What are proof-of-reserves audits, and how do they work?

Key takeaways

• PoR audits are cryptographic verifications used by cryptocurrency exchanges to prove they hold sufficient assets to cover customer deposits. 
• Using methods like Merkle trees and zero-knowledge proofs, PoR ensures transparency, similar to how capital reserves are mandated in traditional finance for stability.
• Coinbase’s cbBTC uses PoR to verify that for every wrapped Bitcoin, an equivalent amount is securely held in Coinbase’s custody. 
• PoR audits can verify asset holdings but do not account for liabilities, which can mislead users about an exchange’s solvency. 

Proof-of-reserves (PoR) audits have become a vital tool in the cryptocurrency industry to promote transparency and security, especially in the wake of high-profile exchange collapses like FTX. 

While similar in concept to traditional banking capital adequacy requirements, PoR audits come with certain limitations, especially in their inability to verify liabilities and their reliance on periodic reports. 

This article explores PoR audits, their role in crypto and their evolution into more robust models for ensuring exchange solvency.

What are proof-of-reserves audits?

Cryptocurrency exchanges are increasingly adopting proof-of-reserves (PoR) audits to verify they hold sufficient assets to cover user deposits. These cryptographic audits, using Merkle trees and onchain verifications, serve as a transparency mechanism in crypto, much like capital adequacy requirements do for traditional finance.

But does the PoR concept draw inspiration from TradFi?

In traditional banking, regulators have long mandated that financial institutions maintain a certain level of capital reserves to safeguard against potential risks. This framework ensures that banks can absorb unexpected losses and continue to operate during economic downturns. A pivotal moment highlighting the importance of such regulations was the 2008 financial crisis. 

During this crisis, many banks faced significant losses due to high-risk exposures, leading to a global economic downturn. In response, international regulatory bodies introduced more stringent measures to bolster the resilience of financial institutions.

One such measure is the Basel III framework, established by the Basel Committee on Banking Supervision. Basel III set forth comprehensive reforms to improve the regulation, supervision and risk management within the banking sector. 

1. Common equity tier 1 (CET1) capital requirements mandate financial services firms to hold a minimum amount of common equity relative to their risk-weighted assets, ensuring they have a solid capital base to cover potential losses.
2. Leverage ratio serves as a backstop to the risk-based capital requirements, limiting the extent to which a bank can leverage its capital base.
3. Liquidity coverage ratio (LCR) ensures that banks have sufficient high-quality liquid assets to withstand a 30-day stressed funding scenario.
4. Net stable funding ratio (NSFR) promotes resilience over a longer time horizon by requiring banks to fund their activities with stable sources of funding.

These measures aim to enhance the banking sector’s ability to absorb shocks arising from financial and economic stress, thereby reducing the risk of systemic crises.

A parallel concept known as proof-of-reserves (PoR) audits has emerged in the world of cryptocurrencies to promote transparency and trust within digital asset platforms. PoR audits are cryptographic verifications that confirm whether a cryptocurrency exchange or custodian holds the assets it claims on behalf of its users. 

These cryptographic audits, using Merkle trees and onchain verifications, serve as a transparency mechanism in crypto. The primary goal is to provide assurance that these platforms are solvent and can meet customer withdrawal demands. Some audits provide the dollar equivalent of the reserves, whereas others report in major cryptocurrencies like Bitcoin (BTC) and Ether (ETH).

How do proof-of-reserves audits work?

PoR audits use cryptographic methods like Merkle trees to verify that exchanges hold sufficient assets to cover user deposits, but they don’t prove solvency, as they don’t account for hidden liabilities. 

These audits are designed to verify that cryptocurrency exchanges and custodians actually hold the assets they claim on behalf of their users. The process typically begins with asset verification, where platforms disclose wallet addresses or use cryptographic proofs, such as Merkle trees, to confirm holdings without revealing sensitive account details. 

A Merkle tree allows user balances to be hashed and aggregated into a single “Merkle root,” which auditors and users can verify independently. Additionally, a third-party auditor may be involved to assess whether the exchange’s reserves match its reported holdings. Alongside this, customer liability verification ensures that total deposits do not exceed available reserves, strengthening the credibility of the exchange’s financial standing.

