Thawing Out Cold Storage

With a market capitalization of $660 billion as of this writing, bitcoin is not only the first and oldest cryptocurrency, it’s the largest store of value – fully 53% of the total value of all cryptos tracked by CoinMarketCap.

And bitcoin true believers are notorious for holding onto their BTC for the long term. In April the percentage of BTC that had not moved in 2 years hit an all-time high of 53%, and almost 29% of all bitcoin in circulation hadn’t moved in 5 years ($150 billion of market cap at the time). In fact, it’s a notable event when a very old BTC address sends funds for the first time, as when this one – which received 489 BTC in October 2010 when bitcoin traded for $0.19 – first moved those funds to another address on March 9, 2022 when BTC hit $41,926, meaning that initial $93 was now worth an astounding $20 million. 

The safest way to hold bitcoin or any crypto, especially for a long period of time, is to put it in what’s called “cold storage”. Any crypto wallet one connects to the internet in order to send or receive crypto-assets is a “hot” wallet, which is subject to compromise if one’s mobile, laptop or desktop device is hacked. With a cold wallet, in contrast, one’s private keys are inaccessible to a hacker who gains access to a computer. One form of cold wallet is a so-called “paper wallet”, where a new crypto address is generated (there are various online tools for this, including BitAddress.org, where the user moving their mouse around the screen adds randomness to the keys generated) and the public and private keys are not stored anywhere on the computer but rather printed or written out on paper and stored in a safe place. More common is a hardware wallet, a physical device that stores one’s private keys offline, and even if the device is lost or broken one can use a secret recovery phrase to access the assets in a new wallet. Popular examples include Ledger and Trezor. 

Have your cake and use it, too? 

Holding one’s bitcoin in cold storage for expected long-term growth is great, but what if there were a way to put at least some of those assets to work in other ways, such as using them for collateral or generating yield? Bitcoin-to-Ethereum “bridges” allow one to keep their bitcoin but “mint” a token on Ethereum that is designed to stay “pegged” to the price of bitcoin while allowing one to take part in the rapidly expanding decentralized finance (DeFi) ecosystem. The first bitcoin equivalent on Ethereum was WBTC (aka “wrapped” bitcoin), launched by BitGo and Kyber Network in 2019.

While WBTC has worked well for nearly 5 years and is now the largest BTC on Ethereum with 163,908 BTC in custody ($5.5 billion at today’s price), like many Bitcoiners I prefer to always be in control of my crypto-assets and so I prefer not to send my BTC to BitGo for custody and rely on their permissioned merchants for converting back. 

Thankfully, a veteran assembly of open source developers at Threshold Network completed full deployment of Threshold Bitcoin (tBTC) in July, and while its early phase includes permissioned elements with trusted partners like Curve DAO, Yearn.Finance and Synthetix, the design replaces the trust in a custodian with a decentralized network and decentralized autonomous organization (DAO) featuring a sophisticated set of incentives for stakers operating and securing the network. 

I believe the advent of tBTC will usher in a new strategy for managing crypto-assets, enabling bitcoin to become not just a static asset, but a dynamic, yield-generating investment. One can now keep, for example, 80% of one’s bitcoin in long-term cold storage, while “thawing” the remaining 20% and putting it to work in DeFi (or whatever percentage fits one’s risk vs return profile). 

Varying degrees of bitcoin utilization

Bitcoin uber bull Michael Saylor, the founder and CEO of MicroStrategy (which holds 158,245 BTC as of its latest reporting on September 24th, $5.4 billion worth), recently spoke on the Coin Stories podcast about the increasing need for multi-modality with bitcoin:  

“Bitcoin makes your country better, makes your company better, makes your family better… it’s going to make everything better, but there are different wrappers we need to put it in. Some people will always be self custody, some will be multisig, some will be multisig layer 2, some will need a layer 3 custodian for political purposes or functionality purposes, or they’ll need it because they’re wrapping it into a product or service they’re offering that runs on that layer 3.” 

It seems clear to me that as the number of bitcoin investors continues to grow and more and more companies like BlackRock file for permission from the SEC to create bitcoin ETFs, there will be larger numbers of investors wanting to put their bitcoin to work. While many will likely still prefer to do so with a custodian holding their assets, those who wish to do so without giving up control will appreciate the flexibility and other benefits of bringing at least some of their bitcoin out of cold storage and into DeFi through protocols like tBTC.