A beginner’s guide to understanding wrapped tokens and wrapped Bitcoin (2023)
In Brief
Bitcoin is a type of digital currency that uses cryptography to create secure and anonymous transactions.
The first wrapped Bitcoin (wBTC) protocol was designed to bring ERC-20 token flexibility and the potential and liquidity of Bitcoin to the Ethereum network when it was introduced in January 2019.
The terms wrapped Bitcoin and wrapped crypto tokens may be familiar to crypto fans, but if you’re new to the world of cryptocurrency, these can seem like obscure and confusing concepts. In this guide, we’ll break down what these terms mean and how they work so that you can gain a better understanding of this exciting and rapidly expanding field.
Bitcoin is a type of digital currency that uses cryptography to create secure and anonymous transactions. As a decentralized currency, Bitcoin is not controlled by any government or central authority and can be used to make secure payments online or in person.
Wrapped crypto tokens are digital assets that are backed by Bitcoin or other types of cryptocurrency. They allow users to access the benefits of cryptocurrency without having to go through the sometimes complicated process of acquiring and storing digital coins or tokens.
A common example of a wrapped crypto token is the WBTC (Wrapped Bitcoin) standard, which provides users with access to all the benefits of Bitcoin while allowing them to trade it on exchanges like any other token.
Wrapped crypto tokens
When used on the DeFi platforms, wrapped crypto tokens are cryptocurrencies that are linked to the value of another original cryptocurrency or other assets like gold, equities, shares, and real estate. A wrapped crypto token is also known as a ‘tokenized asset’ or an extension of the native cryptocurrency. A wrapped crypto token can be bought or sold in a decentralized manner and does not rely on third-party service providers like centralized exchanges.
They can stand in for anything, including fiat money, real estate, commodities, equities, and valuables such as art and collectibles. A wrapped crypto token can also be considered a security and may need to comply with regulations determined by the individual jurisdiction’s laws.
The first wrapped Bitcoin tokens denominated wBTC were deployed in smart contracts on the Ethereum network to enable investors to receive a fixed income. Other assets mostly compliant with Ethereum ERC-20 and Binance Smart Chain BEP-20 are included in the list of wrapped tokens in addition to Bitcoin.
Types of wrapped tokens
Stablecoins, despite considerable differences from the more well-established wrapped coins, are generally recognized as the first wrapped tokens. One dollar or such is used to back a stablecoin like USDT (Tether), for instance. A stablecoin can be bought or sold at set rates and may not fluctuate like other cryptocurrencies.
Another type of wrapped token is a utility token, which grants holders access to certain features or services on a platform. A great example of this is the EOS cryptocurrency, which can only be used to purchase computing power on certain blockchains.
DApp (decentralized application) tokens are another type of wrapped token. These tokens can be used to purchase goods or services on a decentralized platform, such as the ethereum-based prediction market Augur.
How do wrapped tokens work?
Wrapped tokens are a major innovation in the crypto space, as they make it easier for people to access the benefits of cryptocurrency without having to deal with all the complexities involved. To use a wrapped crypto token, you simply need to purchase it through an exchange or other platform and store it in your wallet.
The value of these tokens will typically be pegged to the value of another cryptocurrency, making them a useful tool for investors looking to diversify their crypto holdings. Additionally, wrapped crypto tokens are often built on top of blockchains like Ethereum and Binance Chain, which enable faster and more efficient transactions.
Overall, wrapped tokens represent an exciting and rapidly growing field within the world of cryptocurrency, and we can expect to see many more innovations in this area in the years ahead.
Is crypto wrap taxable?
Wrapped or bridged tokens are subject to the same tax regulations as other cryptocurrencies. In the United States, this means that capital gains tax applies to profits made when trading wrapped tokens. The specific amount of taxes owed and filing requirements depend on individual circumstances and require consulting with a qualified tax professional.
The Internal Revenue Service (IRS) has released guidance for taxpayers who engage in cryptocurrency transactions. This includes “hard forks” and “airdrops” of new digital assets that can be received by holders of existing digital currencies. In addition, the IRS states that taxpayers must calculate their gains and losses from cryptocurrency transactions in USD terms.
It is important to note that different exchanges may have varying methods for calculating and reporting capital gains tax on wrapped tokens. Taxpayers should consult their exchange’s terms of use and other documentation to determine the exact method they should employ when filing their taxes. It is also advisable to keep concise records of all transactions related to cryptocurrency, including wrapped tokens.
Wrapped Bitcoin
The first wrapped Bitcoin (wBTC) protocol was designed to bring ERC-20 token flexibility and the potential and liquidity of Bitcoin to the Ethereum network when it was introduced in January 2019. A token built on the wBTC protocol means that it is a smart contract-enabled extension or dollar-backed representation of Bitcoin.
Are wrapped tokens a good investment?
In the cryptocurrency era, where decentralized finance will unquestionably play a key part, wrapped tokens are becoming more and more considered a wise investment. A wrapped crypto token represents a way to gain exposure to the underlying asset and can give you access to the benefits of investing in Bitcoin or other assets without having to deal with all the complexities involved.
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Disclaimer
In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.
About The Author
Ken Gitonga is passionate about writing. His work involves writing crypto articles on SEO, TAs, News writing, Web3 articles, crypto price prediction, and white paper drafting. Ken is a content writer and marketer. He has worked in the SEO and content marketing industries for over 3 years and has helped businesses grow their online presence and traffic.
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Ken Gitonga is passionate about writing. His work involves writing crypto articles on SEO, TAs, News writing, Web3 articles, crypto price prediction, and white paper drafting. Ken is a content writer and marketer. He has worked in the SEO and content marketing industries for over 3 years and has helped businesses grow their online presence and traffic.
