Shadow Bitcoin

Author: Daii

Open your exchange app and check that “BTC balance” in your account. Do you think that’s the actual Bitcoin? NO, that’s just the “shadow” of Bitcoin.

Bitcoin has long since become different from what it was in the past. You’ve heard its story: a total supply of 21 million coins, halving events that reduce new supply over time. It’s like a “time rock” that’s as hard as can be, and you can even measure its rhythm by block height.

But in the real world, “traded, collateralized, priced, held” Bitcoin does not equal the UTXOs on the chain.

What is UTXO? This is the main subject of today’s article—real Bitcoin, as opposed to shadow Bitcoin. You can think of it as the only truly “cash in hand” in the Bitcoin world.

More precisely, UTXO stands for Unspent Transaction Output. The Chinese translation is often “未花费交易输出.” It sounds technical, but its meaning is very relatable:

In the Bitcoin system, your balance isn’t a number written in an account; it’s more like a “small change” or “cash.”

Each UTXO is like a “change slip” or “cash coupon” with a denomination, indicating: this money belongs to a certain address, and only the person holding the corresponding private key has the right to spend it.

When you “pay” with Bitcoin, you’re not deducting a number from an account; you’re handing over a whole UTXO. The system treats it as “used” (no longer exists), then generates new UTXOs: some go to the recipient, and some as “change” return to your address.

So what you truly own on the Bitcoin chain isn’t the “BTC number shown by a platform,” but a set of UTXOs that you can sign with your private key to spend. These are the real entities in the final settlement layer.

And what you see in your exchange account, ETF shares, DeFi lending positions, or perpetual contract holdings are mostly just “rights or exposure to BTC”—they look like balances but are essentially contracts, certificates, or ledger entries on platforms. They are not real Bitcoin; they are shadows of Bitcoin, at best called shadow Bitcoin.

If you find these still abstract, let’s not argue about concepts for now. Let’s look at three sets of numbers to reveal the “shadow.”

First light: The main trading activity isn’t in spot

Most people’s intuition is that “spot trading” is the core of price discovery, and “derivatives” are just shadows around spot. But data often shows the opposite: derivatives are the main activity.

Kaiko’s annual review mentions that by 2025, about 75% of trading activity in the crypto market will be in derivatives; for Bitcoin, perpetual contracts account for about 68% of trading volume. Meanwhile, the average daily trading volume of Bitcoin perpetual contracts is roughly between $10 billion and $30 billion, with peak days reaching $80 billion on a single platform. (coinglass)

This means: often, the most “crowded” and “intense” trading isn’t in spot, but in leveraged positions.

Second light: ETFs turn “shadows” into mainstream financial assets

If perpetual contracts are “trading shadows,” then ETFs are “institutionalized shadows”: they encapsulate BTC’s price exposure into securities, allowing large funds to enter in familiar ways.

Take Bitbo’s ETF tracking data as an example: as of early January 2026, the total holdings of US spot Bitcoin ETFs reached about 1,301,880 BTC (worth approximately $121.27 billion), with BlackRock’s IBIT holding about 770,792 BTC. (bitbo.io)

These BTCs may indeed be stored on-chain, but for most holders, what they hold isn’t UTXOs but fund shares—they hold “rights to financial assets,” not “control of private keys on the chain.”

Third light: Packaging BTC turns “on-chain yields” into “on-chain credit”

Shadows aren’t only in centralized finance. There’s also a whole industrial system on-chain that “converts BTC into composable assets”: WBTC, cbBTC, etc., turning BTC into ERC-20 tokens in the EVM world, enabling lending, market making, collateral, and yield stacking.

For example, Coinbase’s cbBTC, on its official reserve proof page, shows that as of the morning of January 6, 2026, the total issued amount is about 73,773.70 cbBTC, with verifiable reserve and address information. (coinbase.com)

WBTC remains another major form of packaged BTC (its circulating supply varies over time; for example, CoinGecko displays public data on its circulation/total supply). (CoinGecko)

You’ll notice a very “modern” fact: the scarcer Bitcoin is, the more prosperous its associated credit structures become. Because scarce assets are best suited as collateral—they can compress “time value” into the credit expansion spring.

By now, you might have a perceptual understanding of shadow Bitcoin, but feeling alone isn’t enough. We can’t rely on feelings for decision-making; we need to understand what the essence of shadow Bitcoin really is.

1. What is shadow Bitcoin?

Discussing “shadow Bitcoin” often leads to a cliché: as long as it’s not on-chain BTC, it’s “fake coin.” That’s inaccurate.

