One of the Biggest Opportunities in Web3

Bitcoin was born in 2008 as a form of Digital Money, initially used for payment purposes, and over time, it has evolved into a store of value tool. With the rise of Layer-1 focusing on retail and Layer-2 of Ethereum, the usability of Bitcoin is facing a disruptive opportunity. Currently, there is $240 billion of 'hot money' in BTC (3.4 times the total lock-up amount of the entire Ethereum ecosystem) available for capture and build upon.

BTC = Individual Investor

It is commonly believed that BTC is adopted more by institutions compared to ETH. However, data shows that this is not the case. BTC is primarily driven by individual investors, with 57% of the supply held by individuals and only 9.7% held by institutions (including Miners). By "individual investors", I refer to non-professional investors and individuals who are more likely to be converted into BTC users due to the speculative nature of the new market.

Currently, there is $240 billion of 'hot money' in Centralized Exchanges (CEX) and ETFs, which represents a huge opportunity to capture value by building a Programmability layer on top of BTC. In contrast, the total amount of hot money in Ethereum on CEX is $76 billion. CEX capital is a good indicator of hot money, as 'cold money' is usually stored in cold wallets as long-term capital. ETFs can also be seen as hot money, as BlackRock and VanEck both state that over 80% of ETF inflows come from non-professional investors using online brokerage accounts. In the event of a bear market, even with a 50% reduction, there is still $120 billion of hot money in BTC that can be deployed. Therefore, a large amount of individual investor capital can be deployed into BTC-native Dapps.

BTC quantity on CEX and ETF

Bitcoin is the most widely distributed digital asset globally, with over 460 million independent Wallets. Since Ordinals and inscriptions (inions) appeared, the demand for BTC has increased significantly. On December 19, 2022, Dick Butt (pictured above) became the first inscription on BTC. Since then, the mempool usage rate of BTC has averaged over 50% (see below), far higher than before, even reaching twice the level of the bull market cycle in 2021. This indicates a strong demand for BTC Block space, but also leads to Money Laundering rise to the extent that ordinary users find it difficult to use the chain.

BTCmempool usage

The hot money of BTC rose by 23% during the period from January to July 2024. During this period, the supply of BTC on CEX decreased from 2.9 million to 2.7 million, while the supply of BTC in ETF rose to 890,000, resulting in a net increase of 680,000 BTC. According to the statistics of ETF holders and the flow of hot money on CEX, this is mainly driven by capital from individual investors.

Centralized exchange's BTC

Embracing speculation by individual investors

BTC may be at the beginning of a speculative cycle, which was first triggered by Ordinals, with a cumulative volume of 117 billion US dollars. Combined with BTC's native Dapps and a hot money of 240 billion US dollars, BTC's speculative cycle will inevitably be longer and larger than the cycle experienced by ETH and Solana Decentralized Finance in early 2024. In addition, the adoption of BTC by individual investors in terms of utility has just begun. According to research, 57% of BTC is held by individuals, with only 3.4% held by Miners who usually sell Mining BTC for profit.

BTC Distribution

Current expansion solution

Most extension solutions currently fail to effectively serve the large-scale individual investor community of BTC, either being slow and costly or focusing on institutions. For example, @Stacks is one of the earliest BTCSidechains, taking 30 minutes to complete a transaction even after the Nakamoto upgrade. @Lightspark (Lighting Network) is building enterprise-to-consumer payment solutions based on the Lightning Network, with more adoption by businesses and institutions rather than meeting the existing needs of individual investors. These solutions are still in the early stages of BTC adoption. In the future, we may even see high-fidelity Decentralized Finance, such as BTC open order book exchange, perpetual protocol, and prediction market.

A successful case of a BTC hot wallet application is @Bounce_bit, which is a protocol focused on CEX hot wallet income. Within six months of its launch, its BTC TVL reached 1 billion USD. This indicates that CEX users have a strong demand for utilizing BTC.

