13 February 2023 11:15, UTC
Reading time: ~5 m
Bitcoin inscriptions using ordinals are becoming increasingly popular. As the hype cycle begins for the “NFTs on Bitcoin” movement, profiteering ordinals pump groups have quickly sprung into action.
Although NFTs have existed on Bitcoin for years via OP_RETURN data and Counterparty, Bitcoin developer Casey Rodarmor’s new ordinals project makes it possible to inscribe an unprecedented 3.9 megabytes of data into each Bitcoin block. The resulting inscription often takes the form of an NFT-like picture, audio file, video, or even computer game. Similar to an NFT, this inscription can be traded and passed along to other Bitcoin wallets.
Inscriptions endow normally fungible satoshis — the smallest denomination of bitcoin; one bitcoin equals 100 million satoshis — with numismatic value. In other words, inscriptions give certain satoshis extra value* (see footnote).
One inscription recently sold for a stunning 9.5 bitcoin, or over $200,000 in extra, numismatic value.
Some inscriptions are harmless jokes, others are artwork, a few take the form of censorship-resistant speech, but most are hyped NFT collections. Many inscribe stolen images — including copyrighted media.
Did Taproot ruin Bitcoin with NFT inscriptions of monkey jpegs?
Read more: NFT wash trade accounts for 6.5% of daily sales volume on OpenSea
Let the ordinals pump and dump begin
With so much profit sloshing around just weeks into Rodarmor’s unveiling of Ordinals.com, promoters smell money. OpenSea NFT promoters from the 2021 hype cycle are now hawking Bitcoin inscriptions.
Of course, pump-and-dump groups are nothing new in digital asset history. Thousands exist on Telegram and Discord. If you see a small altcoin suddenly rallying and then crashing within a few minutes, you’re probably watching a pump and dump.
Shielded behind usernames, VPNs, and ephemeral messages, ordinals pump organizers on Telegram or Discord often use pseudonyms, buy followers and engagement to appear credible, or even mask their web traffic with Tor.
Examples of ordinals inscription projects
Although Telegram and Twitter are gaining activity, ordinals pump groups are most active on Discord. One group with thousands of members claimed that they could “front-run whales” and make sure paying members profit “no matter what.”
Just days into the Ordinals project, there are already tens of thousands of inscriptions. Many of them are created by administrators of NFT projects, including:
- Ordinal Punks
- Ordinal Loops
- Ordinal Cubes
- Ordinal Shards
- Ordinal Diamonds
- Ordinal Tulips
- Ordinal Eggs
- Ordinal Penguins
- Bitcoin Rocks
- Bitcoin Punks
- Bitcoin Toadz
- Bitcoin Boos
- Bitcoin Punks
- Inscribed Peps
Several of these projects have simply stolen images from Ethereum-based NFTs. Marquee projects like CryptoPunks, Pudgy Penguins, EtherRocks, and others have already been inscribed from Ethereum onto Bitcoin numerous times — without their owners’ permission.
Other projects are inscribing trademarked and copyrighted content. For example, BitcoinShrooms seems to be pushing its luck with promotional material including a recognizable Linux mascot, a copyrighted Wall-E character, and a copyrighted Pac-Man ghost. Its Twitter account indicated that its sale was not open yet.
Across all of the projects, the focus of administrators is rarely about art and almost always about profitably selling and re-selling NFTs. Many administrators make overt claims about price predictions, profit potential, BitClout-like bonding curves, and their entrepreneurial efforts to add additional “value” to their NFT-based enterprise.
Of course, some people were less than thrilled with the idea of paying an inflated price for essentially a dressed-up satoshi. Some of them equated inscriptions with the NFT fad of 2021 whose volumes quickly declined -99%.
Which ordinals offerings are securities offerings?
Under normal circumstances, the US Justice Department considers pump-and-dump schemes a form of fraud. The department regularly files charges against the organizers of these rings. Similarly, the US Securities and Exchange Commission (SEC) warns against pump-and-dump schemes because their organizers typically misrepresent why an asset is surging in price in order to dump their holdings at an inflated price.
Securities laws exist to force issuers to disclose risks. Obviously, it is easier to withhold information to make an offering more appealing. However, regulators like the SEC enforce disclosure so that investors have enough information to make an informed decision.
Of course, promoters of NFTs and inscriptions often claim that they not securities. Therefore, in their opinion, information disclosure regulations must not apply.
Nevertheless, almost anything — including orange grove parcels — can be sold as a security in what is known as an investment contract.
An investment contract exists when a promoter sells anything — even a non-security — when purchasers invest money into a common enterprise with the expectation of profit to be derived from the efforts of others. When sold in this way, the investment contract is, itself, a security. In other words, the offering of a non-security can be a securities offering.
Kraken settles with SEC over crypto staking — is Coinbase next?
Read more: Ripple says SEC lawsuit could end in weeks — don’t hold your breath
In the same way, many promoters are selling inscriptions in a way that makes their offering a securities offering. For example, one administrator claimed, “It will be our job to make sure we give you more than what you pay for. So, no matter what, everyone will end up in profit, because of what we are working on giving our holders.” That promise seems dangerously close to the SEC’s Howey Test. If an offering passes that test, it is a security.
Inscriptions bring back an old argument about adding data that has nothing to do with payments to the Bitcoin blockchain. Because they don’t have a formal marketplace like OpenSea yet, they’re more vulnerable to potential fraud, including pump-and-dump schemes that can dump satoshis with extra data on unsuspecting buyers.
* (On a mathematical note, it becomes parabolically difficult to trace individual satoshis within UTXO sets as they process through multi-output transactions. In other words, it’s computationally prohibitive to actually trace most satoshis in existence. Although satoshis are neatly ordered within newly mined blocks, as satoshis pass through multi-output transactions, their position within each UTXO set mixes. In launching his Ordinals project, what Rodarmor has actually contrived is an off-blockchain convention wherein participants, in his words, “pretend” to track satoshis. He makes several assumptions of convenience about where satoshis are located within UTXO sets post-transaction and assigns ordinals to his hypothetical ordering, despite the impossibility of knowing where satoshis are actually located after several multi-output transactions. Notwithstanding this arbitrary ordering system, Rodarmor has indeed combined a novel schematic using SegWit’s witness data discount, Taproot signatures, and Ordinal theory to introduce NFT-like inscriptions into the Bitcoin network.)