While traditional PoR audits rely on Merkle trees, they have limitations, such as the inability to prove solvency (i.e., whether an exchange has hidden liabilities or outstanding loans). To address this, ZK-proofs are being explored as a more private and secure method of reserve verification. 

Zero-knowledge (ZK) proofs offer a more advanced solution by enabling exchanges to mathematically prove they are fully backed without revealing sensitive data, paving the way for proof-of-solvency audits.

A ZK-proof-based PoR system could allow an exchange to mathematically prove that its reserves exceed its liabilities without revealing individual account balances or wallet addresses. This eliminates the risk of exposing sensitive user data while still providing strong cryptographic assurance that the exchange is solvent. Some blockchain projects and exchanges are experimenting with ZK-proofs for PoR, but adoption remains in the early stages.

Ultimately, PoR audits are a critical step in improving transparency in crypto markets, especially after past exchange failures like FTX, which falsely represented its reserves. By combining Merkle trees with ZK-proofs, the industry could move toward proof-of-solvency audits, which not only verify reserves but also ensure an exchange does not carry undisclosed debts. 

Here are the differences between Merkle tree-based PoR and zero-knowledge proof-based PoR:

If widely adopted, these methods could enhance trust in centralized exchanges (CEXs) while maintaining user privacy, offering a regulatory-friendly yet decentralized approach to crypto financial accountability.

Below is a list of exchanges and their PoR audit details.

Did you know? Following a hack in February 2025, Bybit underwent a comprehensive PoR audit conducted by the cybersecurity firm Hacken. This audit confirmed that Bybit’s holdings fully covered user liabilities, maintaining a 1:1 ratio for all in-scope assets. The audit encompassed a full verification of wallets containing 40 different asset types, ensuring transparency and security for all users.

What is Coinbase’s cbBTC, and how does it ensure trust through PoR?

Coinbase’s cbBTC is a token that represents Bitcoin (BTC) 1:1 onchain, fully backed by the equivalent amount of Bitcoin held in Coinbase’s custody. By wrapping BTC into cbBTC, users can interact with it in decentralized applications (DApps) and across various blockchains, such as Ethereum, Solana and Base, while retaining its Bitcoin value.

Coinbase uses PoR to ensure transparency and verify that the wrapped cbBTC tokens are fully backed by actual Bitcoin reserves held by Coinbase. PoR audits confirm that Coinbase holds sufficient Bitcoin in its reserves to support all issued cbBTC, maintaining trust and security for users who wrap or redeem their Bitcoin.

PoR audit and transparency for cbBTC

• 1:1 backing of cbBTC by Bitcoin: Coinbase ensures that for every cbBTC token issued, there is an equivalent amount of Bitcoin securely stored in its custody. This process ensures the integrity and security of cbBTC, allowing users to confidently use their wrapped tokens in decentralized finance (DeFi) and across multiple blockchain platforms.
• PoR for user assurance: PoR audits help verify Coinbase’s claims by cross-checking its Bitcoin reserves with the number of cbBTC tokens in circulation. This audit ensures that users’ wrapped tokens are always fully backed, offering additional security and transparency. As part of its PoR commitment, Coinbase has published audit reports that confirm its reserves.
• Secure handling of Bitcoin reserves: Coinbase ensures that the Bitcoin backing cbBTC is not sold, transferred or used for other purposes. The Bitcoin is held securely to maintain the 1:1 backing for cbBTC, ensuring that users can redeem their wrapped tokens for Bitcoin at any time.

CbBTC is accessible to Coinbase customers with verified accounts who are based in select regions, including the US (excluding New York), the UK, the European Economic Area (EEA), Australia, Singapore and Brazil. Additionally, users can acquire cbBTC through Coinbase Wallet or other third-party exchanges that offer support for it.

Did you know? While Coinbase provides transparency through PoR, you should be aware that the wrapping or unwrapping of cbBTC does not constitute a taxable event for the IRS, as clarified by Coinbase. However, you should consult tax professionals for personalized guidance.

Limitations of PoR approach

While proof-of-reserves audits verify that exchanges hold assets, they fail to account for liabilities, creating a false sense of security. Additionally, PoR audits are mere snapshots with no real-time oversight.

