Bitcoin, Blockchain and Cryptocurrencies

Bitcoin, blockchain and cryptocurrency entered the world stage in 2008 when the online publication of a white paper under a pseudonym envisioned a new way to transfer value over the Internet. Over the next ten years, the crypto asset market has gone through all the classic phases of a disruptive technology:

(a) massive bullish markets and crushing sell-offs.
(b) periods of euphoria and moments of despair.
(c) FOMO (fear of missing out) and panic.

As the crypto market enters its second decade, one thing is clear: crypto and blockchain will not disappear..
In 2020, cryptocurrencies boasted a combined market capitalisation in excess of $350 billion; major financial institutions, such as Fidelity Investments and CME Group, are heavily involved; large foundations, such as those of Harvard University, Yale University and Stanford University, are investing, along with hedge funds such as Paul Tudor Jones II or even companies like Tesla. Cryptographic efforts by leading companies, such as Facebook, PayPal, Visa and Square, are also headline news; central banks, from the US Federal Reserve to the People’s Bank of China, are discussing how to develop blockchain-enabled digital currencies.

Despite all the enthusiasm, however, significant challenges remain for investors approaching the market. For starters, the quality of information is poor. Theories on the drivers of cryptoasset valuations are untested and often poorly designed. Due diligence efforts by leading advisors are in their infancy and few people have thought carefully about the role (if any) cryptoassets should play in a professionally managed portfolio. Fundamentally, few people understand what they really are or why they might be important. Is it an alternative currency? A technology? A venture capital investment? A speculative bubble?

Increasingly, people decide that now is the time to start answering these questions.

  • For financial advisors, the reason is that clients are asking for it.
  • For fintech executives and central bankers, the reason is because crypto and blockchain threaten to disrupt their markets.
  • For professional investors, the reason is because the returns and low correlations that cryptoassets like bitcoin offer to this point are becoming hard to ignore.

The best starting point for understanding crypto and blockchain is bitcoin. Bitcoin was the first crypto asset and is now the largest, and the discoveries that allowed bitcoin to emerge are the basis for all other blockchain and crypto projects. As a result, understanding bitcoin, its origin, how it works and what new opportunities and challenges it creates, provide a solid foundation for considering the entire cryptocurrency and blockchain space.

Bitcoin was created by a computer programmer working under the pseudonym “Satoshi Nakamoto”, who published a white paper on October 31, 2008, entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” to an unknown mailing list of cryptographers.

The author described a vision of how people could hold, send, and receive value digitally, with no trusted intermediary (e.g., a bank or payment processor) in between. On January 3, 2009, shortly after the white paper was published, the software was released, the first bitcoin was minted, and the bitcoin network was launched.

Although much of our lives have migrated online, money remains stuck in an analogue age. We don’t think much of it because we have fintech apps and online bank accounts, but the underlying structure of our ‘modern’ financial system is archaic. This can be seen, for example, in the fact that sending money abroad takes two to four days and paying bills using your online bank account could take an equal amount of time. Transferring cash and valuables online is difficult, far more difficult than moving basic information, such as text messages, e-mails, and photos.

Let’s consider a simple transaction in which Alice wants to send Bob $1,000. They do not live near each other, so Alice can’t give Bob cash, and she sends Bob a cheque. If Bob and Alice use the same bank, it is simple: Bob can cash Alice’s cheque directly. However, if Alice has a current account at Bank A and Bob has an existing account at Bank B, things slow down. Bank B will not credit Bob’s account until it knows that Alice’s cheque is not a “bad” cheque. Processing this check, making sure that Alice’s account is not overdrawn and that she has not written multiple cheques to the same banking account, takes days.

The right way to understand this problem is to think of it as a database problem. Bank A and Bank B both have the databases of their accounts, and neither bank can view the other bank’s database to find out whether a banking account has enough money to issue a cheque. The process of reaching a consensus on the status of each bank’s accounts takes time. If you try to speed up this process, the potential for loss is significant. Allowing the movement of money or other valuables, as happens with text messages between two people and without any central intermediary, requires a different solution.

Nakamoto’s solution to this problem (which represents the idea behind all blockchain databases today) was to create a single distributed database accessible to everyone. Thanks to the blockchain system, anyone in the world can exchange transactions, but where the ledger is not controlled by a single company, government, person, or entity. In other words, a ‘distributed ledger’ that is ‘permissionless’ and maintained on a ‘decentralized’ basis.

