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In today's issue: Until recently, most NFTs were created on the Ethereum blockchain. While that's all fine, some of us (particularly bitcoin maximalists) wanted another option.
That other option has arrived in the form of bitcoin ordinal inscriptions.
Bitcoin ordinals allow for unique inscriptions of images, text, and GIFs (among other things) onto single satoshis, making them NFTs on the bitcoin blockchain.
This new innovation has been embraced by the community, with over 10 million ordinals being created since January 2023.
Like NFTs, bitcoin ordinals could present great investment opportunities. That's why we've written The Investor’s Complete Guide to Bitcoin Ordinals.
Read on to learn more about this new bitcoin use case. |
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| | | Must Read Today's most important story for crypto investors. |
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With just one day to go until Hong Kong's new crypto regulations come into effect, it seems Beijing is providing some backing for the rollout, recently releasing a report titled, "Beijing Internet 3.0: Innovation and Development White Paper."
Even though major crypto players like Binance CEO Zhao Chengpeng (CZ) and Tron's Justin Sun praised the report, they noted it doesn't mention cryptos and instead focuses on Web3 and the metaverse.
“Internet 3.0 is a three-dimensional space that blends the virtual with reality, with highly immersive and interactive experiences,” the document's authors say. |
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This tweet from Binance CEO CZ has gone viral, with over 3 million views over the past four days. Image via Twitter.
The paper goes on to discuss AI, virtual reality, the metaverse, and even brain-computer interfaces, but shies away from mentioning crypto, which has been illegal to trade in mainland China since September of 2021.
Per Animoca Brands co-founder Yat Siu, “Hong Kong, we believe, will experience a talent and innovation boom embraced by the potential of Web3 and has a chance to lead in this category not just regionally, but globally.”
Investor takeaway: Even though the white paper includes no mention of crypto, it indicates that Beijing's attitude toward digital assets may be thawing.
It's likely that the timing of this paper is linked with the regulatory changes coming tomorrow in Hong Kong. Some believe that with Hong Kong back in the crypto mix, a new bull market powered by Chinese capital could arrive soon. |
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New Blockchain Risk Scorecard: Uniswap (UNI)
Uniswap is a decentralized exchange (DEX) built on the Ethereum blockchain that enables the peer-to-peer exchange of one digital token for another. Its native token, UNI, is used for voting on governance proposals.
Since its launch in 2018, Uniswap has grown to be the largest of the DEXs, with a TVL of over $4 billion. Concurrently, its UNI token remains in the top 25 tokens based on total market cap.
However, we don't just look at popularity when determining the investment potential of a crypto project... We also look at risk.
In our new Uniswap Blockchain Risk Scorecard, we delve into the many potential risks of UNI like financial, regulatory, and team-related risks.
Premium members: Download the Uniswap Risk Scorecard here, and visit our Premium page to compare the risk with other top tokens.
Not yet a Premium member? Sign up now for just $10 a month and get instant access to our complete library of industry-leading investor scorecards. |
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| The Investor’s Complete Guide to Bitcoin Ordinals by Anatol Antonovici |
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Executive summary: Bitcoin ordinals bring non-fungible tokens (NFTs) to the bitcoin blockchain. This innovative approach not only enhances the intrinsic value of bitcoin, but also provides long-term investors with fresh opportunities to invest in bitcoin-based NFTs.
Non-fungible tokens (NFTs) have been trending in the crypto investment space since 2021. Primarily hosted on blockchain networks that support smart contracts (Ethereum, Solana, Binance Chain, etc.), NFTs are now poised to make a splash in the bitcoin ecosystem. This has been made possible thanks to Casey Rodarmor's ingenious bitcoin ordinals protocol.
Bitcoin ordinals assign each satoshi (the smallest fraction of a bitcoin) a unique identifier, turning them into trackable units. Bitcoin ordinals thus keep tabs on each satoshi's creation and transaction history, effectively transforming them into bitcoin's very own NFTs, which can contain unique inscriptions like images, texts, or GIFs.
Since its inception in 2023, the system has already minted millions of these ordinal NFTs. The data inscribed in these ordinals remains permanently etched on the bitcoin blockchain, thereby ensuring its decentralization and independence from third-party control.