While proof-of-reserves audits enhance transparency by verifying that exchanges hold sufficient assets, they come with notable limitations that can create a false sense of security. 

• Liability exclusion concern: One of the biggest concerns is the exclusion of liabilities. PoR audits only confirm the assets an exchange holds, not whether they have outstanding debts, obligations or hidden leverage. 

This was a critical issue with FTX, which falsely presented itself as solvent by showcasing its assets without disclosing the massive liabilities owed to creditors and users. Without a simultaneous proof-of-liabilities (PoL) audit, an exchange can appear well-funded while actually being deeply insolvent. Both assets and liabilities are needed to be included in this exercise for it to be completely useful.

• Snapshot audits and ongoing solvency risks: Another key limitation is the snapshot nature of these audits, which provide verification for a single moment in time but do not guarantee ongoing solvency. An exchange could pass a PoR audit today and deplete reserves the next day by moving funds, taking on new liabilities or engaging in risky lending practices. 

For instance, when Binance published its first PoR audit in December 2022, it faced criticism because it was a one-time report rather than a real-time solvency check. Unlike traditional finance, where banks undergo continuous regulatory scrutiny and stress tests, crypto PoR audits lack ongoing oversight, leaving room for manipulation between audit periods. Some firms, like Nexo, introduced real-time PoR in 2021 but discontinued it in 2024, as their auditors could no longer support the capability.

• Reliance on third-party auditors: Lastly, PoR audits rely heavily on third-party auditors, making their effectiveness dependent on the credibility and independence of the auditing firm. Some exchanges have opted for internal audits, which raises concerns about objectivity and transparency. 

A case in point is Mazars Group, the auditing firm that conducted PoR reports for Binance and Crypto.com in 2022. It later withdrew from providing crypto audit services, citing concerns over the reliability of the process. This incident underscored the industry’s need for stronger, independent and standardized auditing frameworks to ensure that PoR audits genuinely reflect an exchange’s financial health rather than serving as a mere public relations tool.

Proof-of-reserves as a step forward, not a perfect solution

PoR is a good step in the right direction. It is not perfect, but there is no need to make perfection an enemy of progress. Many of the recent developments in the cryptocurrency industry look promising, where PoR can not only serve native crypto assets but could also help traditional finance when their assets and liabilities are tokenized. 

In its ideal form, PoR should be used to assess the solvency of any counterparty, whether in DeFi, centralized finance (CeFi) or traditional finance (TradFi), making the future of finance more robust and reliable with its implementation

Crypto payments for small businesses: Benefits, risks and how to get started

Key takeaways

• Accepting crypto payments reduces transaction fees, eliminates chargebacks, and enables seamless global transactions.
• Businesses of all sizes, from e-commerce to real estate, are integrating cryptocurrency payments to attract new customers.
• Risks like price volatility and regulatory compliance can be managed with trusted payment processors like BitPay, CoinsPaid and Coinbase Commerce.
• Setting up crypto payments is easier than ever, with zero upfront costs and user-friendly integration options for small businesses.
• The rapid adoption of cryptocurrencies has led businesses of all sizes to increasingly embrace digital currencies like Bitcoin as a legitimate payment method.

And it’s not just a rehash of old news. For years, you might have seen luxury brands like Gucci and telecommunications companies like AT&T accepting Bitcoin. But today, crypto payments are much more than an easy bit of PR — they’re seamlessly integrating into e-commerce, hospitality, travel and even your neighborhood coffee shop.

What started as a niche trend in the early 2010s has accelerated over the years. As of 2025, over 659 million people worldwide — roughly 1 in 13 individuals — are using cryptocurrency. Moreover, approximately 15,000 businesses globally accept Bitcoin (BTC), including around 2,300 in the United States.

While there are considerations to keep in mind, many view accepting BTC and other cryptocurrencies, even as a small business, as a win-win. The benefits often outweigh any challenges, with minimal downsides and significant potential rewards.

The following sections explore the whos, the whys and the hows.

What companies are currently accepting cryptocurrencies?

As briefly touched upon, it’s not only niche crypto-specific sectors that are accepting Bitcoin payments. Here are some sectors that you might not have considered, with accompanying case studies.

