Over the course of its 14-year history, Bitcoin (BTC -4.56%) has primarily existed as a new form of money made possible by blockchain technology. The goal, as established by Bitcoin founder(s) under the name Satoshi Nakamoto in 2009, was to become a truly decentralized, peer-to-peer digital currency for financial transactions. But all that could be about to change in 2023.
At the end of January, a new protocol called Ordinals was launched that will make it possible to create and store non-fungible tokens (NFTs) on the Bitcoin blockchain. The launch has already sparked an outcry in the token's community, and it is sure to affect how investors think about Bitcoin, and how they value it.
What are Bitcoin NFTs?
These new Bitcoin NFTs are going to be very different from the NFTs you find on, say, Ethereum (ETH -4.52%) or Solana (SOL -8.79%), which are the two heavyweights when it comes to NFTs right now. Current NFTs are cryptographic tokens powered by smart contracts. They reside on top of a blockchain and are separate from that blockchain.
Image source: Getty Images.
In contrast, these Bitcoin NFTs are pieces of artwork that are literally "inscribed" into the very blockchain itself. Using a clever bit of programming and a deep knowledge of how the blockchain functions, developers were able to find a way to add NFT data to blocks that were previously only able to hold financial transaction data.
New use cases for Bitcoin
Most notably, the introduction of NFTs means that Bitcoin can be used for more than just financial transactions. Thus, from an investment perspective, the introduction of NFTs could actually boost the digital currency's value.
Anything that adds utility to a digital coin should increase the value of that coin, right? And given the size of the NFT market (which posted nearly $25 billion in sales in 2022), there could be a huge impact on future valuation if Bitcoin starts to chip away at the NFT market share of Ethereum and Solana.
Moreover, these new NFTs could potentially attract an entirely new demographic to Bitcoin. When it comes to crypto, many people want to have a little bit of fun. That's why meme coins are so popular, and why NFTs took off in the first place.
So NFTs could be one way of opening up Bitcoin to new investors and making the cryptocurrency even more attractive to a mainstream audience.
Limitations of Bitcoin
On the negative side, these NFTs have the potential to clog up the Bitcoin blockchain and make it slower than it already is. Right now, it can only process seven transactions per second, so anything that slows down that processing is going to decrease its value as a payment method.
Moreover, these NFTs, far from opening up new use cases and new market opportunities, might actually end up highlighting the limitations of Bitcoin.
For example, it's known to be incredibly energy-intensive, causing miners to consume tremendous amounts of power to mine a single block. So why would anyone want to make the process even more inefficient? Some miners have already said they will refuse to mine any Bitcoin blocks that contain NFT data.
For many purists, NFTs run counter to the original vision of Satoshi Nakamoto and the famous Bitcoin whitepaper. In their minds, adding NFTs to Bitcoin is as controversial as the addition of the giant glass pyramid to the Louvre in Paris.
Some developers have even called the new NFTs an "attack on Bitcoin." So it's unclear how much appeal these NFTs are going to have.
Does this boost Bitcoin's value?
At the end of the day, I don't think Bitcoin needs NFTs. Not every blockchain needs to be all things to all people, and it should not attempt to become Ethereum.
And these new NFTs are not trying to "fix" anything that's wrong with current NFTs. If anything, they're a step backward for NFTs because they are not tokens, and thus cannot be moved off-chain or easily traded.
As even the creator of the new Ordinals protocol acknowledges, these NFTs are more like "digital artifacts" that will reside on the Bitcoin blockchain forever.
I don't think these new NFTs are going to move the needle for investors. But I think they will generate much more public debate about Bitcoin, and suggest new ways to make it even better.
As for me, I'm watching developments that will improve the efficiency and speed of the blockchain, because that's the best way to add long-term value to Bitcoin.