The value of such a database is obvious. If all parties can agree on the state of the database at any time, the delays needed to allow database A to synchronize with database B can be massively reduced. Although simple in concept, implementing this new database architecture involved overcoming several significant technical challenges that had occupied computer scientists since 1980.

If you have copies of the same database floating around on a million different machines and no one is responsible, how can you make sure that all documents are identical, updated synchronously, and reflect only honest transactions? In other words, how can you reliably create a consensus on what is accurate and true? This is the real breakthrough of blockchain: creating a timely, safe consensus on all copies of a decentralized, distributed database.

This involves technological steps governed by smart incentives, cryptography, and other technological advances. These steps are at the heart of both the opportunities and challenges created by blockchain applications; therefore, it is worth understanding how they are structured and how they work.

The best way to understand how the consensus process works is to understand the flow of a bitcoin transaction from the start to the end. Alice has ten bitcoins she wants to send to Bob, so she sends a message to all the computers running a copy of the updated database (‘the Bitcoin network’) that says: ‘I want to send ten bitcoins to Bob’. Alice has a unique password (called a ‘private key’) that allows her to sign the message so that the network knows that the message only comes from her and no one else. Computers in the bitcoin network can easily confirm that Alice has ten bitcoins to send because they have a copy of the current database. It is important to note that the transaction has only been proposed. No one computer has yet updated its copy of the ledger.

Transactions are initially placed in a waiting room, where they wait to be confirmed. Since the transaction is only proposed and not finalized, the system can quickly forward the message to ensure that every participant is aware of it. Alice is not alone: while she is sending her message, others are also sending messages, wanting to send their bitcoins to various recipients.

Special actors come into play: the so-called ‘bitcoin miners‘. Miners are computers scattered all over the world that form a critical part of the bitcoin network. Their job is to aggregate groups of new valid transactions, like Alice’s one, and propose them for settlement. These groups of transactions are called ‘blocks‘, hence the word ‘block’ in ‘blockchain’.

At any given time, thousands of these computers are competing for the right to solve the next block. The competition involves solving a challenging mathematical puzzle, and miners can only propose a new block if they solve the current predicament. Whoever finds the solution first is entitled to a reward, which consists of newly minted bitcoins and potentially transaction fees paid by the entity initiating the transaction.

The reward is significant: each new block currently comes with a reward of 6.25 newly minted bitcoins. This payment is what incentivizes miners to do the work required to verify transactions and maintain the database. New blocks are placed on the bitcoin network roughly every ten minutes, although the exact time depends on how fast the puzzle is solved.

For now, only one network participant (the miner who proposed the new transaction block) can see the fully updated ledger; all other participants still see only the oldest blocks. Since the reward is significant, many miners compete to adjust each transaction block. However, competing is expensive (solving the puzzle requires considerable computing power and consumes a lot of energy) and knowing which of the thousands of miners will solve the puzzle first is impossible.

Once a miner solves the puzzle, however, he can publish the solution and
propose a block of transactions to the network. The peculiar advantage of the system is that although solving the mathematical puzzle is difficult and expensive, checking the result is easy. When a miner publishes a solution and a block of transactions, other members of the network check the work. If the transactions are valid and the solution to the puzzle is correct, the network participants update their copy of the database with the new transactions. At that point, Alice’s transaction is considered settled.

This ‘chaining of blocks’ is why this database architecture is called ‘blockchain’.

Could it be that the unknown bitcoin miner sending a block is malicious and proposes an invalid transaction block that somehow benefits him? Network participants examine every transaction in every proposed block and reject blocks with invalid transactions.

