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 payments system and the ultimate form of "sound money." Some even imagined that one day, Bitcoin might replace the U.S. 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's concerning it that these innovations are leading to higher transaction fees, network congestion, and complaints about market disruptions. What's going on here, and what impact should it have on your decision to buy Bitcoin?
The "new" Bitcoin
Perhaps the easiest way to describe what's going on 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 core purpose of its blockchain is to handle digital currency transactions. From this perspective, blocks on its blockchain should only contain transaction data -- nothing more. Proponents of the new Bitcoin, though, believe that the core Bitcoin blockchain should be used for more than just digital currency transactions. Why not the creation of NFTs or even meme tokens, such as those found on the 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 "inscribe" text, images, and other content into blocks on the Bitcoin blockchain. By the end of February, these Ordinals were so popular that Yuga Labs, creator of the 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 first started appearing in early March, and if anything, have been even more of a sensation than Bitcoin NFTs. In just two months, BRC-20 tokens have nearly surpassed a total market cap of $1 billion. In early May, signs of a Bitcoin meme-token mania were emerging.
Real-world impact
According to one blockchain analytics service, 65% of all Bitcoin transactions on May 7 were related to BRC-20 tokens. Put another way, 65% of the traffic on the Bitcoin blockchain this past Sunday involved people swapping 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 put a temporary halt on 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, the transaction fees for withdrawing $100 in Bitcoin are now reportedly as high as $20. Think about that: If your bank charged you $20 every time you took $100 out of the ATM, you might start looking for a different bank.
Of course, the innovators who brought us Ordinals and the new BRC-20 tokens will describe how much functionality and utility they are bringing to Bitcoin. Perhaps they will tell you how they are helping Bitcoin reach wider mainstream adoption. And they will claim that they helped to create a billion-dollar market opportunity literally overnight. Fair enough.
But I can't help thinking about that 65% figure. Are two-thirds of Bitcoin transactions now just related to speculating in meme tokens? Please, nobody tell Gary Gensler this. As soon as the Securities and Exchange Commission chairman finds out that crypto enthusiasts have turned Bitcoin into a speculative meme-token playground, it's game over. And that's 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 inscribing funny pictures into its blockchain?
Should you invest in Bitcoin?
At one point, I thought the new NFTs might be a good thing for Bitcoin's future valuation. However, 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, yes, "meme." Now that larger, more mainstream cryptocurrency exchanges are starting to list these tokens for trading, this problem could get bigger as more people get in on the meme-token mania.
For now, I remain bullish on Bitcoin long term. But, in the short term, I'm taking a close look 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 hindered by high fees, congestion, and other forms of market friction, then it might be time to pump the brakes. If Bitcoin is trying so hard to become Ethereum, why not just invest in Ethereum?