E-commerce

• Shopify enables merchants to accept cryptocurrency payments through various payment gateways, including BitPay and Coinbase Commerce.
• Newegg accepts Bitcoin and other cryptocurrencies for electronics purchases, integrating crypto payments into its checkout process.
• Rakuten Japan allows users to convert Rakuten Points into Bitcoin, Ether (ETH) and Bitcoin Cash (BCH), effectively incorporating crypto into its rewards ecosystem.

Food and beverage

• Subway accepts Bitcoin at selected locations, with franchises in Europe and North America processing crypto payments.
• Burger King franchises in Brazil and Venezuela allow customers to pay for meals with Bitcoin and select altcoins.
• Starbucks supports Bitcoin payments through the Bakkt app, enabling customers to reload their Starbucks cards with cryptocurrency.

Retail

• Home Depot accepts Bitcoin payments via Flexa, allowing customers to use cryptocurrency for home improvement purchases.
• Whole Foods processes crypto payments through the Spedn app, which enables Bitcoin and other digital currency transactions at checkout.
• Nordstrom integrates crypto payments into its in-store and online shopping platforms, supporting purchases with Bitcoin and Ethereum.

Real estate

• In Miami, a $22.5-million penthouse in the Arte Surfside complex was purchased entirely with Bitcoin, one of the largest real estate transactions involving cryptocurrency.
• Magnum Real Estate Group sold a retail condo in Manhattan for $15.3 million in Bitcoin, marking one of the first large-scale commercial real estate deals in crypto.
• Kuper Sotheby’s International Realty in Texas completed a home sale using Bitcoin, expanding crypto transactions into the residential property market.

Hospitality and travel

• Mirai Flights processes cryptocurrency payments for private jet charters, catering to high-net-worth individuals.
• Travala accepts BTC, ETH and other cryptocurrencies for hotel and flight bookings, partnering with major travel service providers.
• Expedia facilitates crypto payments for hotel bookings through Travala, offering Bitcoin payment options on select accommodations.

Advertising

• Claimr, a Web3 marketing platform, processes approximately 8 million euros annually, with the majority of transactions conducted in cryptocurrency.
• Accessible.org began accepting Bitcoin and other cryptocurrencies in 2025, allowing clients to pay for digital accessibility services with crypto.
• Black Iris Social Club in Richmond accepts Bitcoin for event bookings and memberships, integrating cryptocurrency into its operations.

Did you know? The first-ever real-world transaction using Bitcoin took place on May 22, 2010, when programmer Laszlo Hanyecz bought two pizzas for 10,000 BTC. Today, those 10,000 BTC would be worth hundreds of millions of dollars, making it one of the most expensive pizza orders in history. This event is now celebrated annually as Bitcoin Pizza Day in the crypto community.

Why are businesses accepting crypto payments?

So, all the big brands are in. But what’s driving this trend, and can small businesses benefit, too?

One of the most significant advantages is lower transaction fees. Traditional payment processors and credit card companies typically charge businesses between 2% and 4% per transaction, while crypto payment gateways often reduce this to less than 1%. For businesses processing high volumes of transactions, these savings can be substantial.

Another key factor is the ability to access a global market without the restrictions of currency exchange rates and international banking fees. Cryptocurrency payments enable seamless cross-border transactions, allowing businesses to serve international customers without friction. This is especially beneficial for industries like travel, luxury goods and digital services, where cross-border commerce is common.

Security and fraud prevention also play a role. Cryptocurrency transactions are final, eliminating chargebacks — something that costs businesses billions of dollars annually in fraudulent disputes. This makes crypto payments particularly appealing to merchants in industries where chargebacks are common, such as e-commerce and online services.

Did you know? In 2025, chargeback fraud, particularly friendly fraud, has become a significant concern for merchants. Notably, a recent survey revealed that 55% of Generation Z and 49% of Millennials earning over $100,000 annually admitted to engaging in digital shoplifting — a form of first-party fraud where consumers falsely claim issues with online orders to secure refunds or avoid payments. 

Additionally, businesses recognize that accepting cryptocurrency aligns with the preferences of a growing demographic of crypto users. Companies integrating crypto payments position themselves as forward-thinking and innovative, appealing to solvent, tech-savvy consumers who prefer digital transactions over traditional banking systems.

