Wrapped Bitcoin (wBTC), a token that reflects the Bitcoin value (BTC), is interoperable and compatible with decentralized applications created on the Ethereum network. Wrapped Bitcoin was released in 2019. It tracks the real Bitcoin value, so each token of wBTC has a unique relationship with Bitcoin.

Because Bitcoin and Ethereum use different protocols, the blockchains they run cannot communicate with one another. Wrapped Bitcoin is one solution to this problem. It allows BTC holders to “wrap” their Bitcoins and create a token compatible for Ethereum’s protocol, so that it can transact and communicate with another blockchain.

What does it mean?

Wrapped Bitcoin allows smart contracts and applications to use the Ethereum blockchain to interact cryptocurrency that is backed up by real Bitcoin reserves. Users can exchange BTC for Bitcoin and then have their original Bitcoin stored in a digital vault. The user is then able to receive newly minted Bitcoin.

Wrapped Bitcoin can be redeemed on a one to one basis with BTC. This means that users have the ability to wrap and unwrap bitcoin whenever they want. These transactions are generally subject to a small fee by exchanges. Before you make a transaction, check the fees to wrap or unwrap cryptocurrency.

Wrapping Bitcoin or any cryptocurrency means that you make it compatible with other ERC-20 tokens running on the Ethereum blockchain network.

What is an ERC-20 token?

ERC-20 tokens, which stand for Ethereum Request For Comment 20 tokens, are a set of fungible tokens that can be used on the Ethereum blockchain network. “Fungible” refers to the ability of a token to be interchangeable with other ERC-20 tokens. This is in contrast to NFTs which are unique tokens that demonstrate ownership of digital assets.

ERC-20 is the standard that these digital tokens must meet in order to be able to transact with one another. ERC-20 standards require that tokens meet certain requirements. These include how transactions are approved and how tokens can be transferred. Smart contract usage must also be considered.

Although Ether (ETH), is the native cryptocurrency on Ethereum’s blockchain network is compatible with ERC-20, it cannot interact directly with other ERC-20 tokens. Wrapped Ether (wETH), was created as a way for ETH holders to transact directly on the Ethereum network with ERC-20 tokens.

What do you get with wrapped Bitcoin?

  • Staking: Proof-of-work cryptos like Bitcoin don’t support staking. This is a way for investors earn rewards by helping to create a proof of stake network. Ethereum went from being a proof-of work protocol in September 2022 to becoming a proof of stake during an event known as “the merge”. Investors who own Bitcoin and want to make passive income from the cryptocurrency market may now stake their wBTC via the Ethereum network.

  • Decentralized finance products that allow you to borrow, lend, and swap your wBTC with other ERC-20 compatible tokens via DeFi platforms on Ethereum’s network, such as MakerDAO or Uniswap.

Is wrapping Bitcoin tax-free?

It’s unclear. It’s not clear. If you prefer a conservative approach to taxation, you could consider wrapping Bitcoin in virtual currency to trade one for another. This would be a taxable transaction.

How to purchase wrapped Bitcoin

There are several ways to get wrapped Bitcoin.

Purchase it directly from an exchange

Wrapped Bitcoin can be purchased directly from a cryptocurrency exchange. First, make sure that the cryptocurrency exchange you are using supports wrapped Bitcoin. Then, create an account. After your account has been created, you will be able to fund it with ACH, wire transfer, or debit card.

While some exchanges allow you to use a credit card for funding your account, it is not recommended that you take out debt in order to purchase crypto. Borrowing money to purchase volatile assets is generally a bad idea. Many banks consider credit card deposits to crypto exchanges as cash advances. This is often charged a fee between 3% and 5%. Cash advances can be used to pay interest if you are unable to pay the debt off immediately. If the cryptocurrency you purchased loses its value, you may find yourself paying higher interest rates (sometimes 20% or more) on an asset no longer worth what you paid.

After you have funded your account, place an order to buy wBTC in the amount that you desire and then complete your purchase. If you plan to keep your wBTC in your account for a long time, you might want to move the funds to a separate crypto wallet. This can help protect your assets in the event that the exchange you work with goes bankrupt, as was the case for BlockFi and FTX, or is hacked. However, a wallet won’t protect you from crypto volatility.

Another cryptocurrency to wrap Bitcoin

Check to make sure your cryptocurrency is compatible with ERC-20 if you have it. If your crypto is compatible with ERC-20, you can trade it for wBTC tokens on an exchange that supports it.

Convert Bitcoin to You already have

You can exchange Bitcoin for wBTC if you have it. You will typically have to pay an exchange a fee to wrap or unwrap your BTC.

The editor and author were not involved in any of the investments mentioned at the time this article was published.