If there’s one critique of Bitcoin, I thought was a feature, not a bug; it was the claim that it was a boomer coin; it wasn’t Turing complete, so it couldn’t hold all sorts of token standards and non-native blockchain data stuffed on it.
All you can do with Bitcoin is buy it, store it, sell it, trade it or buy something with it. That’s what money is meant to do, but some didn’t see Bitcoin as money but more as a technology network that happens to have a native asset.
To make money in Bitcoin over the short term, you either need to mine it, provide a service, or become a world-class trader. All these efforts are far from easy, and you’re competing against a global market, so instead of playing this game, some have decided to create one of their own.
As capital continues to flow into Bitcoin, there has always been an incentive to build a copycat, an ancillary market where traders can create markets to buy and sell Bitcoin in different forms. It started with altcoins and ICOs in the 2017 cycle and NFTs in the 2021 cycle.
NFTs have exploded in popularity in the past two years; with the backing of celebrities and social media personalities, it has become a household name, yet very few people know what it is or why they should bother investing in one. Sadly for many of these Bored Apes, the killer app is finding people who have money and less sense, relying on monkey see, monkey do.
Luckily for Bitcoiners, this speculation on jpegs was largely isolated in the altcoin market, as NFTs were built on a new token standard. Until now, the Ordinals protocol brought this speculation of pictures and files to Bitcoin.Â
Ordinals and inscriptions are here to stay, but like just because you have “NFTs” on Bitcoin, the deepest and most liquid market, doesn’t mean you’re going to access a plethora of buyers and buying power.
But Bitcoiners are not keen speculators; they’re looking to secure capital for the long term or deploy capital into constructive pursuits and not marketing gimmicks and gambling. Now that the initial ordinal hype has died down and block space competition is back to normal ranges, many inscription holders have found that all they bought was an overpriced jpeg that no one else wants to buy.
The lack of liquidity remains a major constraint in NFT trading, and if you can’t get a Bitcoiner or someone with Bitcoin to buy your inscription, you’re unlikely to “realise” a return on your “investment.” NFTs are highly illiquid assets, and selling them quickly at the desired price is difficult. This lack of liquidity has led many to realise they made a bad purchase, but it looks like we’re not nearly close to enough people accepting the loss.Â
Inscriptions are illquid
When you purchase an inscription, your only way to realise a profit or even a loss in cases where you are desperate to access liquidity you need to find another sucker willing to buy it off you. There are only so many people delusional enough to trade NFTs; if buyers have been exhausted, your only way to attract interest is to drop the price.
If you drop the price and the sale is made, any NFTs in that collection could be reprised based on this latest sale, and that is not good for other people who overpaid for an NFT.
Instead of finding a seller based on price, ordinal marketplaces have sprung up to offer liquidity to traders by securitising them as backing for a loan. The trader can access capital by taking out a loan and avoids selling the NFT on the open market.Â
The intention is to borrow funds, and, in case you can’t pay the lender back, you agree to forfeit the assets you borrowed against as payment.
| Pros | Cons |
|---|---|
| No need to find another buyer | Exposed to market corrections |
| No need to sell your assets | Loss of inscription NFT holder benefits |
| Immediate access to liquidity | Risk losing the “asset” if unable to repay the loan |
| Take advantage of market price fluctuations | Lenders can lose money if the asset is overvalued |
Who might want to borrow against their NFTs?
The elevator pitch for additional financialisation of NFTs by borrowing against your inscriptions is the ability quickly receive liquidity. Instead of waiting months for a new novice investor to come along and buy your mistakes, you can access funds immediately.
NFT collectors.
Those who already own Inscriptions but don’t want to sell them hope the market continues to increase in value over time. So, they borrow against them to invest in more NFTs without losing their assets. This is also a way to unlock capital from your NFT collection and use that capital to juice prices so you can sell other NFTs at an overvalued price.Â
Avoid a taxable event.
Ordinal-backed loans can be used to access liquidity without creating a taxable event (through selling your Inscriptions). This is a tax-efficient strategy some investors use since the interest payments on borrowing against collateralised NFTs are often lower than the capital gains tax if those assets were sold.
Lending is ideal for wrecking the normies.
NFT lending offers users myriad opportunities for speculation and for novice traders to gain leverage that can and will see many of them get wrecked. In general, lending NFTs is rife with risk, a risk that is not properly priced and when risk is mispriced, you find people focusing on the wrong incentives.
Complex transactions.
The idea behind ordinal-backed loans is using PSBT transactions to create an escrow and multi-sig to hold the inscription in a wallet with multiple holders having signing rights. This is not a simple transaction to pull off for your average user or NFT bro, and many could sign over incorrectly and lose their inscribed satoshi or be suckered into signing over rights to their Bitcoin and inscriptions.
Improper valuation.
Loans are made according to a mutual agreement on the value of the collateralised asset. Without a proper value, lenders risk losing money, while a borrower risks getting less than they otherwise would for their NFT asset.
Platform risk.
Centralised platforms might make it easier for users because you’re not dealing with on-chain transactions but rather a third party that takes your inscription as collateral into their custody. This means you are at the mercy of that platform should they disable withdrawals or become insolvent.
Defaulting on the loan.
This is the most common risk when borrowing against your inscription. If you can’t pay back the loan you received, you risk losing your monkey jpeg.
On the other side of the transaction, if these are P2P lending markets, you could be stuck with useless jpegs, and the borrower would opt to leave you with that bag and never bother to repay the liquidity.
Market conditions.
The ordinals and inscription market is volatile, like any NFT market. Because of this, lenders risk losing money if the NFT is overvalued or the price plummets.
The speculation continues to evolve.
Sadly, this grift will be around for a while, and plenty of awful ideas from the wider crypto ecosystem will be applied to ordinals and inscriptions.
I think tokenisation of inscriptions could be one where high-priced inscriptions are broken down with derivate tokens and sold to people who cannot afford to trade in the inscription market for specific collections.
Another would be “bridging” inscriptions into other networks that claim to be part of the Bitcoin network but are side-chains in name only and not are nothing more than Ethreuem clones.
Once “moved” into these token-crazy ecosystems, you can then go wild with the financialisation by creating additional derivatives on top of inscriptions like futures contracts.
Do your own research.
If you want to learn more about ordinals on Bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research other sources, and you can start by checking out the resources below.
Which side of the ordinals debate are you on?
Do you like the idea of bringing NFTs to the Bitcoin base chain, or is it a distraction? Does it bring additional utility or a new set of narrative attack vectors for Bitcoin? How do you think the incentive structure around transactions will change with this new form of transaction competing for on-chain block space?
Let us know in the comments below.
