryptocurrencies. At the end of 2017, around 17 million bitcoins were in the market and the level of market capitalisation was 250 billion euros. Bitcoin has been able to transcend its role as a genuine alternative payment system and is now a lucrative object of investment as well. Experts note that additional cryptocurrencies are gaining ground, but there is much that militates in favour of bitcoin - a system of payment that is by now established and used by a growing number of companies and institutions.



I nvesting in B itcoin: ETN as a smart alternative

Rather than directly buying bitcoins, which involves selecting and installing a suitable client with appreciable attendant expense, investors have a far simpler option for gaining exposure to the performance of bitcoin: bitcoin ETNs. Exchange traded notes (ETNs) are exchange-traded bonds payable to bearer that track the mean value of the bitcoin rate in US dollars on the most liquid trading floors. On the other hand, with physically secured ETNs, the issuer actually acquires and holds the bitcoins that correspond to the invested capital. These ETNs are relatively easy to acquire and to manage, making them a lucrative addition to investment portfolios.