Is packaged bitcoin a garish buy right now?

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Wrapped Bitcoin (WBTC -7.06%) aims to reflect the value of a Bitcoin token (BTC -7.09%), associated with the higher transaction speed and richer functionality of the Ethereum network (ETH -9.47%). After a relatively volatile winter of 2020/2021, the digital currency has done a remarkable job of staying close to Bitcoin prices since the end of April.

The top chart here shows bitcoin prices wrapped in orange, very close to usual bitcoin prices throughout 2021. The less interesting chart below which shows the relationship between these two prices over time, as expected , the result of dividing the price of enveloped bitcoin by that of Bitcoin on the same day gave values ​​very close to 1.0 for most of the year.

Bitcoin price data by YCharts.

This close correlation makes a lot of sense since Wrapped Bitcoin can be traded for Bitcoin tokens at a 1: 1 ratio, and vice versa. It’s built into the encoding of this digital currency by design. They really should order the exact same price per token.

However, I just came across this next chart and was wondering if it is time to make a big investment in Wrapped Bitcoin. Here we’ve zoomed in to the end of the very straight purple line above (with the orange line still representing Wrapped Bitcoin), but the steadfast proximity to 1.0 decreases towards the end. In other words, the price of a Wrapped Bitcoin is now generally a few percent lower than the price of Bitcoin. This is what investors might call a discount, causing them to jump at the opportunity to buy tokens right out of the trash.

Image source: Coinmarketcap.com.

What is happening here?

The previous chart seems to imply that Wrapped Bitcoin is currently selling at a huge discount. So, if you can get an upgraded version of the Bitcoin token for a significantly lower price, why shouldn’t you jump at the chance?

Well I can think of a few reasons to hold your horses:

At the end of the enlarged, unwrapped Bitcoin chart, the price drop may seem large, but it’s only a 2% difference. Graphics can be misleading if you zoom in too close, making the larger context less obvious. Buying wrapped bitcoin at any price only makes sense if you are interested in the underlying tokens in the first place. This digital currency cannot exist without Bitcoin and Ethereum, so you are well aware if any of these fundamental components fall out of favor in the long run. As a result, you take additional long-term risk without any significant tariff compensation. You might not see any real price difference between Bitcoin and Wrapped Bitcoin in the real world. Prices from different data sources do not always match. YCharts’ arrow-simple chart pulls its data from Cryptocompare.com, which in turn aggregates price data from many cryptocurrency exchanges to come up with a down-to-the-minute average. The wobbly Coinmarketcap polls a different set of trade, producing a different chart in this particular case.

At 12:31 p.m. ET on Wednesday, various data sources indeed reported different ratios between Wrapped Bitcoin and Bitcoin prices. Coinmarketcap posted a discount of 1.8%. At Cryptocompare.com I saw a 0.1% price difference in the opposite direction. Coindesk agreed, giving Wrapped Bitcoin a 0.1% higher price. For the most realistic comparison of all, the Coinbase trading platform (COIN -2.25%) showed an even smaller variance of 0.04%. Binance is also close to equilibrium with a price difference of 0.09%.

Your mileage may vary. Maybe your favorite cryptocurrency exchange is giving you a bigger discount.

Image source: Getty Images.

Buy packaged Bitcoin if you want, but you don’t get a big discount

I think Coinmarketcap just needs to give its recent data for these two tokens a slightly better clean-up. There is no real advantage for investors here, although this particular chart shows a real trend.

Even if you get an absolutely huge 3% discount for Wrapped Bitcoin in a quirky cryptocurrency exchange, Wrapped Bitcoin and Bitcoin itself are likely to move more than that in any given 24 hour period. Let’s say you buy some packaged Bitcoin at a 3% discount and then go through the so-called atomic exchange process which exchanges your tokens for old bitcoins. The exchange rate may be in your favor, but there are always transaction fees and the process takes some time. Your chances of making a big profit this way are low.

I’m not saying you shouldn’t consider Wrapped Bitcoin. After all, it is an upgrade from the traditional Bitcoin system, adding advanced features like smart contracts and sharding. If you want this extra functionality and are willing to accept the slightly greater market risks I mentioned earlier, then this is a reasonable alternative to Bitcoin itself. Don’t expect to get a game-changing price advantage based on charts like the Coinmarketcap scribble above.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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