Bitcoin hardliners have been vocal with their concerns about potential network congestion and surges in fees. However, the transformative potential of bitcoin ordinals is widely regarded as a significant leap forward in the NFT space.
Just as with NFTs on Ethereum, bitcoin ordinals promise to be a compelling investment proposition. We're already witnessing the creation of high-profile ordinals, hinting at a promising future value for these distinctive tokens.
What Are Some Popular Ordinals?
Shortly after its launch, ordinals witnessed quick success, with individual pieces selling for hundreds of thousands of dollars.
Notable projects include “Ordinal Punks” (a collection of 100 bitcoin NFTs inspired by CryptoPunks) and “Taproot Wizards,” a series of hand-drawn NFT wizards that marked the largest block and transaction in BTC's history at 4MB. |
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A selection of Ordinal Punks. Image via OrdinalsDirectory.
Ethereum-based “OnChainMonkey” minted 10,000 ordinals into a single inscription, demonstrating a scalable model for creating bitcoin NFTs without overloading the network.
Yuga Labs' 300-piece collection “TwelveFold” featured 288 pieces for auction that were crafted using 3D modeling and high-end rendering tools. The remaining 12 were reserved for philanthropic endeavors.
Investors looking to get exposure to bitcoin ordinals should consider the potential subjective values of the content and pay attention to the reputations of the collections, teams, etc. (Download our NFT Investor Scorecard for a fill-in-the-blank framework for rating NFT investments.)
How Bitcoin Ordinals Work
Launched last January, ordinals allow non-fungible tokens (NFTs) to exist on bitcoin. The goal was to create an indelible record of digital content (like art, text, or video) on the bitcoin blockchain.
With this system, each satoshi associated with a unique inscription becomes an NFT. The protocol has ignited huge interest within the community. Since its launch, millions of ordinal NFTs have been minted, marking a significant evolution in the nascent bitcoin NFT landscape. |
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The rapid growth in the ordinals ecosystem. Image via Dune Analytics.
Ordinals are like a tracking system for satoshis, the smallest bitcoin units. When we put more data on them, they become NFTs. When a satoshi is made during the mining process, it gets its own special number we can follow during all future bitcoin transactions.
To illustrate, if it's the 1,000th satoshi to be made, its special number would be 1,000. Since there will only be 21 million bitcoin, we'll end up with 2.1 quadrillion of these uniquely numbered satoshis. We can call each one an "ordinal."
The ordinal system also gives each satoshi another special number based on where it sits in the lineup of all the bitcoin that's been mined. It also shows where each satoshi stands as a percentage of all bitcoin. On top of that, each satoshi gets a special letter name. These names get shorter over time, and the very last satoshi will be named "a."
This is an example of how a satoshi might be labeled using the ordinal system: |
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An example of a bitcoin ordinals inscription from Ordinals.com
Bitcoin ordinals originate from an ongoing debate within the bitcoin community on whether bitcoin should only process financial transactions, or function as a decentralized network for secure data storage. In its early years, bitcoin only allowed messages of up to 80 bytes be encoded onto blocks. That's barely sufficient to encode short text messages like hashes. Two major hard fork updates (Taproot and Segwit) increased the block size limit to 4MB, introducing a more efficient method of arranging transaction data and opening the door to ordinals.
At the protocol level, these satoshis remain fungible. They can be spent like any other satoshi, but they're also non-fungible, as they carry additional pieces of information (the ordinals).
A familiar example would be to compare ordinals with dollar bills. While each one-dollar banknote is fungible and has an identical value to any other one-dollar bill, it has a unique serial number that differentiates it from the rest.
How Ordinal Inscriptions Work
Ordinals act as the underlying infrastructure. They're the first part of so-called bitcoin NFTs, with the second being the content itself or the inscriptions. In the example with the dollar bill, it would be like an autograph inscribed on the banknote.
Ordinal inscriptions can be images, text, or GIFs linked to individual satoshis. This process is facilitated using the ord, open-source software in combination with a bitcoin node.
Given ordinals are confirmed and recorded on the bitcoin blockchain, the inscribed content is permanent, unalterable, and bitcoin-native. Unlike most existing NFTs that rely on off-chain storage, inscriptions are completely on-chain, making them decentralized and not subject to third-party control.