A more professional breakdown is: dividing “Bitcoin” into three rights—what exactly do you hold?

Ownership (Finality): Can you control UTXOs on-chain with your private key to settle finally?

Redemption/Claim: Can you exchange some certificate back for BTC (or equivalent cash)? What are the redemption paths, rules, priorities?

Price Exposure: Do you just want to follow BTC’s price movements, without caring about redemption or final settlement?

Essentially, “shadow Bitcoin” is: the market uses contracts, custody, securitization, and packaging to give you rights to redemption or price exposure without holding on-chain UTXOs. It’s not a single entity but an entire ecosystem.

However, the ghost behind shadow Bitcoin you probably won’t be unfamiliar with—leverage. Some leverage you add yourself; some leverage others add for you. The biggest benefits go to others, while your gains are tiny and asymmetrical to the risks.

Next, we’ll layer the “shadow” around “leverage,” peeling it like an onion.

2. The ghost behind shadow Bitcoin—leverage

If “shadow Bitcoin” is a layered packaging of “rights and exposure,” then leverage is what makes these shadows suddenly grow fangs.

It’s like an invisible wind: normally just ripples on the water surface, perceived as “liquidity”; but when the wind turns into a hurricane, ripples turn into towering waves, capsizing even the sturdiest boat. The trouble is, the wind doesn’t only come from your own sails—often, the platform raises the sails for you, and you don’t even know where the ropes are tied.

Let’s frame leverage more precisely: it’s not just a “multiple.” Its essence is using the same underlying asset, under different ledgers and rules, to repeatedly generate “traded exposure” and “collateralized credit.” Explicit leverage allows you to control larger nominal positions with less margin; implicit leverage is when the system (platform) uses your assets to expand its balance sheet, concentrating profits at a few nodes and spreading tail risks to participants like you.

To survive in the shadow era, you must first see two pictures clearly.

2.1 The first picture: explicit leverage, like a knife

Many think contracts are just “betting on price movements.” But the real magic of derivatives is: they turn Bitcoin into an “infinitely replicable nominal exposure.”

Kaiko’s 2025 research provides a stark fact: derivatives account for over 75% of all trading activity in the crypto market; for Bitcoin, perpetual contracts make up about 68% of trading volume (and this continues to rise from 2024). In other words, the most “crowded” and “powerful” trading isn’t in spot, but in perpetuals. (Kaiko)

This is the first form of the “shadow factory”: it’s not that Bitcoin has increased, but that the nominal positions around Bitcoin have become enormous. What you see are trading volume, funding rates, liquidation data—these are just different facets of the same thing: the same underlying asset, rolling on leverage.

Amina Bank’s Q3 2025 derivative market summary offers more concrete metrics: average daily derivative volume was about $24.6 billion, with perpetuals accounting for 78% of trading activity, and multiple major exchanges’ derivative volumes consistently exceeding spot, at about 5 to 10 times the ratio. (AMINA Bank)

This isn’t “bustling,” it’s structural: when the main trading occurs in leveraged markets, short-term price behavior increasingly resembles “the price of leveraged products,” not “the spot.”

You don’t need to believe in abstract theory—just one extreme event is enough. Amina’s report recorded a liquidation cascade in September 2025: within 24 hours, about $16.7 billion in positions were forcibly closed, involving over 226,000 traders; among the liquidated positions, longs accounted for 94%, and the report explicitly mentions leverage as high as 125x. (AMINA Bank)

In October of the same year, Reuters reported another intense “deleveraging” moment: during a panic triggered by macro policy shocks, over $19 billion in leveraged positions were liquidated, described as one of the largest liquidation events in crypto history. (Reuters)

You’ll find that the world of explicit leverage is very “rational”: larger positions get liquidated, higher leverage gets wiped out, extreme funding rates revert. It’s like a knife—sharp, but at least you see where the blade is.

But the real danger in the shadow Bitcoin era isn’t the knife you hold, but the one you think you’re watching from the sidelines—someone has already shoved the knife into your hand and signed a waiver for you.

2.2 The second picture: implicit leverage, like a ghost

The most dangerous aspect of implicit leverage is that it often appears under the guise of “returns.”

You deposit BTC, see “Earn,” “DeFi,” or stable annual yields; but in accounting terms, you may have already transferred control or even ownership of the assets to the platform. At that moment, the balance you see is more like an IOU: normally equivalent to BTC, but during a run, you realize it’s a debt certificate, not the on-chain asset itself.

Celsius’s bankruptcy case vividly illustrates th