Finally, some businesses are drawn to the potential of holding crypto as an asset. While many use payment processors that instantly convert cryptocurrency into fiat currency to avoid volatility, others see it as an opportunity to gain exposure to a growing asset class. With major corporations like Tesla and MicroStrategy holding Bitcoin on their balance sheets, smaller businesses are following suit, recognizing the potential long-term value.

Small businesses stand to benefit the most here, as accepting crypto payments is an easy way to carve out a niche for the brand, reaching far more customers than would be possible by offering only fiat payments. The strategy might well mean the difference between failure and success in a competitive startup environment.

Did you know? A survey by Deloitte found that 85% of merchants see crypto payments as a way to reach new customers.

Risks of accepting cryptocurrency payments

While accepting crypto payments is often seen as a win-win, businesses must also be aware of potential risks in doing so on their own, without proper accounting systems and crypto processing partners.

Price volatility

Cryptocurrencies like Bitcoin are known for significant price fluctuations. For example, in early 2025, Bitcoin’s price dropped from $109,071 to around $80,000 — a nearly 25% decline within a short period. Such volatility can impact the value of received payments if not promptly converted to stable currencies.

Regulatory and tax compliance

The regulatory landscape for cryptocurrencies varies by jurisdiction and is continually evolving. For example, in the United States, the Internal Revenue Service (IRS) classifies cryptocurrencies as property, not currency, which introduces complexities in tax reporting and compliance. Businesses must stay informed about applicable regulations to ensure adherence to tax obligations and avoid potential legal issues.

Security concerns

Accepting cryptocurrencies necessitates the use of digital wallets and exchanges, which can be susceptible to cybersecurity threats.
Without robust security measures, businesses risk unauthorized access and theft of digital assets. Implementing strong cybersecurity protocols is essential.

Technical barriers

Integrating cryptocurrency payment systems requires technical knowledge that some small business owners may lack. Establishing digital wallets and navigating digital currency exchanges can be challenging, potentially leading to operational inefficiencies or errors. Investing in employee training or consulting with experts may be necessary to overcome these hurdles.

Market acceptance and perception

Despite growing adoption, cryptocurrencies are not universally accepted or understood. Some customers may be hesitant to use digital currencies due to concerns about security or unfamiliarity, potentially limiting the perceived benefits of offering crypto payment options. Businesses should assess their customer base to determine if accepting cryptocurrencies aligns with their clientele’s preferences.

Use a crypto payment provider 

It’s unlikely that, as a small business, you’ll take this road alone — especially when leading crypto payment processors offer zero up-front integration costs:

• These processors offer immediate conversion services, transforming volatile cryptocurrencies into stable fiat currencies upon receipt, thereby shielding businesses from price fluctuations.
• They also assist in navigating complex regulatory landscapes by providing tools for accurate tax reporting and ensuring compliance with evolving laws.
• To address security concerns, reputable processors implement robust cybersecurity measures, safeguarding digital assets against potential threats.
• Additionally, they offer user-friendly platforms that simplify the technical aspects of cryptocurrency transactions, making integration accessible even for those with limited technical expertise.

The next section will explore a number of crypto processing providers that you may wish to choose from as a small business.

Which crypto payment gateway to choose in 2025 

BitPay

Founded in 2011, BitPay is a pioneering cryptocurrency payment processor. As of 2024, it holds a 6.26% market share in the Bitcoin payment processing sector, serving over 523 customers. 

BitPay caters to a diverse clientele, including retailers, investment banking firms, and nonprofit organizations. The company offers direct crypto-to-fiat settlements, helping businesses avoid volatility while ensuring seamless integration with existing accounting systems. 

Its security infrastructure includes two-factor authentication (2FA) and encrypted transactions, making it a trusted option for enterprises looking to accept cryptocurrency payments.

CoinsPaid

Established in 2014, CoinsPaid has grown into a comprehensive crypto payment gateway, processing over 41 million transactions worth 23 billion euros. The company facilitates approximately 8% of all onchain Bitcoin transactions, making it a major player in the crypto payments sector. 

