Beware of Wrapped Bitcoins
Beware of Wrapped Bitcoins
Bitcoin

Beware of Wrapped Bitcoins

By Patrick Verardi - 21 Oct 2022

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So-called Wrapped Bitcoins are tokens issued on blockchains that are different from Bitcoin’s blockchain but represent precisely BTC, especially its price. 

Wrapped Bitcoin (WBTC)

The most famous and widely used is WBTC, with a market capitalization of more than $4.5 billion. With this market capitalization, it is by far the seventeenth largest cryptocurrency in the world, superior in this respect to, for example, Uniswap’s UNI, Avalanche’s AVAX, Litecoin, Ethereum Classic, and so on. 

WBTC is a token created on the Ethereum blockchain through a special smart contract, and 1 is issued whenever 1 BTC is deposited on the smart contract. Thus, there are as many original BTC immobilized on the WBTC smart contract as there are WBTC tokens issued. 

In fact, it is also present on other blockchains, such as Polygon’s, but the vast majority is on Ethereum

The reason for its existence is that the original BTC on the Bitcoin blockchain cannot in any way interact directly with other blockchains. So in order to be able to use BTC, for example, on the Ethereum blockchain, tokens have been created on this other blockchain that replicates the BTC immobilized in the smart contract. 

To date, there are approximately 244,882 BTC immobilized on WBTC and 244,880 WBTC issued on the Ethereum blockchain.

The price of Wrapped Bitcoin

This exact match means that the market value of WBTC is extremely similar to that of BTC. In fact, over the medium and long term, it is virtually identical. 

The same cannot be said, however, for the other wrapped Bitcoins. 

Although WBTC is by far the most widely used and the most important, there are at least three others: XBTC, SOBTC, and CEWBTC. 

None of these other three tokens that are supposed to replicate the price of BTC turns out to have a price very similar to Bitcoin’s original price. 

While right now, the price of WBTC differs from the original by only 0.05%, that of XBTC differs by almost 1%, that of CEWBTC by 1.1%, and that of SOBTC by as much as 3.5%

In all these cases, with the exception of WBTC, the price of wrapped Bitcoin is lower than the original price of BTC. 

On the BSC blockchain, there is another wrapped Bitcoin, called Bitcoin BEP2 (BTCB), which right now has a market value slightly higher than that of the original BTC, and over the medium term, is tracking that of Bitcoin very well. 

The different blockchains where Wrapped Bitcoin is present.

Many blockchains other than Bitcoin’s host wrapped Bitcoin within them. 

On Ethereum, there is WBTC, on BSC Chain, there is BTCB, on Solana, there is SOBTC, on Cardano, there is CEWBTC, while XBTC is on Stacks. 

In fact, many other blockchains also host wrapped Bitcoins, such as RBTC on RSK, but care must be taken to avoid confusion.

First, when you want to use BTC on a different blockchain than Bitcoin, such as on a DeFi protocol, you have to make sure you choose the correct wrapped Bitcoin. 

Moreover, some wrapped Bitcoins, such as WBTC itself, exist on different blockchains. So, in those cases, you have to be careful to use the right tokens with the correct wallets. 

It is easy to get confused, especially if you do not have a clear understanding of how complex the world of wrapped Bitcoin is. 

Also adding to the confusion are all those cryptocurrencies, or tokens, that have decided to include the word “Bitcoin” in their name but are neither BTC nor wrapped Bitcoin. 

The most famous is Bitcoin Cash (BCH), whose namesake blockchain has nothing to do with Bitcoin. There are also Bitcoin SV (BSV), Bitcoin Gold (BTG), Bitcoin Diamond (BCD), and others, but they are easily recognizable because they have a completely different price than the original Bitcoin. 

The big picture

So overall, in addition to Bitcoin (BTC), there are tokens on other blockchains that replicate its value, called wrapped Bitcoin, and cryptocurrencies that have nothing to do with Bitcoin but use that word in the name. 

Wrapped Bitcoins can be used on other blockchains that precisely replicate the price of BTC. In theory, these tokens should be redeemable at any time by their owners, receiving 1 BTC for each wrapped Bitcoin token given back. 

That has always worked this way for WBTC and BTCB, with no particular problems, which is why they manage to maintain a value always very close to that of BTC. 

In reality, however, there are dozens of wrapped Bitcoins on dozens of different blockchains, only they cannot always perfectly replicate the original price. It also depends a lot on the fairness and ease with which they can return Bitcoins at par when they are returned. 

Parity and security

The main issue is guaranteeing BTC’s return at any time at the precise 1:1 ratio to anyone who wants to return a wrapped Bitcoin. 

To do that, a number of BTC equal to the number of wrapped Bitcoins issued must have been set aside and immobilized, as done, for example, by WBTC. 

In addition, decentralized software must be available that allows the holders of the wrapped tokens to get back the original BTC without any hindrance, limitation, or control. In short, no arbitrary intervention is possible to prevent peer-to-peer exchange. 

Unfortunately, it is always extremely difficult for users to check that all this is true, so for all those wrapped Bitcoins for which there is no reassuring history, it is advisable to be very careful. 

To date, WBTC and BTCB, for example, have always guaranteed parity with BTC, but it is not even certain that they will always be able to do so in the future. 

In order to enable disintermediated and immediate exchange, it is necessary to create cross-chain bridges that operate simultaneously on two blockchains, namely that of Bitcoin and that of the wrapped token, and bridges are often targets of hackers. So it is not only a matter of parity between the wrapped token and the collateral but also a matter of security because of the way smart contracts are designed and implemented. 

Price trends

Being parity with Bitcoin, the price trend of wrapped Bitcoin should be the same as that of BTC. So the predictions are also effectively the same. 

Except that, for wrapped Bitcoins, there is another element to be taken into account, and this element is precisely security

In fact, if there are problems with security or parity with collateral, the price of a wrapped Bitcoin could fall below that of BTC, even by a lot. 

Indeed, a wrapped Bitcoin that has a market value perennially significantly below that of BTC gives a very unsafe image of itself. 

Note that these technical issues that could specifically affect the price performance of these tokens that replicate BTC also depend on the bridges with which they are operated, but also on the blockchains on which they exist. 

For example, suppose you temporarily block the Solana blockchain. In that case, you also block the ability to use SOBTC, even though the original Bitcoin continues to function properly instead. 

In case of serious problems with the underlying blockchain, the price of wrapped Bitcoin could even fall far below that of Bitcoin. 

The picture, therefore, is not only complex but also delicate. And at some times, it could even become critical. 

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