Note that the ordinals protocol doesn't modify the bitcoin blockchain or create a separate layer. However, it benefits from the Taproot upgrade, which improves transaction privacy and efficiency.
The inscribed content is stored in the witness section of a bitcoin transaction, an area made available by the SegWit upgrade implemented in 2017. Later, Taproot further enhanced this by removing data storage limits within blocks, allowing inscriptions of almost 4 MB in size.
How Ordinals Differ from NFTs
The introduction of ordinals has opened the door for bitcoin NFTs, though this term is not really accurate. This is because bitcoin ordinals and traditional NFTs are fundamentally different.
An NFT is a distinct entity from the native crypto of the blockchain that hosts it. For example, an Ethereum-based NFT is entirely different from an ETH token, and the protocol treats it as such. NFTs have their own standards on Ethereum. That's why NFTs can't be confused with regular tokens.
Elsewhere, the bitcoin protocol doesn’t natively recognize bitcoin ordinals, and they can effectively exist as either fungible or non-fungible units. This depends on the preference and recognition of satoshi owners and bitcoin users. For the bitcoin protocol, a satoshi with an inscribed digital artifact can be treated like any other satoshi if the user doesn't value or recognize the inscription. This isn't possible with Ethereum NFTs, where uniqueness and non-fungibility are enforced at the protocol level.
Regarding our banknote example, a one-dollar bill with an autograph is still recognized as one dollar by the bank, but it can be sold for higher amounts to collectors that value the autograph. Traditional NFTs don’t have this fluidity.
Another major difference is bitcoin ordinals are stored directly on-chain and unable to censor, while NFTs are often associated with off-chain data on the Interplanetary File System (IPFS), a decentralized file storage system that can be altered using dynamic metadata.
Unlike ordinals, NFTs can also support creator royalties.
Finally, the inscriptions on ordinals cannot exceed the 4MB bitcoin block size limit. This isn't true for NFTs.
Due to the differences between NFTs and bitcoin ordinals, Rodarmor refers to the latter as "digital artifacts."
The Impact on Bitcoin Network Congestion and Fees
Despite their innovative nature, ordinal inscriptions have raised concerns within the bitcoin community.
Adding large amounts of non-transactional data might compete with traditional bitcoin transactions for block space, potentially increasing transaction fees and prompting miners to prioritize higher-fee ordinals transactions, which could negatively impact the broader use of bitcoin as a means of exchange.
For example, if most dollar banknotes had autographs on them, people might not use them for their nominal value but for the value of the content, affecting money flow and velocity.
However, as of today, ordinals don’t affect fees much, and the increase in miner revenue is unnoticeable.
How to Inscribe Your Own Ordinal
One can create bitcoin ordinals through two primary methods. For technically skilled users, you can run a full bitcoin node and install ordinal software. This allows you to inscribe satoshis and create bitcoin ordinal NFTs. This method requires a Taproot-compatible bitcoin wallet with coin control capability like Sparrow(for receiving ordinals) or Ord wallet (for creating inscriptions). The Ord wallet also prevents accidental spending of inscribed satoshis. Both wallets require some BTC for transaction fees.
A more user-friendly method involves no-code tools like Gammaor Ordinalsbot.com. These platforms allow you to inscribe your ordinal NFT more simply, making the process more accessible for non-tech-savvy users.
Investor Takeaway
Bitcoin ordinals have been around for only a few months, and they haven’t changed the rules of the ecosystem. However, they have tremendous potential in the long term. The main selling point is that no one can censor the content attached to satoshis, while collectibles benefit from unmatched security due to being stored directly on-chain.
As we saw with NFTs on Ethereum, we should see a rise in bitcoin ordinals trading on secondary markets. This is bound to lead to more interest from investors eager to leverage their unique capabilities. It’s also possible that some of these ordinals could see massive upticks if and when the overall market for NFTs recovers.
As is the case with NFTs, bitcoin ordinals present various methods for generating income. They include buying high-quality ordinals at low prices and holding them long term, bulk-minting niche project ordinals and later selling them at higher prices, and identifying potentially profitable categories of ordinals for high-frequency trading.
Download our NFT Investor Scorecard for a fill-in-the-blank framework for rating NFT investments (including bitcoin ordinals). |
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