Unfortunately, as with any pioneering market, the NFT market is also subject to numerous frauds and scams. The main types of scams in the NFT world identified by research conducted by Atlas VPN are as follows:

  • Rug pull: the authors of a project advertise it with the aim of raising the value of the token, once sold and collected the payments they leave the community, disappear into thin air bringing the value of the token to zero.
  • Pump-and-dump: assets of low or very low value are offered at high prices, through targeted campaigns that sometimes go through social media and involve influencers.
  • Wash trading: the price of the asset is inflated through bogus sales to other profiles belonging to the same scammer, until an unfortunate investor looking for a bargain is found.
  • Phishing: scammers request the private key of a user’s wallet; once in possession of this information, the scammers enter the wallet and operate the theft of all cryptocurrency and NFT stored in it.
  • Theft and plagiarism: even in the digital art market, there are those who appropriate the creations of others (often just copy-paste) and then offer them for sale.
  • Unreliable sites: it is better to consider carefully whether to buy an asset on a platform you have never heard of before or one that is completely new.
  • Malicious campaigns: initiatives such as those that give tokens for a special event can be exploited by malicious people to perpetrate all kinds of deception.

The blockchain provides an improvement over existing settlement methods.
On April 12, 2020, someone transferred 161,500 bitcoins, worth over $1.1 billion at the time, in a single transaction. The transaction settled in 10 minutes, and the transaction processing fee was $0.68 In comparison, an international bank transfer, which can only be sent during banking hours, takes one to two days to settle and has fees ranging from 1% to 8%. In addition, bitcoin transactions can be sent at any time of day or night and from anywhere in the world.

This applies to large and isolated transactions: every day, users settle transactions on the bitcoin network with counter values as small as a penny or as large as tens and even hundreds of millions of dollars.

Perhaps the greatest innovations that cryptoasset-based blockchains have facilitated are the related concepts of digital scarcity and digital property rights. Historically, the only way to ‘own’ something online was to have a trusted third party register ownership in a proprietary database.

For example, your broker keeps track of what stocks you own, your bank keeps track of what balances you have, video game companies keep track of in-game purchases, county clerks’ offices keep track of land titles, and so on. Crypto-assets turn that system completely upside down. Because the underlying blockchain database is available to everyone without being controlled by anyone in particular, cryptoassets can provide guarantees of ownership that were previously non-existent in the digital world. Furthermore, cryptography ensures that no one can take possession of that person’s bitcoin without their permission.

With a blockchain, ownership can be easily proven or disproved. Anticipating what creative entrepreneurs will come up with to exploit the technological breakthrough of digital scarcity and digital property rights is difficult. But this is a powerful concept that provides a way of doing things that was not possible before and another area to look at for innovation.

The last advancement worth considering is that cryptoasset-based blockchains allow users to effectively programme money with certain rules and conditions, as one would programme any software. These digital ‘smart contracts’ can be created, revised and enforced easily, instantly and at virtually no cost. Ù

With programmable money as software, it is possible to create transactions with conditions such as the following:

  • Alice transfers cryptoasset X to Bob, but only after Carol agrees, which looks a lot like an escrow account.
  • Alice transfers cryptoasset X to Bob, but only after a certain period of time, which looks a lot like a trust.
  • Alice sends cryptoasset X to Bob, but only if Carol wins the race; if Carol loses, Bob sends cryptoasset Y to Alice, which looks a lot like a contract.

Blockchains allow these and many more complex transactions to be performed without the need for trusted intermediaries. In this way, smart contracts aim to replace or augment many of the core functions provided today by banks, lawyers, accountants, escrow agents and notaries, also in a way that is cheaper, faster, more transparent, open to all participants and available 24/365.

Like digital money, this smart contract idea is not new. Smart contracts were introduced as a theoretical concept by cryptocurrency pioneer Nick Szabo in 1997, but were only made possible in practice after the emergence of cryptoasset-based blockchains. The ability to programme money with digital terms and contracts is the third new capability that is expected to lead to significant applications and strong economic impact.

As we have just mentioned, today Ethereum, which encompasses the vast majority of the NFT market, works with the Proof of Work (PoW) standard. This protocol is used by the miner to validate a new block of transactions on the blockchain. The miners, i.e. those who perform block validations within the blockchain are competing to solve puzzles: the first to solve them has the opportunity to validate the block and get paid.

These puzzles, being extremely complex algorithms, require very high computing power and therefore very high-performance machines with high energy consumption. Over the years, the puzzles have become increasingly complex and with them the computational effort to solve them. Proof of Work therefore brings with it an ecological problem related to the energy course required to keep its infrastructure running. It has been calculated that the large consumption of energy in Ethereum transactions currently produces as much carbon dioxide pollution as an entire country like Switzerland.

