Wrapped Bitcoin vs. Bitcoin: Investor’s Guide 2024

What’s the difference between Bitcoin and Wrapped Bitcoin? 

Bitcoin (BTC) and Wrapped Bitcoin (WBTC) have the same exact value. 

The key difference is that BTC is built natively on the Bitcoin blockchain, while WBTC is built on Ethereum. 

Wrapped Bitcoin allows users to interact with decentralized applications on Ethereum. While WBTC is on a separate blockchain, it tracks the price of BTC and can be redeemed 1:1 for Bitcoin. 

What is Bitcoin?

Bitcoin is the world’s most popular cryptocurrency, created in 2008 by an anonymous person using the pseudonym Satoshi Nakomoto. 

Bitcoin uses blockchain technology to facilitate peer-to-peer transactions without intermediaries. BTC is famous for having a fixed supply of 21 million units — making it a great option for investors looking for a hedge against inflation. 

What are wrapped cryptocurrencies? 

Many blockchain networks — like Bitcoin and Ethereum — are incompatible with each other. 

That means if you hold BTC, there’s no way to transfer your assets to the Ethereum blockchain. This can be an issue if you hold a substantial amount of BTC, and you’re interested in using Ethereum-based DeFi protocols or buying Ethereum-based NFTs. 

Wrapped cryptocurrencies are designed to solve this issue, and allow you to use different cryptocurrencies on ‘incompatible’ blockchains. 

What is Wrapped Bitcoin?

Wrapped Bitcoin (WBTC) is an ERC-20 token (a token created on the Ethereum blockchain) representing Bitcoin. WBTC allows Bitcoin enthusiasts to engage with DeFi protocols, NFTs, and other decentralized applications on Ethereum! 

Because Bitcoin and Ethereum are incompatible blockchains, it’s not possible to transfer your BTC directly to an Ethereum wallet. Wrapped Bitcoin gives investors the next best option — a token that tracks the price of BTC! 

WBTC can be 1:1 redeemed for BTC through decentralized bridges or through exchanges — though you will be required to pay relevant transaction and blockchain fees. 

How can I use Wrapped Bitcoin? 

Wrapped Bitcoin can be used across various DeFi protocols, such as the following: 

• Uniswap
• Compound
• MakerDAO
• Aave

Is Wrapped Bitcoin as safe as BTC?

WBTC is considered safe. However, it’s important to note that wrapped cryptocurrencies come with centralized risks. 

What are the risks associated with wrapped crypto? 

Centralized risks occur when a single entity, such as a custodian, manages the collateralized Bitcoin. In cases like these, you may lose access to your Bitcoin if the custodian is hacked and/or goes bankrupt. 

Recently, soBTC — a wrapped cryptocurrency created by the exchange FTX — became irredeemable after FTX’s bankruptcy. 

How does WBTC manage wrapped crypto risks? 

WBTC is managed by the WBTC DAO (decentralized autonomous organization), a structure created specifically to minimize centralized risk.

The WBTC DAO is made up of 16 stakeholders — including some of the most trusted names in the space like MakerDAO and Gnosis. The DAO makes communal decisions,  such as adding/removing members and making changes to the WBTC smart contract. 

How do I swap wrapped Bitcoin for Bitcoin? 

You can swap Bitcoin for Wrapped Bitcoin through an exchange, or through a decentralized bridge. 

Here are a few platforms that allow you to swap BTC for WBTC, and vice versa: 

• Coinbase 
• Kraken 
• Atomic Wallet 

Is swapping Bitcoin for wrapped Bitcoin taxable? 

Generally speaking, trading one cryptocurrency for another is considered taxable. 

However, the IRS has not given any guidance on how ‘wrapping’ or ‘unwrapping’ a cryptocurrency is taxed. Some investors argue that BTC and WBTC are substantially identical, and that trading one for the other should not trigger a taxable eventbe taxable. 

You can take a conservative or aggressive approach to reporting these transactions based on your risk tolerance: 

Conservative approach: The conservative approach is to treat swapping BTC for WBTC as a crypto-to-crypto swap, and report a capital gain or capital loss depending on how the price of your crypto has fluctuated since you originally received it. 

Aggressive approach: The aggressive approach is to treat BTC and WBTC as equivalent to holding the same asset. This means that swapping one for the other would not trigger a taxable event. 

What are some other examples of wrapped cryptocurrencies? 

Let’s walk through a few other popular wrapped cryptocurrencies: 

RenBTC: Like WBTC, RenBTC is a wrapped cryptocurrency on the Ethereum ecosystem designed to track the price of Bitcoin. RenBTC uses a decentralized smart contract to manage the wrapping process — making it a great choice for investors looking to minimize centralized risk. 

Wrapped Ethereum (WETH): wETH is Ethereum wrapped as an ERC-20 token. wETH is designed to be used with certain DeFi applications which only accept ERC-20 tokens and do not take ETH as payment. 

Wrapped NXM (wNXM): Nexus Mutual is a decentralized insurance provider. While owning NXM requires you to verify your identity, wrapped NXM allows you to own tokens without undergoing the KYC (Know Your Customer) process! 

In conclusion 

If you are interested in exploring the Ethereum ecosystem, Wrapped Bitcoin is a great option. Before you get started, it’s important to keep in mind the tax implications of your transactions and to do research on any decentralized application you’re planning to use!