Is bitcoin a riskier investment than bitcoin?

The wrapped bitcoin (WBTC -0.78%) The cryptocurrency is Ethereum (ETH -0.85%) The symbol reflects the value of the normal Bitcoin (BTC -1.23%) Code. This single arrangement gives Ethereum-based applications access to a Bitcoin-like system for storing value and money transfers. You can also look at it as a version of Bitcoin that also offers Ethereum-like features like smart contracts.

Turning the upside of two very different cryptocurrencies in one package makes a lot of sense, but isn’t this idea too good to be true? Owners of encapsulated Bitcoin must bear the risks of long-term ownership of both Bitcoin and Ethereum, after all.

Let’s see how the market deals with this unusual cryptocurrency.

A couple of informative infographics

Here’s how close the two cryptocurrencies will be together in 2022. The top chart shows daily bitcoin prices in orange and enveloped bitcoin prices in purple. You will rarely see the two lines moving away from each other.

The bottom chart highlights the ratio of the two prices, and shows the daily result of dividing the encapsulated Bitcoin closing price by the Bitcoin price. This line stays close to a value of 1.00 for the most part, but one day in January it stays like a sore thumb:

Bitcoin data wrapped by YCharts

Here’s a closer look at the sudden rally on January 28th. As you can see, Bitcoin had a good day but the price of Ethereum fell by 2.4%. The wrapped Bitcoin token took its cues from Ethereum on this occasion:

Bitcoin price chart

Bitcoin price data by YCharts

On this day, Federal Reserve Chairman Jerome Powell just outlined his agency’s approach to a Fed rate hike in 2022, which has hit risky investments such as cryptocurrencies and growth stocks hard. The crypto space as a whole was shaken by Powell’s comments, and it was no surprise to see different cryptocurrencies moving in different directions on January 28. Ethereum still hasn’t really recovered from the heaviest correction that occurred that day, trading roughly 10% less than Bitcoin’s 33% drop so far.

However, encapsulated Bitcoin jumped back to matching the price of the benchmark Bitcoin token on January 29th, and nothing has changed since then. This makes perfect sense, even if you feel that Ethereum is a higher risk investment than Bitcoin.

Bitcoin token wrapped in a half-opened cardboard box.

Image source: Getty Images.

So what’s the difference?

As you can see, one of the main features of Wrapped Bitcoin is the fact that you can exchange it for a single Bitcoin token whenever you want. You can generate new rolled bitcoins by minting the tokens with a simple procedure, and you can convert them back into bitcoins by burning the rolled bitcoin token. Furthermore, the Wrapped Bitcoin project is backed by the original Bitcoin tokens that have been deposited in order to mint each Wrapped Bitcoin.

Today, the Rolled Bitcoin Project holds 283,904 bitcoins in its vaults. The market capitalization, as measured by CoinMarketCap, is 283,774 bitcoins. This is a difference of 0.05%.

Because of this guaranteed conversion process, the encapsulated bitcoin should be very close to the value of the standard bitcoin. Sure, investors are betting that three projects will survive instead of one (including the Bitcoin wrapped system itself), but there is no practical reason to take additional market risk in encapsulated Bitcoin.

At the same time, you do not see any positive side of having Ethereum features in the Bitcoin file. In the bigger picture, the presence of encapsulated Bitcoin essentially becomes part of the value proposition of the Bitcoin platform, adding a small amount of additional market value to the larger ecosystem. Keep in mind that the total market cap of the rolled token is only 1.5% of the leading footprint in the Bitcoin sector.

Yes, you can buy this token – but it doesn’t really matter

As long as your favorite cryptocurrency exchange offers encapsulated Bitcoin tokens, feel free to choose this alternative instead of – or in addition to – regular Bitcoin tokens. If something goes wrong, you should be able to convert these tokens to Bitcoin as needed.

However, there is no real advantage to buying this token instead of Bitcoin, unless you are an app developer who needs to use the unique combination of Ethereum and Bitcoin features. For most of us, it’s just another market oddity in a sector already riddled with quirks. You might be better off looking at the good old Bitcoin crypto system instead, just to keep things a little simpler.

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