Bitcoin Ordinals

Bitcoin Ordinals | February 24, 2023

On most blockchains, NFTs are issued as unique tokens with a link that points to a file source, usually an image, that is stored elsewhere (often times Arweave or IPFS).

Bitcoin’s recent Taproot update has made it possible to take an individual Satoshi (the smallest denomination of BTC, or 0.00000001 BTC) and inscribe it with data that is stored directly on chain.

The result is an NFT that is completely immutable and stored on-chain vs traditional NFTs where the NFT can potentially be altered by changing the data stored in the file the NFT points to.

The drawback here is that with Bitcoin block sizes limited to a maximum of 4 megabytes, there are limitations to the file size of inscriptions.

Before we go any further, it’s important to understand my personal view on Bitcoin so you can understand any underlying hesitancies in the analysis of the long-term value proposition of Bitcoin Ordinals.

The Problem with Bitcoin

Quite contrary to the popular narrative within the crypto space, my general view on Bitcoin is that it has a flawed, unsustainable security model that will inevitably result in a contentious fork to proof of stake, where it will likely lose a ton of market share.

Also, it's main purported use case as a store of value is vulnerable to competition as BTC lacks upgradeability in a market that is constantly evolving.

While I’m not the only person who has come to this conclusion, click ‘read more’ below to see the analysis that has led to this viewpoint.

Read more →

As investors looking for opportunities to make money in the crypto/NFT space, there are really a few questions we need answers to:

1. Do Bitcoin Ordinals have staying power?
2. Will a robust market with large amounts of trade volume develop for Bitcoin NFTs?
3. How do we identify NFTs on Bitcoin that are likely to appreciate in value?
4. Is there an advantage to buying early(now), before a high-volume market emerges?

Are Bitcoin Ordinals here to stay?

Probably. There are only two ways they can ‘go away’.

1. A change, or fork, to the Bitcoin network revokes the ability to inscribe Sats with data.
2. A lack of interest and demand leads to a low-volume, illiquid market.

Many Bitcoin purists have pushed back, irrationally, on the idea of having NFTs on the Bitcoin blockchain. They believe that NFT transactions bloat the ledger and make everyone else’s transactions more expensive.

Here is a Bitcoin Core dev claiming that Bitcoin Ordinals are an abuse of the network:

While there is a group of Bitcoin maximalists that share this opinion, the majority seems to be in favor of Bitcoin Ordinals. Most importantly, Bitcoin miners are in favor of Ordinals, because it increases the demand for Bitcoin block space, and thus increases the profitability of mining.

It is quite difficult to make changes to (fork) the network successfully without the support of the miners which means it will be difficult for the anti-ordinal group to change the Bitcoin network to eliminate the ability to create Bitcoin NFTs.

The larger concern to Bitcoin NFT investors a lack of technical development (productization) and retail interest in Bitcoin NFTs.

Because Bitcoin NFTs are so new, there is very little infrastructure built yet for traders and collectors. At this point in time there are a few rough iterations of Bitcoin NFT exchanges and a few Bitcoin NFT wallets.

From a strictly UI/UX standpoint, Bitcoin NFTs lag behind other chains like Ethereum and Solana.

In order to attract more trade volume, the Bitcoin developer community will need to develop better infrastructure solutions for traders and collectors to improve accessibility to Bitcoin NFTs.

On the topic of accessibility, one thing Bitcoin ordinals have going for them is their price denomination in BTC. This gives artists and projects building NFTs on Bitcoin access to the over 6M addresses that have >$1k in BTC.

In short, the current accessibility of Bitcoin NFTs is very low, however, as Bitcoin NFT productization improves, accessibility should greatly increase.

Examples of Bitcoin NFT productization would be integrations with Blur, OpenSea, Coinbase wallet, Metamask, etc. As Bitcoin NFTs become accessible through the already popular crypto wallets & exchanges, demand may increase.

Will a robust market with large amounts of trade volume develop for Bitcoin NFTs?

Most likely. Why? Aligned incentives. It’s in the crypto industry’s best interest to foster a strong BTC NFT market.

NFT exchanges and crypto wallets will likely add support for Bitcoin NFTs as a way to differentiate themselves from their competition and as an attempt to establish dominance in an emerging market.

How do we, as investors, make money from Bitcoin NFTs?

Identify Bitcoin NFTs with high potential during a time when general demand and/or accessibility for Bitcoin NFTs is low.

The same rules apply to Bitcoin NFTs as regular NFT projects.

When attention subsides, floor prices drop, and vice versa. Ideally you sell into hype and buy when everyone is bored of the narrative and volume is low.

Alternatively, you can look to make quick flips during periods of high demand, though for the inexperienced this is essentially a game of high stakes hot-potato.

As a buyer, you need to have confidence that hype and excitement around the NFT you are purchasing will return at a later date.

So the question becomes, what (or who) is going to drive excitement (demand) to the NFT you purchase?

There are two primary things that consistently drive demand to an NFT project:

1. Rarity & Historical Significance (Collectibles)

Ultra rare and/or historically significant NFTs get bouts of speculation when the overall NFT market is hot. They are generally illiquid and difficult to find buyers for, but can fetch high prices when they do sell. They don’t necessarily need a team or community pushing for

2. Founders or Team (Built Projects)

A project’s founders or team can continually renew interest and demand. For example, Yuga is constantly working towards the next exciting thing in their roadmap. There’s always another mint, another game, or another reward. The DeLabs team, for example, is incredible at going viral on social media and pushing demand to their NFTs.

