An example of a bitcoin ordinals inscription from Ordinals.com
Bitcoin ordinals originate from an ongoing debate within the bitcoin community on whether bitcoin should only process financial transactions, or function as a decentralized network for secure data storage. In its early years, bitcoin only allowed messages of up to 80 bytes be encoded onto blocks. That's barely sufficient to encode short text messages like hashes. Two major hard fork updates (Taproot and Segwit) increased the block size limit to 4MB, introducing a more efficient method of arranging transaction data and opening the door to ordinals.
At the protocol level, these satoshis remain fungible. They can be spent like any other satoshi, but they're also non-fungible, as they carry additional pieces of information (the ordinals).
A familiar example would be to compare ordinals with dollar bills. While each one-dollar banknote is fungible and has an identical value to any other one-dollar bill, it has a unique serial number that differentiates it from the rest.
How Ordinal Inscriptions Work
Ordinals act as the underlying infrastructure. They're the first part of so-called bitcoin NFTs, with the second being the content itself or the inscriptions. In the example with the dollar bill, it would be like an autograph inscribed on the banknote.
Ordinal inscriptions can be images, text, or GIFs linked to individual satoshis. This process is facilitated using the ord, open-source software in combination with a bitcoin node.
Given ordinals are confirmed and recorded on the bitcoin blockchain, the inscribed content is permanent, unalterable, and bitcoin-native. Unlike most existing NFTs that rely on off-chain storage, inscriptions are completely on-chain, making them decentralized and not subject to third-party control.
Note that the ordinals protocol doesn't modify the bitcoin blockchain or create a separate layer. However, it benefits from the Taproot upgrade, which improves transaction privacy and efficiency.
The inscribed content is stored in the witness section of a bitcoin transaction, an area made available by the SegWit upgrade implemented in 2017. Later, Taproot further enhanced this by removing data storage limits within blocks, allowing inscriptions of almost 4 MB in size.
How Ordinals Differ from NFTs
The introduction of ordinals has opened the door for bitcoin NFTs, though this term is not really accurate. This is because bitcoin ordinals and traditional NFTs are fundamentally different.
An NFT is a distinct entity from the native crypto of the blockchain that hosts it. For example, an Ethereum-based NFT is entirely different from an ETH token, and the protocol treats it as such. NFTs have their own standards on Ethereum. That's why NFTs can't be confused with regular tokens.
Elsewhere, the bitcoin protocol doesn’t natively recognize bitcoin ordinals, and they can effectively exist as either fungible or non-fungible units. This depends on the preference and recognition of satoshi owners and bitcoin users. For the bitcoin protocol, a satoshi with an inscribed digital artifact can be treated like any other satoshi if the user doesn't value or recognize the inscription. This isn't possible with Ethereum NFTs, where uniqueness and non-fungibility are enforced at the protocol level.
Regarding our banknote example, a one-dollar bill with an autograph is still recognized as one dollar by the bank, but it can be sold for higher amounts to collectors that value the autograph. Traditional NFTs don’t have this fluidity.
Another major difference is bitcoin ordinals are stored directly on-chain and unable to censor, while NFTs are often associated with off-chain data on the Interplanetary File System (IPFS), a decentralized file storage system that can be altered using dynamic metadata.
Unlike ordinals, NFTs can also support creator royalties.
Finally, the inscriptions on ordinals cannot exceed the 4MB bitcoin block size limit. This isn't true for NFTs.
Due to the differences between NFTs and bitcoin ordinals, Rodarmor refers to the latter as "digital artifacts."
The Impact on Bitcoin Network Congestion and Fees
Despite their innovative nature, ordinal inscriptions have raised concerns within the bitcoin community.
Adding large amounts of non-transactional data might compete with traditional bitcoin transactions for block space, potentially increasing transaction fees and prompting miners to prioritize higher-fee ordinals transactions, which could negatively impact the broader use of bitcoin as a means of exchange.
For example, if most dollar banknotes had autographs on them, people might not use them for their nominal value but for the value of the content, affecting money flow and velocity.
However, as of today, ordinals don’t affect fees much, and the increase in miner revenue is unnoticeable.
How to Inscribe Your Own Ordinal
One can create bitcoin ordinals through two primary methods. For technically skilled users, you can run a full bitcoin node and install ordinal software. This allows you to inscribe satoshis and create bitcoin ordinal NFTs. This method requires a Taproot-compatible bitcoin wallet with coin control capability like Sparrow(for receiving ordinals) or Ord wallet (for creating inscriptions). The Ord wallet also prevents accidental spending of inscribed satoshis. Both wallets require some BTC for transaction fees.
A more user-friendly method involves no-code tools like Gammaor Ordinalsbot.com. These platforms allow you to inscribe your ordinal NFT more simply, making the process more accessible for non-tech-savvy users.
Investor Takeaway
Bitcoin ordinals have been around for only a few months, and they haven’t changed the rules of the ecosystem. However, they have tremendous potential in the long term. The main selling point is that no one can censor the content attached to satoshis, while collectibles benefit from unmatched security due to being stored directly on-chain.
As we saw with NFTs on Ethereum, we should see a rise in bitcoin ordinals trading on secondary markets. This is bound to lead to more interest from investors eager to leverage their unique capabilities. It’s also possible that some of these ordinals could see massive upticks if and when the overall market for NFTs recovers.
As is the case with NFTs, bitcoin ordinals present various methods for generating income. They include buying high-quality ordinals at low prices and holding them long term, bulk-minting niche project ordinals and later selling them at higher prices, and identifying potentially profitable categories of ordinals for high-frequency trading.
Download our NFT Investor Scorecard for a fill-in-the-blank framework for rating NFT investments (including bitcoin ordinals). 