The more sustainable alternative is Proof of Stake (PoS). While the PoW standard requires more and more energy to participate in block validation, PoS adopts an approach in which validators compete on the basis of how many resources they hold (i.e. how many tokens they have in their stakes): the higher the accumulated number, the more likely a certain individual is to be chosen as the validation performer. Since there is no computational demand, no energy is wasted as in PoW and thus transaction costs are also much lower.

When a person acquires an NFT, he or she takes possession of a non-fungible token that refers to a digital asset. It is difficult to define rights from a legal point of view, as there can be substantial differences between one NFT and another.

For instance, in the case of NFTs relating to the ownership of a work, ownership of the copy of the work is transferred and not of the original work, which could therefore be the subject of other sales. The NFT representing Jack Dorsey’s (the founder of Twitter) first ‘tweet’, sold for nearly $3 million, does not grant the owner any rights to the ‘tweet’. Subject to legal agreements outside the blockchain between Jack Dorsey and the platform that hosted the sale of the NFT, the author of the tweet could in fact decide to put the same tweet up for sale on another competing platform.

Underlying NFTs is thus a mechanism of trust between author and buyer that is independent of blockchain technology.

Non-fungible tokens ultimately certify the ownership of a resource. This digital act gives its holder the exclusive possibility to use, sell and transfer that asset. With the purchase of an NFT, I have acquired the certificate of possession of the file; technically what happens when I purchase an NFT is that within the code, my public address is entered into a table thus linking my wallet to the NFT.

Generally speaking, whoever buys an NFT shows his right of possession but not ownership over the digital asset and particular services that may be associated with it; all on a transparent and non-hackable infrastructure: the blockchain.

The global trade volume of NFT in 2021 exceeded USD 17 billion, representing an increase of 1,836% compared to 2020 (source

The reasons why this market is developing more and more are as follows:

Speculation: people, for example, bet on a work of art in the hope that it will increase in value and then resell it for a profit.

Emotionality: thanks to NFT, it is possible to support one’s favourite digital artists; this is emotionally positive for the buyer, but also for the creator as he can monetise his creations. Many artists have been working in the field of digital art for years, publishing their works on platforms such as Instagram or Pinterest. These works can be downloaded for free, without recognising any value or payment to the artist. Thanks to the concept of intellectual property, introduced by the NFT, it is now possible to certify that a given artist has created that work, which can be purchased via the token attached to it.

Personal identity: the development of digital and the development of social networks create the conditions for showing one’s social status to other people; today we are careful to give a good image of ourselves both online and offline.

Nowadays we tell a lot about ourselves on social networks (shopping, travelling, the achievement of a work goal). The digital reality is becoming more and more important compared to the physical one, in all fields. If we have to evaluate a person, for example, what we see online on Linkedin or Instagram counts a lot in addition to what we see in person. The number of followers on social media is often taken as a method of measuring the importance of the person himself.

In a few years’ time, it will be our public portfolio that will show the world a face of who we are, through which tokens we have, and this will be an important relational marketing step, because it will allow us to identify people with respect to their activities, passions, in exactly the same way as is done today on LinkedIn or Instagram.

Bitcoin is not the only crypto asset. According to data aggregator CoinMarketCap, there are more than 6,000 different crypto assets and many new ones are created every month. Although most of these assets are very small, several are valued at more than $1 billion. The Bitwise 10 Large Cap Crypto Index is a market capitalization-weighted index of the ten most significant crypto assets, screened for liquidity, security, and other risks. It captures approximately 85% of the total market capitalization of the cryptocurrency market.

Multiple crypto-assets exist and are thriving because their underlying blockchains are optimized for different uses. The blockchain technology attached to each crypto asset is simply software. Any two blockchains are similar types of software, but they can be programmed to serve very different uses.


Non-Fungible Tokens (NFTs)

The Non-Fungible Token (NFT) expression incorporates two specific terms: Token and Non-fungible.

A token is something that is on a blockchain, has a value, and can be received and sent, but is not the official currency of that blockchain.

In law, the term fungible is associated with goods which, having no specific individuality, can take the place of one another in legal effects; the typical fungible good is money.
For example, if I were to give Giuseppe 10 euros and he was to provide me with another 10 euros, there would be no difference in the composition of our assets. Each 10-euro banknote represents an identical value, so the money can be considered fungible.
One Bitcoin is fungible since it can be replaced with another. On the other hand, a piece of artwork is non-fungible because it cannot be exchanged for a generic good but is identical in value. NFTs, in the same way, are unique pieces that cannot be replicated or replaced.