Founders who understand the attention economy will drive demand towards their project.

Note that the nature of the Bitcoin blockchain and the way ordinals are inscribed lends itself more to the collectibles category. The file data is inscribed directly onto a single satoshi and lives permanently on the Bitcoin blockchain, which the majority of the market believes to be the most trustworthy and decentralized blockchain in existence.

Because Bitcoin does not have robust, scalable native smart contract functionality, it is not well suited for projects that are trying to build innovative things. For example, it would not make sense for Yuga to build their Otherside metaverse on Bitcoin. Nor would it make sense for DeLabs to build their staking mechanics and rewards center on Bitcoin.

Thus, as investors, it makes sense to tailor a strategy around Bitcoin’s strengths as an ideal chain for collectibility and general provenance.

Note that a sub-category of collectibles is 1-of-1 art. Keep in mind that Bitcoin NFT art is limited by the 4mb block size, meaning the file size must be below 4mb, and the cost of inscription can get quite expensive as the file size approaches the maximum. Once again, the high cost of inscribing Bitcoin NFTs makes it an unattractive chain for larger projects and a more ideal chain for smaller collectible collections.

The file size limitations came into play recently with the 535 DeGods that were inscribed in one single block. Because they wanted to ensure that all 535 DeGods were a part of the same Bitcoin block, the images had to be downscaled, making them blurry:

The images can then be scaled back up by 3rd party exchanges and/or wallets, but the image that actually lives on the blockchain is blurry.

Ordinals from projects that are already successful on other chains, such as DeGods, may derive additional value from the core collection, making them lower risk acquisitions.

Watchlist

Ordinal Punks

Ordinal Punks are a collection of 100 CryptoPunks inspired ordinals on Bitcoin. They fetch a high price due to their low inscription counts (between 407 and 642), meaning they are among the first 1000 ordinals on Bitcoin.

At this point in time, Ordinal Punks have the highest Bitcoin NFT sale recorded, with Ordinal Punk #94 selling for 9.5 BTC, or ~$215,000 at the time of sale.

One major drawback to Ordinal Punks is that they are a CryptoPunks derivative and derivative collections rarely hold value in the long-term.

DeGods

535 DeGods were inscribed as ordinals on the Bitcoin blockchain in a single Bitcoin block. These 535 DeGods were originally “burned” early on in the DeGods span of existence, but are now living on as Bitcoin ordinals.

These ordinal DeGods should benefit by being associated with the rest of the DeGods collection, which has demand consistently driven by the team and founders.

The drawback is that because they are on Bitcoin, it is unlikely that they will carry the same benefits (such as staking) as the core collection which is moving to Ethereum.

This is due to the Bitcoin blockchain not supporting many of the functionalities that can Ethereum does. Additionally, due to Bitcoin’s limited block size, the DeGod images had to be downscales to fit, making them blurry.

Resources

Currently, (February 2023) accessibility is still low with no trusted Bitcoin NFT exchanges live yet, and the first wave of excitement has begun to die down. Here are a few resources to keep track of:

Ordinals.com has documentation on Bitcoin Ordinals.

OrdealBook is an OTC market for various ordinal collections.

Ordynals is a Bitcoin Ordinals directory.

Gamma is an NFT exchange for the Stacks blockchain that is working to integrate an Ordinals marketplace.

Ordswap is a rough iteration of an ordinals marketplace with a fairly poor UI/UX, and is not seeing much volume or use.

Ordinals Wallet is, you guessed it, a wallet that supports Bitcoin Ordinals.

Xverse is a Bitcoin wallet that supports Bitcoin Ordinals.

Hiro is a Bitcoin & Stacks wallet with a similar UI to MetaMask that supports Bitcoin Ordinals.

Potential catalysts

• OpenSea Integration
• Blur Integration
• Coinbase Integration
• High quality Ordinals exchange launches with proper UI/UX
• Major project (like Yuga labs) launches an ordinals collection

Final Notes

• The Bitcoin Ordinals market is currently immature and lacks productization that makes it accessible to general consumers.
• Bitcoin ordinals benefit from the file data being stored directly on the Bitcoin blockchain, but the Bitcoin blockchain lacks functionality ideal for innovative or transaction intensive uses such as NFT staking.
• This makes Bitcoin Ordinals most suitable for small collections of art and collectibles.
• Low inscription counts (earliest ordinals) are the rarest, and are currently the only attribute demanding significant value.
• Successful projects on other chains may look to drop special edition sub-collections as Bitcoin ordinals. These may be more suitable for speculation as they inherit some brand value from the already successful core collection.
• New narratives will have hype, but hype always dies down with time. As a speculator, you must identify the next source of excitement that will drive demand to your NFT.
• Hype is generally driven by founders or a spike in general adoption of the underlying technology.
• BTC denomination is a major advantage for Bitcoin ordinals, as Bitcoin is the most popular cryptocurrencies in the world.
• As is common with most new technologies, scams will be rampant. Remain vigilant and use common sense.