Written by: Guillaume, Venture Capital Associate at UTXO Management
Translated 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 the following 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 an idea for 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 idea of Bitcoin reserves seriously, otherwise they will face the possibility of being left behind by other countries. If this idea is finally put into action, the United States will have about 1% of the total supply of Bitcoin. Note: The Rubicon River 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 that the dice have been thrown, similar to the Chinese "wood has become a boat", indicating that the situation is set and irreversible. From the perspective of other countries, it will be difficult to replicate this strategy because the United States basically gets these bitcoins for free. In contrast, it will be very difficult for many countries to accumulate hundreds of thousands of bitcoins without paying a huge premium. This is also why Bitcoin mining has become a national security issue. Following Trump’s announcement, Michael Saylor presented a framework for the state to adopt Bitcoin as a treasury asset (how and why to adopt Bitcoin reasonably) 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 gains in Bitcoin prices, which means that dollar-denominated corporate finances will suffer relatively. This becomes a bright line separating winners from losers. Converting some of your assets into Bitcoin will not necessarily make you a winner, but it will become a basic requirement for institutional competition. Institutions that do not act in this way will only 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.
The conference was successful from a retail participation perspective, but retail buyers appear to be burned out and are either all in or unwilling to buy more Bitcoin at current prices. Another possible explanation is that the feeling that emerged throughout the conference was that people were “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 treasury asset. The event was a success and a great reminder that venture capital should focus first on exceptional individuals who are racing to bring new utility to Bitcoin. After participating in the BTC Startup Lab, I deeply realized how valuable the founders of projects in the Bitcoin ecosystem 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 main takeaways from the conference was that the 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 showed that the opportunity of Bitcoin native yield is equally attractive to crypto investors who are currently allocating capital on different chains. In the current environment, TVL follows interests, and we have discussed with many investors who either want to cross-chain from Bridged BTC on other chains (such as WBTC) to Bitcoin L2, or want to look for more attractive opportunities than Ethereum or Solana-based altcoins. In addition to the general return on investment, the incentive activities of Bitcoin ecosystem projects also provide varying upside.
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 its peak 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 venture capital opportunities in the Bitcoin ecosystem will become impossible to ignore. One possible reason for the current lag in Bitcoin venture capital financing is that VCs do not have as much technical knowledge of the Bitcoin ecosystem as they do of other cryptocurrencies. The small number of Bitcoin analysts and the historical lack of programmability in the Bitcoin space have affected its attractiveness 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 moving 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
Not surprisingly, 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 held many L2 afterparties. In summary, the momentum of L2 development is undoubtedly strong (mainly sidechains, which Bitcoin Layers’ Janusz insists is wise). And I predict that this trend will intensify as these L2s continue to incorporate more projects into their platforms. The 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. One of the key moments during the conference was Cathie Wood speaking about Bitcoin L2 with Alyse Killeen on the main stage, which could be a signal 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 with 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 allow the next million users to join the Bitcoin ecosystem with trust assumptions that meet most user needs. However, despite the excitement around Bitcoin Rollups, there are still many challenges in this space. The first is the cost of publishing data availability to Bitcoin. While this is a boon for miners, it remains a challenge to provide an optimal solution while allowing users to trust the fewest intermediaries in the process (trust-minimized solutions). Another important point is that these teams are preparing to release new technical documents to the public, aimed at bringing new understanding of how to design bridges for these Rollups.
The Forgotten Lightning Network
With all the attention focused on Trump and the new shinier stuff (sidechains), the Lightning Network was forgotten about during the conference. Alex B of Bitcoin Magazine posed this question while speaking at Alpha Day: “I don’t think I’ve heard a single person mention Lightning.” It may be forgotten for a few days, but Lightning is not dead yet. Once fees start to soar again (it’s not a question of if, it’s a question of when), I’m sure Lightning will be the focus of discussion again. Regardless, the Lightning track will continue to grow in a slow and steady manner. Just like before the conference, when Lightning Labs announced that they were (finally) releasing 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, Bitcoin-native (generating revenue for nodes) transactions. People always say being too early is sometimes 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 a superior token standard and network effect. Many people I spoke to at conferences tended to oppose the use of Runes/BRC-20s for Taproot Assets, while I see them as complementary, one has a community, and the other has the means to provide the community with significant cost savings and faster transaction settlement (in a completely trustless manner). I think the 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 great 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 currently supporting miners 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, miners are having a hard time maintaining respectable profits following the Bitcoin block reward halving, and transaction fees collected from Ordinals and Runes have been disappointing (so far). This has led many miners to consider alternative revenue streams, preferably ones that are highly profitable, predictable in timing, and compatible with existing infrastructure, and AI is the perfect fit. Second, the market is also generously rewarding miners with AI exposure, as the marginal effect of hash rate announcements forces miners and analysts to rethink how public companies are valued. While this trend can be largely attributed to Core Scientific and Iris, it appears to be waning 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 with Bitdeer aiming for 5J/TH by 2025), and the return of institutional funding for mining, led by Cantor Fitzgerald, which announced a $2 billion funding round that expects business 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 capital, 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 risk. 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 Bitcoin’s mempools. Mempools were also a big topic of discussion last week, as additional programmability in Bitcoin and the introduction of Rollups could potentially bring some form of MEV or MEVil to the protocol. It’s important to understand the potential impact of MEV on Bitcoin, and our investment in Rebar Labs has never made more sense. While we are still in the early stages of discussions around this, 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
Speaking in front of a possible future president of the United States is no mean feat. However, Bitcoin Core developer Matt Corallo gave a brilliant presentation on the most fundamental principles of Bitcoin development that deserves more attention. In particular, his accurate description of the block size battle in front of an audience of thousands. This period of Bitcoin’s history is less about the block size than about the governance process, i.e. who gets to decide when and how the code gets changed? After 2017, we found the beginnings of the answer, that miners and companies don’t get to decide. And after the BTC++ conference earlier this year, we found that developers/tech commentators don’t get to decide either. The only remaining stakeholders 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 unwanted changes to the protocol. Bitcoin is not code, it’s not a blockchain, it’s not even a currency, it’s a consensus among users. So, what did we learn from the 22,000+ people who came to Nashville to learn about Bitcoin? 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. Michael Saylor 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.
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