A Bitcoin side project is pitching to investors. Buyer beware.
getty
overview
Bitcoin has always suffered from an inability to send more than a dozen transactions over the network every second. During peak usage, transaction fees can exceed $60. Bitcoin’s inflexible code makes it difficult to increase transaction processing power directly. Deploying a Layer 2 solution like the Lightning Network allows for this by offloading the burden of transaction scaling and more versatile transaction options to a layered technology that relies on Bitcoin but is somewhat separate from it. It will be. As interest in the ecosystem grows due to the success of spot exchange-traded funds (ETFs), investors are beginning to consider opportunities to invest in the broader Bitcoin economy. But before you jump in, you need to use some foresight.
Sign up for Forbes CryptoAsset & Blockchain Advisor today and navigate the roller coaster of the Bitcoin and crypto market..
Main background
The hype surrounding Bitcoin investing primarily revolves around so-called layer 2 solutions, along with several other options. Layer 2 platforms are networks that complement the main blockchain like Bitcoin and help reduce congestion. The most popular are collateralized payment solutions like the Lightning Network, which turns Bitcoin from “digital gold” to a better, private, decentralized version of his Venmo. The second is a “builder” solution that aims to bring “smart contract”-like functionality to Bitcoin like Stack (STX). Finally, there are entire platforms like Liquid that exchange Bitcoin to Bitcoin.
Lightning Network has been around since 2018. Transforming Bitcoin from “digital gold” to a currency that can be used for microtransactions. Public and private companies are integrating the Lightning Network to benefit from lower routing fees (less than $1). Since 2018, the number of nodes has increased from approximately 50 to approximately 16,000, with network capacity exceeding 4,500 BTC and $280 million. There are also several merchants, with many hotspots having over 200 merchants accepting Bitcoin as payment, primarily through Lightning. BitPay connects thousands of merchants with Lightning Network payers, and that number is growing every year.
Liquid Network has committed approximately 4,000 BTC as L-BTC. L-BTC itself functions similarly to a stablecoin pegged to the underlying BTC assets held by the Liquid Foundation. L-BTC itself adds to Bitcoin by offering more private and faster transactions. It is more private as the specific amount is not broadcast to the public chain. There are also peer-to-peer decentralized applications for lending and other utilities built on Liquid, but the volume may be very small. Examples of this include Hodl, a peer-to-peer lending and borrowing solution that issues loans in his USDT on Liquid to protect user privacy. There are also hundreds of thousands of offers to borrow against Bitcoin at the moment, including Direct Peer SideSwap. -to-peer trading, and an Aqua Wallet that allows you to seamlessly hold both Layer 1 Bitcoin and Lightning and L-BTC. From a direct investment perspective, we aim to always have a 1:1 correlation between the values of L-BTC and Bitcoin, so Liquid is not a direct investment method, but based on the functionality of Bitcoin. , which aims to enable more private investing. Transactions between individuals who trade Bitcoin and exchanges.
Many companies have also launched their own Layer 2 and related governance tokens. Some are listed in BRC-20, a standard for creating alternative tokens similar to Ethereum’s ERC-20 standard, which includes around 60 listings. This includes projects that bring Turing-complete calculus to Bitcoin security similar to Ethereum’s EVM and NFT-like ordinal numbers. The majority have a market capitalization of less than $50 million and appear to exclusively trade small amounts using the stablecoin Tether (USDT). The only thing that might stand out is his original ORDI token that started the BRC-20 boom, but even that token fluctuates wildly based on individual tweets and is, after all, a meme coin. .
There are other protocols besides BRC-20, such as Stacks. Since December 31, 2019, its token STX has risen from $0.10 to about $3 in March 2024, which is an all-time high of about 30x return on investment. Bitcoin itself has risen about 10 times over the same period. Stack also offers Bitcoin yield by staking your tokens. Important decentralized apps on the stack include Gamma, which provides an easy platform for trading Bitcoin NFTs, and Gamma, a standard similar to ERC-20 that underpinned the rise (and fall) of ICOs. such as AlexGo, which offers BRC-20 tokens. The plan is to release the Nakamato update and sBTC, tying the stack directly to Bitcoin while purporting to offer native yield, DeFI, and NFTs, i.e., bringing Ethereum features to Bitcoin.
To summarize, one thing you should know about Stacks is that it has been around since 2017 and had an SEC-certified presale involving 4,500 people, including multiple venture capital firms. Unlike Bitcoin, which had no premine, Stack had an initial distribution. Nakamato’s update is an attempt by the stack to move itself even closer to Bitcoin’s Layer 1, but there is currently no guaranteed peg or routing mechanism, but rather “evidence” that all hashes of a transaction are in place. ” is there. Bitcoin block. Despite years of attempts, Stax has so far barely integrated with Bitcoin.
Outlook and impact
Bitcoin’s Layer 2 network is still in its developmental stages, so investors should exercise extreme caution before investing in Stack, ORDI, or any other token that claims to benefit from increased Bitcoin adoption. These price increases have coincided with a further hardening of current holdings. Users do not want to sell or give up these tokens, which is necessary for a Bitcoin-centric economy to grow. According to a recent survey, forbes Stax has even been classified as one of the $20 billion zombie blockchains that doesn’t have enough activity to justify its high valuation. Additionally, Bitcoin Ordinal and his BRC-20 token also had occasional implementation issues, leading to double spending of user funds and potential fraud.
Investors looking to purchase BRC-20 governance tokens will benefit from the 2017-2018 ICO boom, when billions of dollars were raised from gullible investors with little transparency or investor rights. Lessons should be heeded.
The balance of risk and reward is not always in this position. In fact, with new Bitcoin issuance decreasing year after year, the new flow of Bitcoin Layer 2 provides miners with a much-needed source of income. Transaction fees paid for registration total over 3,559 BTC. This has resulted in hefty transaction fees that reward miners for securing the Bitcoin network. Eventually, there will come a time when there will be no reward for mining blocks. Therefore, to continue mining Bitcoin, transaction fees are required to feed them.
decision point
There are better ways to get more exposure to Bitcoin right now than joining these side projects.
1. Investing in public stocks of Bitcoin mining companies and financial companies (Most notably MicroStrategy). Companies like Tesla and Block Inc. have Bitcoin in their treasuries, but Block Inc. also has a division dedicated to building Bitcoin services called TBD. There is at least one publicly traded company offering Lightning Liquidity (LQWD, but a small-cap stock on the Canadian Venture Index).
2. Generate yield/loan from self-custodial Bitcoin. Loans can be extended from self-custodial Bitcoin through solutions such as Unchained and Atomic Finance. Atomic Finance pushes Bitcoin into “hot wallets” and uses covered calls to generate non-custodial yield without requiring a switch to L2.
3. Investing in private companies building Bitcoin infrastructure. There are several Bitcoin-based funds, including Ego Death Capital, which is currently raising $100 million Fund II. Lightning providers like the Breez wallet and his ACINQ (which runs Phoenix, the largest Lightning node and wallet) are privately raising funds. This may not be an accessible option unless you’re part of an accredited or institutional group of investors with links to the Bitcoin space, but to be a significant part of Bitcoin’s future, it’s another Could be a method.
