Written by: Guillaume, Venture Capital Associate at UTXO Management
Compiled by: Yangz, Techub News
If you’re looking for a more substantive Bitcoin 2024 recap than the TLDR thread on X, this post is for you. Much of what follows is the result of discussions with Tradfi investors, cryptocurrency investors, Bitcoin ecosystem project founders, analysts, and mining executives.
Macro: Bitcoin has crossed the Rubicon
Donald Trump and the Point of No Return
"Bitcoin strategic reserve" has been the idea of many Bitcoiners for many years, and sometimes it can even be said to be a dream, and it actually happened last week. It can be said that Bitcoin crossed its own "Rubicon" last Saturday, and behind this is actually the game between major powers. From today, countries around the world must take the concept of Bitcoin reserves seriously, otherwise they will face the possibility of being left behind by other countries. If this concept is finally put into action, the United States will own about 1% of the total supply of Bitcoin.
Note: The Rubicon is a shallow river in northeastern Italy. In 49 BC, Caesar crossed the river to Rome, Italy. When crossing the river, Caesar said "alea iacta est", which means the dice have been rolled, similar to the Chinese saying "the wood has become a boat", indicating that the situation is set and irreversible.
From the perspective of other countries, it would be difficult to replicate this strategy because the United States basically got these bitcoins for free, compared to many countries that would have a very difficult time accumulating hundreds of thousands of bitcoins without paying a huge premium. This is why Bitcoin mining has become a national security issue. After Trump's announcement, Michael Saylor presented a framework for the country to adopt Bitcoin as a treasury asset (how to reasonably adopt Bitcoin and why to do so) in front of more than 10 senators. When good ideas meet good times, they will be unstoppable.
Institutions have flocked to
Game theory applies to institutions as well. If nation states are accumulating Bitcoin, then corporations must do the same. Nation state accumulation essentially guarantees long-term price appreciation for Bitcoin, which in turn means that dollar-denominated corporate finances will suffer relatively. This becomes a bright line separating winners from losers. Moving some of your assets into Bitcoin won’t necessarily make you a winner, but it will become a basic requirement for institutional competition. Institutions that don’t act in this way will simply be left behind. As the old saying goes, “it makes sense to buy some just in case.”
Retail investors are still absent
Although Bitcoin is less than 10% away from its ATH, as shown in the chart below, retail traffic measured by the 30-day change in total transfer volume below $10k is at a 3-year low.
From the perspective of retail participation, the conference was successful, but retail buyers seem to be tired and either all in or unwilling to buy more Bitcoin at the current price. Another possible explanation is that the feeling revealed throughout the conference is that people are "waiting for the next catalyst."
VC and Bitcoin Ecosystem
Supporting the best Bitcoin talent
UTXO Management hosted its first investor day, UTXO Alpha Day, at the conference. We brought together hundreds of capital allocators, entrepreneurs, institutional investors, and angel investors to discuss yield assets in Bitcoin, the landscape of new Bitcoin layers, and the idea of Bitcoin as the ultimate fiscal asset. The event was a success and a great reminder that venture capital should focus first on outstanding individuals who are competing to bring new utility to Bitcoin. After participating in the exchange held by BTC Startup Lab, I deeply realized how valuable the founders of Bitcoin ecosystem projects are, and the United States must welcome them with open arms. Their work is focused on preparing for the bull market, and when Bitcoin decisively breaks through the previous high, everything will follow.
One of the key takeaways from the conference was that investor demand for Bitcoin native yield strategies is growing beyond our initial expectations. When we talk about idle capital, most people tend to think of Bitcoin in their wallets, however, last week has shown that the opportunity for Bitcoin native yield is equally attractive to crypto investors who are currently deploying capital on different chains. In the current environment, TVL follows interests, and we have discussed with many investors who are either looking to cross-chain from Bridged BTC on other chains (such as WBTC) to Bitcoin L2, or looking for more attractive opportunities than Ethereum or Solana-based altcoins. Incentive activities of Bitcoin ecosystem projects provide varying upside in addition to general yield returns.
VCs’ understanding of Bitcoin is still limited
As Galaxy highlights in its latest report on blockchain venture capital, investment interest in cryptocurrencies has grown steadily this year, but is still far from the peak seen in the first quarter of 2022. The report states that “in the second quarter of 2024, venture capitalists invested $3.194 billion in cryptocurrency and blockchain companies (up 28% from the previous quarter) across 577 deals (down 4% from the previous quarter).”
While this bodes well for the cryptocurrency industry as a whole, venture capital investments in the Bitcoin ecosystem accounted for only 3.1% of total transactions, or $96.4 million, in the second quarter of 2024, while Bitcoin’s market capitalization accounted for more than 55% of the entire cryptocurrency market.