Supporting over 30 cryptocurrencies, CoinsPaid serves industries such as IT, marketing, financial services, real estate and gambling. The platform offers a business wallet, an over-the-counter (OTC) desk for large-volume transactions and software-as-a-service solutions tailored for crypto integration. 

CoinsPaid is licensed in Estonia and complies with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations while undergoing regular independent security audits to maintain its reputation for secure and compliant processing.

Coinbase Commerce

Launched in 2018 by Coinbase, Coinbase Commerce enables merchants to accept multiple cryptocurrencies directly into a user-controlled wallet. It provides seamless integration with major e-commerce platforms such as Shopify and WooCommerce, allowing businesses to accept ETH, Litecoin (LTC) and USDC (USDC). 

Notably, in February 2024, Coinbase Commerce ended support for Bitcoin and other unspent transaction output (UTXO)-based coins. To make Bitcoin payments, users will need a Coinbase account. The decision comes as Coinbase faces challenges in implementing updates to its Ethereum Virtual Machine payment protocol for Bitcoin.

While specific market share data is limited, Coinbase Commerce is widely used by small to mid-sized businesses across sectors such as computer software, utilities and telecommunications. 

The platform offers a straightforward setup with no transaction fees apart from standard network costs, making it an attractive option for businesses looking for a simple crypto payment solution without intermediaries.

Binance Pay 

Binance Pay, introduced by Binance, is a cryptocurrency payment solution that enables merchants and users to conduct transactions using various cryptocurrencies. It supports over 30 cryptocurrencies, including BTC, ETH and BNB (BNB), allowing for versatile payment options. 

The platform offers zero transaction fees for both merchants and users, making it an attractive option for businesses aiming to integrate crypto payments without incurring additional costs. Binance Pay also emphasizes security by incorporating features such as 2FA and encrypted transactions, ensuring safe and reliable payment processing.

Step-by-step guide to set up a crypto payment gateway 

Despite a run-in with the Lazarus Group last year, CoinsPaid continues to operate as a major crypto payment gateway, maintaining competitive setup costs and fees. As such, this section will walk you through the steps you’d be expected to take when integrating any crypto payment processor, using CoinsPaid’s flow as an example.

• Request a consultation: Businesses can begin by submitting a request on the CoinsPaid website. A CoinsPaid representative will promptly reach out to schedule a meeting and discuss requirements.
• Receive a free demo and proposal: The CoinsPaid team provides a detailed demonstration of the system, answers any questions, and prepares a tailored proposal based on the company’s specific needs.
• Onboarding: To finalize the agreement, businesses must complete the Know Your Business (KYB) verification by submitting the necessary documents for compliance with regulatory standards.
• Integration: CoinsPaid’s team assists in integrating the payment gateway into the company’s existing infrastructure, ensuring a smooth and efficient setup.
• Start accepting crypto: Once integration is complete, businesses can begin offering cryptocurrency payments, providing customers with an additional payment option while potentially expanding their market reach.

By following these steps, you can effectively integrate CoinsPaid into your business, offering your customers the option to pay with cryptocurrencies. 

Integrating cryptocurrency payments is a forward-thinking investment

With lower transaction fees, access to a global customer base and protection from chargebacks, crypto payments provide clear advantages over traditional payment methods.

The risks associated with crypto payments — such as volatility, regulatory compliance and security concerns — are easily mitigated by using a trusted payment processor like CoinsPaid, BitPay or Coinbase Commerce. These platforms handle everything from instant fiat conversion to security and compliance, making the transition to crypto seamless and low-risk.

With major brands already embracing digital currencies, there’s no reason for small and medium-sized businesses to be left behind. Crypto payments are fast, borderless and cost-effective, making them a no-brainer for any forward-thinking business. 

Whether you’re a startup looking to gain a competitive edge or an established company seeking new revenue streams, integrating cryptocurrency payments is an investment in the future.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

BTCFi explained: How Elastos uses Bitcoin’s security to power DeFi

The decentralized finance (DeFi) landscape continues to evolve, and Bitcoin-centric solutions are gaining momentum. BTCFi is an emerging sector that transforms Bitcoin (BTC) from a passive store of value into an actively utilized asset in DeFi. 

A new report by Cointelegraph Research and Elastos delves into how Bitcoin’s security helps to create trustless, scalable financial ecosystems.

