Use Caution Before Investing In Bitcoin Side Projects – Forbes

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Bitcoin side projects are making pitches to investors. Buyer beware.
Bitcoin has always struggled with its inability to send more than a dozen transactions through the network each second. During times of peak use transaction fees can surge higher than $60. Bitcoin’s code is inflexible, so directly increasing its ability to process transactions is hard. Enter Layer 2 solutions like the Lightning Network that have helped make this possible by taking the burden of transaction scaling and more versatile transaction options onto a layered technology dependent on, but still somewhat separate from Bitcoin. As interest in the ecosystem grows with the success of spot exchange-traded funds (ETFs), investors are beginning to consider investment opportunities in the broader Bitcoin economy. However, one should use a discerning eye before jumping in.
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The hype around Bitcoin investing has mostly to do with so-called Layer 2 solutions, along with a few other options. Layer 2 platforms are complementary networks to a main blockchain like Bitcoin that help ease congestion. The most popular are collateralized payment solutions like the Lightning Network that turn bitcoin from “digital gold” to a better, more private and decentralized version of Venmo. Second are “builder” solutions that aim to bring “smart contract” like functionality into Bitcoin like Stacks (STX). Lastly, there are entire platforms like Liquid which transact back and forth between Bitcoin.
The Lightning Network has been around since 2018. It changes Bitcoin from “digital gold” into a usable currency for microtransactions. Public and private companies are integrating the Lightning Network to try to benefit from the smaller routing fees (less than $1). The number of nodes has increased from about 50 to around 16,000 since 2018, with the amount of network capacity topping more than 4,500 BTC and $280 million. There are also several merchants, with many hotspots having more than 200 merchants accepting bitcoin as payment, largely through Lightning. BitPay connects thousands of merchants to Lightning Network payers—and this is growing year by year.
Liquid Network has about 4,000 BTC pledged as L-BTC. L-BTC itself acts similar to a stablecoin pegged to underlying BTC assets held by the Liquid Foundation. L-BTC itself adds on Bitcoin by providing more private and quicker transactions—they’re more private because specific amounts are not broadcast to a public chain. There are peer-to-peer decentralized applications for lending and other utilities built on Liquid, though volume can be quite low. Examples of this include Hodl Hodl, a peer-to-peer borrowing and lending solution with loans issued in USDT on Liquid to preserve user privacy, and as of now, a few hundred thousand in offers for borrowing against bitcoin, SideSwap which offers direct peer-to-peer trading, and Aqua Wallet, which can seamlessly hold Layer 1 bitcoin, and both Lightning and L-BTC. In terms of direct investment, the value of L-BTC and Bitcoin are aimed to always correlate around 1:1, so Liquid isn’t meant to be a way to directly invest but rather to build on Bitcoin’s capabilities, and allow for more private transactions between individuals and exchanges that trade Bitcoin.
There are also a slew of companies that have launched Layer 2s and their own associated governance tokens. There are those listed under BRC-20, a standard for creating fungible tokens in a similar vein to Ethereum’s ERC-20 standard, which includes about 60 listings. This includes projects that are bringing Turing-complete calculations to the security of Bitcoin similar to the EVM of Ethereum and ordinals, which are similar to NFTs. The vast majority have small market caps under $50 million and seem to be trading exclusively on thin volumes with the stablecoin tether (USDT). The only only potential standout is the original ORDI token that started the BRC-20 craze, yet even that token has fluctuated wildly based on individual tweets—and is, at the end of the day, a memecoin.
Outside of BRC-20, there are protocols such as Stacks—since December 31, 2019, its token STX has risen from $0.10 to about $3 in March 2024, an all-time return on investment of about 30x. Bitcoin itself has risen by about 10x in that same time period. Stacks also offers yield in bitcoin for staking its token. Significant decentralized apps on Stacks include Gamma, which offers an easy platform for trading Bitcoin NFTs, and AlexGo which offers BRC-20 tokens—a similar standard to the ERC-20 that powered the rise (and fall) of ICOs. The plan is to release the Nakamato update and sBTC, directly tying Stacks to Bitcoin while purporting to offer native yield, DeFI and NFT—in short, bringing Ethereum’s capabilities to Bitcoin.
To summarize, one thing to know about Stacks is that it has been around since 2017 and had a SEC-qualified pre-sale with 4,500 people involved, including multiple venture capital firms. Unlike Bitcoin, which didn’t have a premine, Stacks had an initial distribution. The Nakamato update is all about Stacks trying to tie itself more closer to Bitcoin’s Layer 1, yet as of now, there isn’t a guaranteed peg or routing mechanism, but rather a “proof” that all of the hashes of transactions are placed in a block on Bitcoin. Despite many years of trying, Stacks is still barely integrated with Bitcoin—for now.
Bitcoin’s Layer 2 networks remain in their developmental stages, so investors should use extreme caution before investing in Stacks, ORDI, or any other token purporting to benefit from the rise in bitcoin adoption. Concurrent with these price increases is further ossifying of current holdings: Users do not want to sell or part with these tokens, which is necessary for a bitcoin-centric economy to grow. A recent investigation from Forbes even categorized Stacks as one of 20 billion-dollar zombie blockchains that do not have sufficient activity to justify their lofty valuations. Additionally, ordinals and BRC-20 tokens on Bitcoin have had implementation problems as well at times, leading to the double-spending of user funds and the potential of scams.
Investors looking to purchase BRC-20 governance tokens should heed the cautionary tale of the ICO boom in 2017-2018, where billions of dollars were raised from gullible investors with little in the way of transparency or investor rights.
The risk-reward balance may not always stay in this position, in fact the new flow of Bitcoin Layer 2s will provide a needed source of revenue to miners as new bitcoin issuance dwindles over the years. There have been a total of above 3,559 BTC in transaction fees paid out over inscriptions. This has led to significant transaction fees which reward miners for securing the Bitcoin network. Eventually, there will come a time where there will be no reward for mining a block—so for Bitcoin mining to continue, there needs to be transaction fees to feed them.

There are better ways to gain extra exposure to bitcoin right now than getting exposure to these side projects.
1. Investing in public shares of bitcoin mining and treasury companies (most prominently MicroStrategy). Firms like Tesla and Block Inc. hold bitcoin in their treasury, although Block Inc. also has a department dedicated to building Bitcoin services called TBD. There is at least one public company providing Lightning liquidity (LQWD, albeit a small-cap on the Canadian venture index).
2. Generating yield/loans from self-custodied bitcoin. Loans can be exteneded from self-custodied bitcoin through solutions like Unchained, and Atomic Finance, which pushes bitcoin out on a “hot wallet” and uses covered calls to generate non-custodial yield that doesn’t require switching to a L2.
3. Investing in private companies that are building Bitcoin infrastructure. There are several Bitcoin-based funds such as ego death capital, which is currently raising a $100 million Fund II. Lightning providers such as the Breez wallet and ACINQ (which runs the largest Lightning node and a wallet, Phoenix) have raised private rounds of financing. This may not be an accessible option unless you’re an accredited investor with links in the Bitcoin space and/or part of an institutional fund, but it can be a different way to be a big part of Bitcoin’s future.

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