We believe that as Bitcoin DeFi/infrastructure improves, this trend will soon reverse and the VC opportunities in the Bitcoin ecosystem will become non-negligible. One possible reason for the current lag in Bitcoin VC financing is that VCs do not have as much technical knowledge of the Bitcoin ecosystem as other cryptocurrencies. The small number of Bitcoin analysts and the historical lack of programmability in the Bitcoin space have affected its appeal to VCs. We expect this to change soon, as understanding the ins and outs of Bitcoin in a less crowded market will bring more technical talent (including developers) to the Bitcoin ecosystem.
Alpha in the Bitcoin Ecosystem
Henry Elder from UTXO highlighted all the ways traditional investors should consider when deploying on-chain Bitcoin capital at Alpha Day. Here are some highlights:
BTCFi is in its infancy and can be roughly divided into three categories: sidechains, L2, and meta protocols.
Relying on the experience of Ethereum sidechains and related tools in the past few years, Bitcoin sidechains are easier to start than real Bitcoin L2, so sidechains are also the most developed and mature BTCfi ecosystem. In addition, the Bitcoin sidechain ecosystem also benefits from the highly developed security audit infrastructure that already exists in Ethereum and its related L2.
L2: With the exception of Lightning Network, Bitcoin ecosystem L2 is still largely under development, with each product implementing a unique and novel technical solution to link security to Bitcoin.
Bitcoin meta-protocols that use the Bitcoin chain directly are the most native Bitcoin protocols. They use Bitcoin native assets, and the details of their operation are encoded directly into Bitcoin blocks, but must be decoded using a custom indexer. Arch Network is an example of a meta-protocol that supports BTCfi applications, while Ordinals, BRC-20s, and Runes are also meta-protocols that support BTCfi assets.
In the past, the only real Layer 1 options available for building were Ethereum and a few other blockchains. Now, Bitcoin offers an alternative that is not only more economically secure and credibly neutral, but also potentially offers superior technical security due to a smaller attack surface than Ethereum. Traditional projects can eliminate billions of dollars in annual expenses and/or inflation by switching to a proof-of-stake model using BTC or L2 on top of Bitcoin, while gaining better security and maintaining a high degree of technical and cultural independence.
Bitcoin L2: The coolest guy on the block
L2 becomes the focus of the conference
Unsurprisingly, L2 was a hot topic at the conference. BitcoinOS (Grail) announced a new Rollup protocol that verifies proofs directly on Bitcoin (BitVMX did something similar on testnet a few days ago). In addition, Bitlayer and many other L2-related companies were big sponsors of the conference, and there were many L2 afterparties. In summary, the momentum of L2 is undoubtedly strong (mainly sidechains, which Janusz from Bitcoin Layers insisted was wise). And I predict that this trend will intensify as these L2s continue to incorporate more projects into their platforms. Different Bitcoin L2s will compete to build strong community moats to withstand the fierce competition in the field. With more than 80 projects joining the track, we also found that this hype was obviously short-lived for many people. People mostly know the main players in Asia and the United States, while other players, unless they bring new innovations, will still be shrouded in the fog of war. A key moment during the conference was Cathie Wood speaking on the main stage about Bitcoin L2 with Alyse Killeen, which could be a sign that larger institutional players are considering entering the space (Franklin Templeton Development Institute also held a private event with several VCs, including UTXO).
Rollup Team at the Forefront of Bitcoin Research
After meeting with the teams at Alpen, Bitlayer, and Citrea, it became clear to us the level of technical research going on in the Bitcoin space. The paradigm shift of BitVM has spurred some of the brightest minds in the space to explore the frontiers of Bitcoin Script and zero-knowledge proofs, and the work being done now will likely enable the next million users to join the Bitcoin ecosystem with trust assumptions that meet the needs of most users.
However, despite the excitement about Bitcoin Rollup, there are still many challenges in this field. The first is the cost of publishing data availability to Bitcoin. While this is good for miners, how to provide the best solution while allowing users to trust the least intermediaries in the process (trust minimization solution) remains a difficult problem. Another important point is that these teams are preparing to release new technical documents to the public, aiming to bring new understanding on how to design bridges for these Rollups.
The Forgotten Lightning Network
With all the attention focused on Trump and the new, shinier sidechains, the Lightning Network was forgotten during the conference. Alex B of Bitcoin Magazine raised the issue during his Alpha Day presentation: “I don’t think I’ve heard a single person mention Lightning Network.”
It may be forgotten for a few days, but the Lightning Network is not dead yet. Once fees start to soar again (it’s not a question of if, but when), I’m sure the Lightning Network will be at the center of discussion again.
Regardless, the Lightning Network track will continue to grow in a slow and steady manner. Just like before the conference, when Lightning Labs announced that they would (finally) release Taproot Assets on the Lightning Network, my reaction to the news was: “I don’t think people understand the significance of this yet. Bitcoin is evolving.”
