Bitcoin 2024 Review: BTC has crossed the 'Rubicon River', L2 becomes the focus of attention

Author: Guillaume, UTXO Management Venture Capital Assistant

Compile: Yangz, Techub News

If you are looking for a more substantial ‘Bitcoin 2024’ summary than the TLDR thread on X, then this article is tailored for you. Most of the following content is the result of discussions with Tradfi investors, cryptocurrency investors, BTC ecosystem project founders, analysts, and mining executives.

Macro: BTC has crossed the “Rubicon”

Donald Trump and the Road Not Taken

“BTC Strategic Reserve” is a concept that many Bitcoiners have had for years, sometimes even a dream, and it actually happened last week. It can be said that BTC crossed its own “Rubicon” last Saturday, and behind this is actually the game between major powers. From today on, countries around the world must take the concept of BTC reserves seriously, otherwise they may be left behind by other countries. If this concept is ultimately put into action, the United States will have about 1% of the total BTC supply.

Note: The Rubicon is a shallow river in northeastern Italy. In 49 BC, Caesar crossed the river to Rome, and as he did so, he famously said, ‘alea iacta est’, meaning ‘the die is cast’. It is similar to the Chinese phrase ‘the wood is already a boat’, indicating that the situation is already determined and cannot be reversed.

From the perspective of other countries, it would be very difficult to replicate this strategy, because the United States basically obtains these BTC for free. In contrast, many countries would find it very difficult to accumulate hundreds of thousands of BTC without paying a huge premium. This is also why BTC Mining has become a national security issue. After Trump announced this news, Michael Saylor proposed a framework for the country to adopt BTC as a national treasury asset (how to adopt BTC reasonably and why to do so) in front of more than 10 senators. When good ideas meet the right time, they will be irresistible.

Institutions have come in droves

Game theory also applies to institutions. If a nation-state is accumulating BTC, then companies must do so as well. The accumulation by nation-states essentially guarantees a long-term pump in BTC price, which also means that companies’ finances denominated in USD will be relatively damaged. This becomes a clear line that distinguishes winners from losers. Converting some assets into BTC may not necessarily make you a winner, but it becomes a basic requirement for institutional competition. Institutions that do not act accordingly will only be left behind. As the saying goes, ‘It makes sense to buy some just in case’.

retail investor still absent

Although BTC is less than 10% away from ATH, as shown in the figure below, the retail investor flow measured by the change in total transfer volume in the past 30 days with a total volume of less than $10,000 is at its lowest point in 3 years.

From the perspective of retail investor participation, this meeting is a success, but retail investor buyers seem to have become tired, either already all in, or unwilling to buy more BTC at the current price. Another possible explanation is that there is a sense throughout the entire meeting of people ‘waiting for the next catalyst’.

VC and BTC ecosystem

Support the best BTC talent

UTXO Management held the first investor’s UTXO Alpha Day at this conference. We gathered hundreds of capital allocators, entrepreneurs, institutional investors, and angel investors to discuss income assets in BTC, the layout of the new BTC layer, and the concept of BTC as the ultimate financial asset. The event was successful and served as a good reminder that venture capital should first follow outstanding individuals who are bringing new utility to BTC. After participating in the exchange meeting organized by BTC Startup Lab, I deeply realized the value of the founders of BTC ecological projects, and the United States must welcome them with open arms. Their focus is on preparing for the bull market, and everything will come when BTC decisively breaks through the previous high.

One of the main takeaways from this meeting is that the demand for BTC native yield strategies from investors is continuously rising, exceeding our initial expectations. When we talk about idle capital, most people tend to think of BTC in their wallets. However, last week’s situation showed that the opportunity of BTC native yield is equally attractive to Cryptocurrency investors who are currently allocating capital on different on-chain platforms. In the current environment, TVL follows the interest. We have discussed with many investors, who either want to bridge BTC from other on-chain platforms (such as WBTC) to BTC L2, or are looking for more attractive opportunities than AltCoin based on Ethereum or Solana. Incentive activities for BTC ecological projects provide not only general yield returns but also unequal rise space.

VC’s understanding of Bitcoin is still limited

As emphasized in the latest report on blockchain venture capital by Galaxy, the interest in Cryptocurrency investment has been steadily rising this year, but it has not yet reached the peak of the first quarter of 2022. The report states, “In the second quarter of 2024, venture capitalists invested 31.94 billion US dollars in Cryptocurrency and blockchain companies (up 28% rise), involving 577 transactions (down 4% compared to the previous quarter).”

Although this is a good sign for the entire cryptocurrency industry, in the second quarter of 2024, venture capital investment in the BTC ecosystem accounted for only 3.1% of the total trading volume, which is $96.4 million, while BTC market cap accounted for more than 55% of the entire cryptocurrency market.