Network Effect: Rollup and Sidechain

BTC is the largest and most widely distributed digital asset, therefore it has the strongest network effect in Web3. The hot money of BTC is 3.4 times the TVL of the Ethereum ecosystem. We may be witnessing the birth of a new global internet computer.

Since 2019, ETH sidechains such as Wanchain, Neo, and Ziliqa have been created as alternative solutions. At its peak, there were over 700 PoS and EVM sidechains. However, due to technical and economic limitations, these sidechains failed to effectively leverage the network effects of ETH and attract and retain developers.

In contrast, @Optimism and @Arbitrum focus on the network effect of ETH and work closely with ETH to expand its underlying layer. Therefore, they are more successful than EVM Sidechain and have become leading scaling solutions. A similar trend is also emerging in the BTC ecosystem, with multiple sidechains being created. If history is any guide, the real winners in the BTC ecosystem may be those scaling solutions that align with BTC in terms of economics, security, and incentive mechanisms. This means using BTC natively as gas (BTC can be used as transaction fees), validating the state of any BTC full node, and unidirectional asset exit to the BTC underlying layer.

Compared to Ethereum

The proportion of hot money in BTC's total value is similar to the total TVL of ETH, and this value can be released by implementing programmability on BTC. The total TVL of ETH's L1 and L2 is $71 billion, accounting for 17% of ETH's total value. Unlike ETH, most of BTC's hot money is underutilized, mainly stored in CEX and ETFs. There is reason to believe that financial instruments native to BTC can significantly improve its utilization.

Comparison of hot wallets for BTC and Ethereum

Challenge

1. The positioning of BTC as digital gold is difficult to change, resulting in a low usage rate of expansion solutions.

Mitigation measures: The narrative is driven by demand, and existing data suggests an oversupply of personal investors in BTC. The positioning of BTC as digital gold may be misleading. Historically, BTC's price fluctuation has no correlation with the price of gold (see the chart below), but is highly correlated with tech stocks instead. This indicates that the market tends to view BTC as a technological innovation rather than a store of value. The origins of BTC also foreshadow its future programmability, as it was initially created as a practical token for payments.

Comparison of BTC and gold prices

2. BTC will primarily target institutions and serve as the payment settlement layer for Decentralization, and native BTC applications such as Decentralized Finance are difficult to emerge.

Relief Measures: There are 240 billion US dollars of hot BTC on CEX and ETF. Referring to the Ethereum ecosystem, the historical utilization rate of ETH has increased with the increase of the number of applications.

3. Retail users are unwilling to spend BTC.

Relief measures: By expanding the Smart Contract of the solution, BTC can be unlocked to make it a global Digital Money, not just a digital asset. Before the Decentralized Finance summer of 2020, the practicality of Ethereum was low, with a TVL of less than $1 billion. However, with the rise of Decentralized Finance, TVL rose to $100 billion in November 2021.

Future Trends

In the next 6-12 months, the following catalysts may enable us to recreate the 'Decentralized Finance Summer' phenomenon on BTC:

1. OP_CAT (technical): A new opcode in the BTC programming language that enables the verification of Zero-Knowledge Proof and trustless bridge, which is a missing component for creating native BTC extension solutions. In addition, covenants and vaults will also enhance the usability of BTC. This upgrade only requires a one-time soft fork because the opcode already exists in the BTC codebase.

2. BitVM (technical aspect): As an alternative to OP_CAT, BitVM can perform arbitrary computations off-chain and realize the creation of trustless bridges.

3. US monetary policy: Due to the policy shift caused by the US election, Trump, and JD Vance, it is expected that the interest rate may drop by as much as 50 basis points in the next 6 months, which will drive funds into Bitcoin, as one of the most trusted cryptocurrencies.

4. Liquiditystake on BTC: Liquiditystake, driven by @babylonlabs_io, can bring a new wave of Liquidity to the native applications of BTC. As a reference, @Lombard_Finance launched in September and attracted more than $260 million BTC TVL in less than a week.

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