The total supply of wrapped Bitcoin recently fell to its lowest level since May of 2021 following the second-largest burn for a single day that took place on February 27th. In total, 11,500 wrapped Bitcoin connected to bankrupt cryptocurrency lender Celsius were burned. Following this, the growth rate turned negative. The existing supply of wrapped Bitcoin currently sits at 164,396, with a month-to-month growth rate percentage of -7.39%.
Wrapped Bitcoin is an ERC-20 token that is Ethereum-based and mirrors Bitcoin’s value. Its value pegged 1:1 with that of Bitcoin. Bitgo helped develop wrapped Bitcoin in conjunction with blockchain protocol Ren and liquidity platform Kyber. Wrapped BTC is managed by wBTC DAO, a decentralized autonomous organization made up of just over 30 members.
Anytime merchants wish to exchange Bitcoin for the wrapped version, they initiate a burn transaction, after which the custodians are alerted. The merchant then transfers standard Bitcoin to a custodial address on the blockchain, which remains locked. Once the real Bitcoin is received, the custodial address then mints an equal amount of the wrapped version on Ethereum.
ERC-20 tokens make transferring wBTC faster than transferring regular Bitcoin. However, the primary advantage of wrapped Bitcoin is its integration into Ethereum wallets, decentralized apps, and smart contracts.
At the height of the bull run of 2021, wrapped tokens gained popularity as tools to be used within the decentralized ecosystem. Wrapped Bitcoin’s supply reached its peak of 285,000 in April of last year, when Bitcoin’s price was above $48,000.
However, the bear market and a number of crypto exchange failures caused the demand to fade. The first indications of a decrease in demand came just after Terra collapsed. That crash forced several cryptocurrency lenders to cash in their wrapped BTC. It has been reported that the Celsius Network redeemed approximately 9,000 wBTC at one point.
A similar situation came about in November 2022, when the FTX exchange attempted to redeem 3,000 wBTC just prior to submitting its bankruptcy filing. After FTX collapsed, wrapped Bitcoin went on to experience its largest redemption month, with more than 28,000 wrapped coins being redeemed and reverted back to the classic coin.
Contagion within the market caused by FTX’s crash also caused wBTC to depeg from Bitcoin’s original value. Even though the slippage was only 1.5%, serious concerns were raised about whether or not synthetic tokens were a practical method of value transfer.