Lightning fast, trustless, native to Bitcoin (generating revenue for nodes). People always say it’s too early and sometimes that’s a mistake, but in the case of Lightning, I believe this is the best outcome for capital allocators. Yes, there are no degens and no culture on the Lightning Network, but it has superior token standards and network effects. Many people I’ve spoken to at conferences tend to be against applying Runes/BRC-20s to Taproot Assets, while I see them as complementary, one has a community, the other has the means to save the community a lot of costs and speed up transaction settlement (in a completely trustless way).
I think investment opportunities at the intersection of Runes/Bitcoin native assets and Lightning infrastructure will be significant as demand will naturally flow to these projects (Joltz and LnFi are good examples that come to mind).
Can I still mine now?
The price per unit of computing power is no longer the key to profitable miners, but "We are building an artificial intelligence pilot project"
In my discussions with miners and analysts, it’s clear that the only catalyst supporting miners right now has nothing to do with mining and everything to do with capital allocation. Miners are choosing to allocate resources to AI and HPC, while investors are choosing to allocate resources to miners with the most exposure to these relatively new verticals. There are several reasons for this shift:
First, after the Bitcoin block reward halving, miners have found it difficult to maintain a respectable profit, and transaction fees collected from Ordinals and Runes have (so far) been disappointing. This has led many miners to consider other sources of income, preferably ones that are highly profitable, predictable in timing, and compatible with existing infrastructure, and artificial intelligence is the perfect candidate.
Second, the market is also generously rewarding mining companies with AI exposure, as the marginal effect of hash rate announcements forces miners and analysts to rethink how to value public companies.
While this trend can be largely attributed to Core Scientific and Iris, it appears to be abating and returning to rationality, with many delegates betting on selling their available capacity to AI/HPC companies at a premium.
Still, other drivers of mining growth were evident last week, including unexpected advances in ASIC design efficiency (particularly Bitdeer’s goal of 5J/TH by 2025), and the return of institutional funding for mining, led by Cantor Fitzgerald, which announced a $2 billion funding round that it expects to grow much faster than that. This is important because unlike the 2021 mining cycle, when miners relied primarily on ASIC-backed loans to raise funds, capital markets have since been closed to miners, forcing them to rely on highly dilutive ATM offerings. This announcement could be a turning point for mining funding in the 2025 cycle.
Blockspace commoditization is becoming a reality
I had the pleasure of attending the Alkymia launch event hosted by Blockspace Media. For those unfamiliar with Alkymia, its newly launched platform allows users to place directional bets on Bitcoin transaction fees. This is a new set of tools that allows miners to stabilize their income while allowing exchanges, protocols, and traders to hedge against transaction fee volatility. As block space becomes more valuable, the complexity of on-chain transactions will also increase, providing an advantage to professionals who understand the nuances of the Bitcoin mempool.
Mempools were also a big topic of discussion last week, as additional programmability on Bitcoin and the introduction of Rollups could potentially bring some form of MEV or MEVil to the protocol. Understanding the potential impact of MEV on Bitcoin is important, and our investment in Rebar Labs has never been more meaningful. While we are still in the early stages of discussions, the general consensus among those I have spoken with is that MEV on Bitcoin will be different from Ethereum, with less centralization risk and more accessible opportunities for all miners.
The overlooked talk by Matt Corallo
Giving a speech in front of a possible future president of the United States is no mean feat. However, Bitcoin Core developer Matt Corallo gave a fascinating presentation on the most fundamental principles of Bitcoin development that deserves more attention. In particular, he accurately described the block size dispute in front of an audience of thousands. This period of Bitcoin’s history is less about the block size issue than about the governance process, i.e., who decides when and how the code should be modified?
After 2017, we found the beginnings of the answer, that miners and companies don’t have the final say. And after the BTC++ conference earlier this year, we found that developers/tech commentators don’t have the final say either. The only stakeholders left in the Bitcoin governance triumvirate are users, and while users must ultimately work with miners and developers to solidify code changes into the blockchain, they are still the “gatekeepers” that prevent unnecessary changes to the protocol. Bitcoin is not code, not a blockchain, and not even a currency, it is a consensus among users.
So, after more than 22,000 people came to Nashville to learn about Bitcoin, what did we learn from them?
In talking to a number of Nashville locals and international visitors, I gathered the following information:
Change is exciting, and most people are in favor of recent proposals to bring more functionality to Bitcoin. However, most people don’t understand what they change or how they work, and educational content is lacking.
After educating Uber drivers and restaurant/bar employees about Bitcoin, I found that user experience is still the top concern. Most people know about Bitcoin, have heard of it, or have bought some. But most often, people will put their Bitcoin on a mobile platform like Cash App and don't know how to deposit Bitcoin into their address. On top of that, I think Bitcoin's next upgrade should make it easier for people to keep custody of their Bitcoin, which is exactly what they will need later when interacting with L2 and applications. I believe that focusing on infrastructure investment will be a top priority in this cycle.
Finally, I want to end this post with Michael Saylor’s optimistic prediction for Bitcoin, which predicts that the price of Bitcoin will reach $13 million by 2045. Maybe you have to remind yourself every day that you may not be bold enough or optimistic enough.