We believe that with the improvement of BTC Decentralized Finance / infrastructure, this trend will soon reverse, and the investment opportunities in the BTC ecosystem will become impossible to ignore. One possible reason for the lag in BTC investment and financing is that investors’ understanding of the BTC ecosystem technology is not as good as other cryptocurrencies. There are few BTC analysts, and the lack of programmability in the BTC field has affected its attractiveness to VC. We expect this situation to change soon, as understanding the ins and outs of BTC in a less crowded market will bring more technical talents (including developers) to the BTC ecosystem.

Alpha in the BTC ecosystem

Henry Elder from UTXO highlighted all the ways traditional investors should consider when deploying on-chain BTC capital at Alpha Day. Here are some key points:

BTCFi is in its early stages and can be roughly divided into three categories: Sidechain, L2, and meta-protocol.

• Based on the experience of the past few years with ETH sidechains and related tools, launching a sidechain for BTC is easier than launching a true BTC L2, making sidechains the most developed and mature BTC DeFi ecosystem at present. In addition, the BTC sidechain ecosystem also benefits from the highly developed security audit infrastructure that already exists in the ETH and its related L2.
• L2: Apart from the Lighting Network, the BTC ecosystem’s L2 is still largely in the development stage, with each product implementing unique and innovative technical solutions to secure BTC.
• The BTC yuan protocol directly uses the BTC chain, which is the most native BTC protocol. They use BTC native assets, and the operational details are directly encoded into the BTC Block, but must be decoded using custom indexers. Arch Network is an example of a meta-protocol that supports BTCfi applications, while Ordinals, BRC-20s, and Runes also belong to meta-protocols, supporting BTCfi assets.

In the past, the only options for building Layer 1 that could be truly used were Ethereum and some other blockchains. Now, BTC provides an alternative that is not only more economically secure and neutral, but also may offer superior technical security due to a smaller attack surface compared to 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 built on BTC, while gaining better security and maintaining a high degree of technical and cultural independence.

BTC L2: The Most Handsome Guy on the Street

L2 Becomes the Focus of the Conference

As expected, L2 became the focus of this conference. BitcoinOS (Grail) announced the launch of a new Rollup protocol that can directly proof of validation on BTC (a few days ago, BitVMX did something similar on the testnet). In addition, Bitlayer and many other L2-related companies were major sponsors of this conference and held many L2 afterparties. Overall, the development momentum of L2 is undoubtedly strong (mainly Sidechain, Janusz of Bitcoin Layers insists that this is wise). And I predict that as these L2s continue to onboard more projects onto their platforms, this trend will become more and more intense. Different BTC L2s will compete to establish strong community moats to resist fierce competition in this field. Currently, more than 80 projects have joined this track, and we also find that this kind of hype is obviously short-lived for many people. Most people know the major participants in Asia and the United States, and other participants will still be shrouded in the fog of war unless they bring new innovations. An important moment during the conference was Cathie Wood discussing BTC L2 with Alyse Killeen on the main stage, which may be a signal that larger institutional participants are considering entering this field (Franklin Templeton Development Research Institute also held a private event with several risk investment companies, including UTXO).

Rollup team is at the forefront of BTC research

After meeting with the teams from Alpen, Bitlayer, and Citrea, we gained a clear understanding of the level of technical research in the BTC field. The paradigm shift of BitVM has prompted some of the brightest minds in this field to explore the cutting-edge areas of BTC scripts and Zero-Knowledge Proof. The work that has been completed now is likely to attract the next million users to the BTC ecosystem, with trust assumptions that can meet the needs of most users.

However, despite the excitement surrounding BTC Rollup, there are still many challenges in this space. The first is the cost of providing data availability to BTC. While this is Favourable Information for Miners, the challenge lies in how to provide the most optimal solution while minimizing the need for users to trust intermediaries (trust-minimized solutions). Another key point is that these teams are preparing to release new technical documents to the public, aiming to bring new insights on how to design bridges for these Rollups.

Forgotten Lighting Network

Due to people’s focus being entirely on Trump and the new, shinier object (Sidechain), the Lighting Network was forgotten by everyone during the conference. Bitcoin Magazine’s Alex B raised this question during Alpha Day: ‘I don’t think I’ve heard anyone mention the Lighting Network.’

Perhaps it will be forgotten for a few days, but the Lighting Network is not dead. Once the transaction fees soar again (it’s not a matter of possibility, but a matter of when), I am confident that the Lighting Network will once again become the focus of discussion.

In any case, the Lighting Network race will continue to grow slowly and steadily. Just like before the conference, Lightning Labs announced (finally) the release of Taproot Assets on the Lighting Network. My reaction to this news is: ‘I don’t think people understand the significance of it, BTC is evolving.’

Lightning-fast, Trustless, and native to BTC (earning for Node). People often say that sometimes it’s wrong to be too early, but as far as Lightning is concerned, I believe this is the best outcome for capital allocators. Yes, there are no degens or so-called culture on the Lightning Network, but it has outstanding Token standards and network effects. Many people I met at the conference tend to oppose the application of Runes/BRC-20s to Taproot Assets, but I think they are complementary, one has the community, and the other has the means to save a lot of costs for the community and speed up the transaction Settlement (in a completely Trustless way).