Bitcoin’s expanding role in DeFi

DeFi has traditionally been dominated by Ethereum, which accounts for over 50% of the sector’s total $175 billion total value locked (TVL). However, Bitcoin’s strong security and liquidity make it an attractive foundation for DeFi innovation.

Despite its strengths, Bitcoin’s lack of native smart contract functionality has historically limited its role in decentralized finance. The emergence of Bitcoin-centric DeFi solutions aims to bridge this gap and enable Bitcoin holders to participate in lending, stablecoin issuance and crosschain interoperability without custodial risks.

Elastos: Leveraging Bitcoin’s security for decentralized applications

Elastos stands out as one of the leading players in this evolution by incorporating merged mining, a method that allows secondary blockchains to inherit Bitcoin’s security. 

Because approximately 50% of Bitcoin’s total 800 EH/s hashrate secures Elastos, the platform is positioned as one of the most computationally robust Bitcoin-linked networks. This ensures that financial applications built on Elastos maintain a level of security akin to that of Bitcoin itself.

At the core of Elastos’ infrastructure is its Elastic Consensus model, a hybrid mechanism that integrates auxiliary proof-of-work, bonded proof-of-stake, and proof-of-integrity. 

This multi-layered approach enables Elastos to provide secure, scalable financial services and enhances its appeal for DeFi applications. The Elastos Smart Chain, an Ethereum Virtual Machine-compatible sidechain, facilitates the development of decentralized applications (DApps) to ensure seamless integration with the broader DeFi ecosystem.

BeL2: A breakthrough for BTCFi

A major highlight of the report is the BeL2 Arbiter Network, designed to bring trustless Bitcoin transactions into DeFi. BeL2 leverages zero-knowledge proofs (ZKPs) to verify Bitcoin transactions on the Elastos and Ethereum networks without relying on centralized custodians. 

This mechanism allows Bitcoin to be used in DeFi protocols without synthetic assets or intermediaries and addresses a long-standing challenge in BTCFi.

This model has already attracted institutional interest. An initiative led by students and alumni of Harvard University is developing a BTC-backed stablecoin using BeL2. The platform also supports decentralized lending that allows Bitcoin holders to collateralize loans in stablecoins while retaining exposure to BTC’s price appreciation.

Elastos’ market position and future potential

Elastos’ BTCFi approach competes with established Bitcoin DeFi solutions such as Stacks and Rootstock. Stacks primarily benefits from Bitcoin finality, and Rootstock focuses on EVM compatibility, while Elastos distinguishes itself by combining high security (via merged mining) and crosschain interoperability. This positions Elastos as a formidable player in the BTCFi landscape.

However, the report also identifies some challenges, such as regulatory uncertainties, ecosystem awareness and some technical complexities. Despite these hurdles, Elastos’ combination of Bitcoin security, trustless smart contract execution and institutional backing positions it for potential growth in the evolving BTCFi sector.

Challenges and opportunities in Bitcoin DeFi adoption

As the blockchain industry shifts toward crosschain interoperability and decentralized governance, Bitcoin-secured assets are expected to play an important role in reshaping both traditional and decentralized finance.

Elastos’ innovations, particularly through BeL2 and its decentralized identity (DID) framework, aim to enhance the security, scalability and institutional adoption of Bitcoin in DeFi. 

With Bitcoin-secured finance projected to expand significantly, Elastos’ infrastructure provides a robust foundation for the next wave of decentralized financial applications.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Cointelegraph does not endorse the content of this article nor any product mentioned herein. Readers should do their own research before taking any action related to any product or company mentioned and carry full responsibility for their decisions.

Bitcoin’s megaphone pattern, explained: How to trade it

Key takeaways

• The Bitcoin megaphone pattern features at least two higher highs and two lower lows, forming an expanding structure.

• Connecting these highs and lows with trendlines creates a megaphone-like appearance, reflecting market instability.

• The formation signals heightened volatility, with price swings becoming more pronounced over time.

• Depending on the trend direction, the pattern can indicate potential breakouts either upward (bullish) or downward (bearish).

The megaphone pattern, also known as a broadening formation, is a technical analysis chart pattern that traders observe in various financial markets, including cryptocurrencies like Bitcoin. 

