The more Bitcoin works like Ethereum, the less investors should like it
When the pseudonymous Satoshi Nakamoto published the original Bitcoin (CRYPTO: BTC) white paper back in 2008, he envisioned the cryptocurrency as a peer-to-peer digital payment system and the ultimate form of “sound money.” Some even imagined that Bitcoin could one day replace the US dollar as the world’s reserve currency.
Flash-forward to 2023, and we’re starting to see some unexpected innovations coming to Bitcoin’s ecosystem that seem to contradict this original premise—among them highly speculative meme tokens and new non-fungible tokens (NFTs). What with these innovations leading to higher transaction fees, network congestion and complaints of market disruption. What’s going on here and what impact should it have on your decision to buy Bitcoin?
The “new” Bitcoin
Perhaps the simplest way to describe what is happening here is that it is a battle between the “old” Bitcoin and the “new” Bitcoin. The old Bitcoin is the cryptocurrency originally proposed by Nakamoto. The main purpose of the blockchain is to manage digital currency transactions. From this perspective, blocks on the blockchain should only contain transaction data – nothing more. However, proponents of the new Bitcoin believe that the central Bitcoin blockchain should be used for more than just digital currency transactions. Why not create NFTs or even meme tokens like the ones found on Ethereum (CRYPTO:ETH) blockchain?
Image source: Getty Images.
Back in January, one of the hottest phenomena in the crypto world was the creation of Bitcoin Ordinals, which are a new form of NFT called “inscriptions”. Innovators found a clever way to “type” text, images and other content into blocks on the Bitcoin blockchain. In late February, these Ordinals were so popular that Yuga Labs, the creator of Bored Ape Yacht Club, even created an NFT collection for Bitcoin.
The excitement over Bitcoin NFTs, in turn, led to the creation of a new type of token, known as BRC-20, that can be traded on the Bitcoin blockchain. These only started appearing in early March and if anything they have been even more of a sensation than Bitcoin NFTs. In just two months, BRC-20 tokens have nearly surpassed a total market capitalization of $1 billion. In early May, signs of a Bitcoin meme-token craze emerged.
Real impact
According to a blockchain analytics service, 65% of all Bitcoin transactions on May 7th were related to BRC-20 tokens. Put another way, 65% of the traffic on the Bitcoin blockchain this past Sunday involved people trading in and out of meme tokens. Things got so out of hand, in fact that Binance (CRYPTO: BNB) — the largest cryptocurrency exchange in the world — had to temporarily halt Bitcoin withdrawals.
The important point here is that we are starting to see disruptions in the way Bitcoin is used, and these are causing higher fees and network congestion. In El Salvador, where Bitcoin is legal tender and used for everyday purchases, transaction fees to withdraw $100 in Bitcoin are now reportedly as high as $20. Think about it: If your bank charged you $20 every time you took out $100 from the ATM, you might want to start looking for another bank.
Of course, the innovators who gave us Ordinals and the new BRC-20 tokens will describe how much functionality and utility they bring to Bitcoin. Maybe they’ll tell you how they’re helping Bitcoin reach wider mainstream adoption. And they will claim that they helped create a billion dollar market opportunity literally overnight. Fair enough.
But I can’t help but think about that 65% number. Are two-thirds of Bitcoin transactions now just related to speculating in meme tokens? Please, nobody tell Gary Gensler this. As soon as the chairman of the Securities and Exchange Commission finds out that crypto enthusiasts have turned Bitcoin into a speculative meme-token playground, it’s game over. And that is a primary concern of mine. How can anyone reasonably describe Bitcoin as “sound money” when people are playing with meme tokens in the background and entering funny pictures into the blockchain?
Should You Invest in Bitcoin?
At one point I thought the new NFTs might be a good thing for Bitcoin’s future valuation. But with the arrival of BRC-20 meme tokens, I’ve started to change my mind. Many of the most popular Bitcoin BRC-20 tokens are clearly designed to be meme tokens. The top tokens in this category by market cap now include a pizza-themed token, a frog-themed token, and a token that calls itself, well, “meme.” Now that larger, more mainstream cryptocurrency exchanges are starting to list these tokens for trading, this problem could get bigger as more people join the meme token craze.
For now, I remain bullish on Bitcoin for the long term. But in the short term, I’m looking more closely at what’s happening with NFTs and meme tokens. If the primary purpose of Bitcoin – to act as a peer-to-peer digital cash system – is being thwarted by high fees, congestion and other forms of market friction, it may be time to pump the brakes. If Bitcoin is trying so hard to become Ethereum, why not just invest in Ethereum?