Non-Fungible Tokens (NFT) are “digital certificates” based on blockchain technology that uniquely identifies the irreplaceable and non-replicable ownership of a digital product created on the Internet: such as a photo, video, text, article, audio, GIF, etc. When a digital object is certified with an NFT, it is as if there was the author’s signature on it, and no one can say that it is not original.

Buying an NFT does not involve obtaining ownership of the workpiece but the possibility of demonstrating a right onto that work through a smart contract that automatically executes an agreement that is forever registered on the blockchain.

  • Ownership: NFTs are connected to digital wallets; being unique and indivisible, they are associated with a single owner.
  • Limited supply: the supply of NFTs is kept limited by smart contracts that preserve its properties. The number of NFTs can be defined by the developers by also defining rarity levels that increase their value.
  • Origin: blockchain technology allows to trace the source of a given NFT through the decentralized register; this allows to prove the authenticity of the property and prevent fakes.
  • Interoperability: NFTs are characterized by free exchange on different open markets (marketplaces). This allows users to move assets outside the original creation spaces: in this way, they move from closed economic systems to a free market.
  • Liquidity: the digital nature of NFTs and their integration into major cryptocurrency networks such as Ethereum lead to high liquidity compared to physical assets; however, compared to tokens and fungible currencies, NFTs are less liquid.
  • Standardization: NFT protocols are based on software such as Ethereum, a feature that determines their standardization.

There are several use cases for Non-Fungible Tokens:

  • Art market: there are real digital works of art (such as an image, audio, a video file) that people buy as collectables or as a form of investment. In 2021, the crypto-art market generated a turnover of approximately 2.8 billion dollars, with over 774,000 sales between the primary and secondary markets (source The average price of a crypto work has increased nearly tenfold over the year, from around $ 300 to $ 3,000.
  • Collectables: real electronic cards. For example, the NBA used some clips of the highlights of the American basketball season and created NFTs. In this case, by purchasing the NFT, you are not purchasing the copyright on the image, but you are buying a digital picture, not a paper one, with the aim of collecting it.
  • Music: to collect songs by your favourite singers without purchasing the copyright. There are markets where you can also buy or sell copyright through NFTs to achieve investment; however, these markets are small and illiquid.
  • Gaming: some NFTs can be used within blockchain-based video games; NFTs become digital collectables or gadgets that can be used in virtual games.
  • Certificates: NFTs can be used to verify the authenticity of a person’s identity or birth certificates, academic credentials, licenses, or others.
  • Financial documents: invoices, bills, and orders can be transformed into NFTs.
  • Real estate: Real estate and other valuable properties can be tokenized to improve the property’s liquidity or speed up financing.

Initially, a digital version of the work of art is created, which, in computer language, is defined by a sequence of binary digits (0-1). Then, this sequence is compressed into another series called “hash” (fingerprint) which uniquely identifies that file: the hashing process makes it impossible to reconstruct the original digital document. This BIT sequence is unique and is transcribed on a decentralized ledger: the blockchain. Ethereum currently contains the majority of the NFT market, as it is the most tested and developed platform; Ethereum works with a protocol called Proof of Work.

Since most NFTs are built on the Ethereum blockchain, a digital wallet must be opened in which to deposit and keep the cryptocurrencies necessary for transactions.

Once you have created your wallet containing the cryptocurrencies, you need to choose the marketplace (the virtual shop) where you can buy or sell NFTs. If the NFT has a very cheap cost or is free, it is likely that a variable tax will be applied to be paid (gas fee). Since these are crypto tokens that are supported by a real blockchain, these tokens can be exchanged both through smart contracts and through a manual exchange. They are, in effect, assets that we can buy and sell. For this purpose, many markets have also been born that allow auctions or private agreements.

The available NFTs appear within the marketplaces. Interested buyers can:

  • purchase the NFT directly (fixed price);
  • make bids in the auction, at the end of which the seller receives a notice with the best bids from the buyers;
  • make a bid at the price that is considered the fairest.

Once the bid is accepted, the platform manages the transfer of funds for the digital asset, concluding the purchase and sale process.