Is Wrapped Bitcoin a Riskier Investment Than Bitcoin?

The Wrapped Bitcoin (CRYPTO: WBTC) cryptocurrency is and Ethereum (CRYPTO: ETH) token that mirrors the value of an ordinary Bitcoin (CRYPTO: BTC) token. This odd arrangement gives Ethereum-based applications access to a Bitcoin-like system for value storage and money transfers. You can also look at it as a version of Bitcoin that also offers Ethereum-like benefits such as smart contracts.

Baking the upside of two very different cryptocurrencies into a single package makes a lot of sense, but isn't this idea too good to be true? Holders of Wrapped Bitcoin must shoulder the long-term ownership risks of both Bitcoin and Ethereum, after all.

Let's see how the market is treating this unusual cryptocurrency.

A couple of informative charts

Here's how closely the two cryptocurrencies have stayed together in 2022. The upper chart shows daily Bitcoin prices in orange and Wrapped Bitcoin prices in purple. You rarely see the two lines moving apart.

The lower chart highlights the ratio of the two prices, showing the daily result of dividing Wrapped Bitcoin's closing price by Bitcoin's price. This line sticks close to the 1.00 value for the most part, but one day in January sticks out like a sore thumb:

Wrapped Bitcoin Chart

Wrapped Bitcoin data by YCharts

Here's a closer look at the spike on Jan. 28. As you can see, Bitcoin had a pretty decent day but Ethereum's price dipped 2.4% lower. The Wrapped Bitcoin token took its cues from Ethereum on this occasion:

Bitcoin Price Chart

Bitcoin Price data by YCharts

On this day, Federal Reserve Chairman Jerome Powell had just outlined his agency's approach to federal interest increases in 2022, weighing heavily on risky investments such as cryptocurrencies and growth stocks. The crypto space as a whole was shaken up by Powell's comments, and it was no surprise to see different cryptocurrencies moving in different directions on Jan. 28. Ethereum still hasn't really recovered from the heavier correction it took on that day, trading roughly 10% below Bitcoin's 33% drop year to date.

However, Wrapped Bitcoin jumped back to matching the standard Bitcoin token's prices on January 29, and nothing has changed since then. That makes perfect sense, even if you feel that Ethereum is a higher-risk investment than Bitcoin.

A Bitcoin symbol wrapped in a half-open cardboard box.

Image source: Getty Images.

So what's the difference?

You see, one key feature of Wrapped Bitcoin is the fact that you can trade it in for one Bitcoin token whenever you like. You can create new Wrapped Bitcoins by minting tokens through a simple procedure, and you can turn them back into a Bitcoin by burning a Wrapped Bitcoin token. Furthermore, the Wrapped Bitcoin project is backed by the original Bitcoin tokens that were deposited in order to mint each Wrapped Bitcoin coin.

Today, the Wrapped Bitcoin project holds 283,904 Bitcoins in its coffers. The market cap, as measured by CoinMarketCap, stands at 283,774 Bitcoins. That's a difference of 0.05%.

Because of this guaranteed conversion process, Wrapped Bitcoin should always be very close to the value of a standard Bitcoin. Sure, investors are betting on the survival of three projects instead of one (including the Wrapped Bitcoin system itself), but there is no practical reason to bake additional market risk into the Wrapped Bitcoin.

At the same time, you don't see any upside from the presence of Ethereum features in Wrapped Bitcoin. In the bigger picture, the existence of Wrapped Bitcoin essentially becomes a part of the value proposition for the underlying Bitcoin system, adding a small amount of extra market value to the greater ecosystem. Keep in mind that the Wrapped token's total market value is just 1.5% of Bitcoin's sector-leading footprint.

Yes, you can buy this token -- but it doesn't really matter

As long as your preferred cryptocurrency trading platform offers Wrapped Bitcoin tokens, you should feel free to pick up this alternative instead of -- or in addition to -- ordinary Bitcoin tokens. If something goes wrong, you should be able to convert these tokens into Bitcoin as needed.

That being said, there's no real upside to buying this token instead of Bitcoin, unless you are an app developer that needs to use its unique combination of Ethereum and Bitcoin features. For most of us, it's just another market oddity in a sector already full of quirks. Maybe you're better off looking at the good old Bitcoin crypto system instead, just to keep things a little simpler.

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Anders Bylund has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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