I think the investment opportunities at the intersection of Runes/BTC native assets and Lightning infrastructure will be very important, as demand in this area will naturally flow towards these projects (Joltz and LnFi are great examples I can think of).

Can I still mine now?

The price of Computing Power units is no longer the key to profitability for mining companies, but rather “we are building an artificial intelligence pilot project”

In my discussions with Miner and analysts, it is obvious that the only catalyst supporting Miner at present is unrelated to Mining, but related to capital allocation. Miners choose to allocate resources to artificial intelligence and high-performance computing, while investors choose to allocate resources to Miners that are most exposed to these relatively new verticals. There are several reasons for this shift:

First, after the BTC Block Reward Halving, Miners find it difficult to maintain substantial profits, and the transaction fees collected from Ordinals and Runes (so far) are also disappointing. This has led to many Miners considering other sources of income, preferably ones that are high in profit, predictable in time, and compatible with existing infrastructure, and artificial intelligence is the most suitable choice.

Secondly, due to the marginal effects of Hash Rate announcements, Miners and analysts have to rethink how to value listed companies, and the market is also generously rewarding mining companies with AI risk exposure.

Although this trend is largely attributed to Core Scientific and Iris, it seems to be weakening and returning to rationality, with many representatives at the conference betting on selling their available capacity to AI/HPC companies at a premium.

Nevertheless, last week, there were still very clear factors driving the rise in the mining industry, including unexpected advances in ASIC design efficiency (especially Bitdeer’s goal of reaching 5J/TH by 2025), and the return of mining institutional financing led by Cantor Fitzgerald, which announced a $2 billion financing business, with the rise speed of the business expected to far exceed this level. This is important because unlike the mining cycle in 2021, when mining companies mainly relied on ASIC-supported loans to raise funds, since then, the Capital Market has closed to mining companies, forcing them to rely on highly diluted ATM issuance. This statement may be a turning point in mining financing in the 2025 cycle.

Block space commodification is becoming a reality

I had the pleasure of attending the Alkymia launch event hosted by Blockspace Media. For those unfamiliar with Alkymia, its new platform allows users to make directional bets on Bitcoin without Money Laundering. This is a new trap tool that allows Miners to stabilize income while allowing exchanges, protocols, and traders to hedge against Fluctuation risks in transaction fees. As Blockspace becomes more valuable, the complexity of on-chain transactions will also increase, providing an advantage for professionals who understand the nuances of the Bitcoin mempool.

Mempools was also an important topic of discussion last week, as BTC’s additional programmability and the introduction of rollups could introduce some form of MEV or MEVil into the protocol. Understanding the potential impact of MEV on BTC is crucial, and our investment in Rebar Labs has never been more meaningful than it is now. While we are still in the early stages of the relevant discussions, people I have spoken to generally believe that MEV on BTC will be different from that on Ethereum, with less centralization risk and greater opportunities for all Miners.

The Neglected Matt Corallo Speech

Speaking in front of potential future US presidents is by no means an easy task. However, BTC core developer Matt Corallo has made a very insightful statement on the most basic principles of BTC development, which is worth more attention. In particular, his accurate description of the Block size debate in front of thousands of listeners. This history of BTC is not so much about the Block size issue as it is about the governance process, i.e., who decides when and how to modify the code?

After 2017, we found the prototype of the answer, which is that Miner and the company don’t have the right to decide. And after the BTC++ conference earlier this year, we found that developers/technical commentators don’t have the right to decide. The only remaining stakeholders in the BTC governance triumvirate are users, and while users will eventually have to work with Miner and developers to solidify changes to the code into the Block chain, they remain the “gatekeepers” to prevent unnecessary changes to the protocol. BTC is not a code, not a block chain, not even a currency, it is a consensus among users.

So, after more than 22,000 people came to Nashville to learn about BTC, what did we learn from them?

In conversations with some locals from Nashville and international tourists, I gathered the following information:

• Change is exciting, and most people are in favor of the recent proposals to bring more functionality to BTC. However, most people do not understand what they can change or how they work, and there is a lack of relevant educational content.
• After promoting BTC to Uber drivers and restaurant/bar staff, I found that user experience is still the most concerning issue for people. Most people know about BTC, have heard of it, or bought some. But the most common situation is that people will put BTC on mobile platforms like Cash App, but don’t know how to deposit BTC into their Address. Most importantly, I think the next upgrade of BTC should make it easier for people to manage their BTC, which is exactly what they will need when interacting with L2 and applications in the future. I believe that investing in basic infrastructure will be a top priority in this cycle.

Finally, I would like to end this article with Michael Saylor’s optimistic forecast for BTC. Michael Saylor predicts that by 2045, the price of BTC will reach $13 million. Perhaps you need to remind yourself every day that you may not be bold and optimistic enough.