This pattern is characterized by its distinctive shape, resembling a megaphone or an expanding triangle, and signifies increasing volatility and market indecision. Here are its defining characteristics:

• Higher highs and lower lows: The pattern consists of at least two higher highs and two lower lows, forming an expanding structure. Each subsequent peak is higher than the previous one, and each trough is lower, creating diverging trendlines.

• Diverging trendlines: When trendlines are drawn connecting the higher highs and lower lows, they diverge, forming a broadening pattern that visually resembles a megaphone.

• Increased volatility: The formation of this pattern indicates heightened volatility as the price swings become more pronounced over time. This reflects a struggle between buyers and sellers, leading to wider price movements.

Did you know? Bitcoin megaphone trading differs from traditional megaphone trading in that no physical megaphones are involved in the process.

1. Bullish megaphone formation 

This variation of the pattern suggests a potential breakout to the upside.

• Initial uptrend: The price begins in an uptrend, reaching the first peak (point 1).

• First retracement: A pullback occurs, creating a lower low (point 2) that is still above the prior trend’s starting level.

• Higher high formation: The price rallies again, surpassing the previous high and forming a higher high (point 3).

• Lower low expansion: A more pronounced drop follows, leading to a lower low (point 4), extending the range of price fluctuations.

• Breakout and continuation: The price breaks above the resistance line (point 5), confirming a bullish breakout.

2. Bearish megaphone formation 

This version of the pattern signals a potential downside breakout.

• Initial downtrend: The price begins with a downward movement, setting an initial low (point 1).

• First retracement: A minor upward correction follows, forming a lower high (point 2).

• Lower low expansion: A new low forms (point 3), further widening the range.

• Higher high formation : The price spikes again but still struggles to hold above prior highs (point 4).

• Breakout and reversal: The price breaks below the support line (point 5), confirming a bearish breakout.

Did you know? A high-volume breakout from a megaphone pattern signals strong market conviction, confirming a real move. Low volume? It’s likely a fakeout, with the price reversing back. Remember, wait for a volume spike before entering.

Megaphone history in Bitcoin trading

The megaphone pattern, or broadening formation, has appeared at various pivotal moments in Bitcoin’s trading history:

1. The early days: 2013–2014

In Bitcoin’s (BTC) formative years, extreme volatility often produced broadening formations. During this period, traders noted megaphone patterns — often with a bearish tint — reflecting wild price swings as the market struggled to find balance. 

Although less documented then, these early examples have since become reference points for understanding how chaotic market conditions can manifest as megaphone formations.

2. The late 2017–early 2018 bearish formation

As Bitcoin surged toward its then-all-time high near $20,000 in late 2017, a bearish megaphone pattern appeared on daily charts. This formation, marked by diverging trendlines with higher highs and lower lows, signaled increasing indecision and mounting selling pressure. 

Many technical analysts viewed it as a warning sign of an impending reversal — a forecast that materialized with the dramatic correction experienced in early 2018.

3. The early 2021 bullish turn

In early 2021, as Bitcoin approached the $60,000 threshold, traders observed a bullish megaphone pattern forming on multiple timeframes. Characterized by a series of progressively higher highs and higher lows, this pattern indicated a period of heightened volatility combined with cautious optimism. 

The subsequent breakout confirmed a strong bullish momentum, reinforcing the pattern’s validity as a predictive tool in a maturing market.

Trading strategies for the megaphone pattern

In this section, we’ll explore a number of trading strategies compatible with the Megaphone pattern. 

1. Megaphone breakout trading 

Breakout megaphone pattern trading involves entering a trade when the price decisively breaks out of the pattern’s boundaries with strong volume confirmation.

a. Identifying key levels

• Draw upper and lower trendlines: Connect the pattern’s higher highs and lower lows to form the megaphone shape. These trendlines mark the critical resistance and support levels.

• Confirm the breakout zone: In a bullish scenario, the upper resistance line is the key zone to watch for a breakout. In a bearish scenario, focus on the lower support line.

b. Volume confirmation

• Look for a volume surge: As the price breaches resistance (bullish) or support (bearish), a spike in volume indicates strong market participation.

• Reduce false breakouts: If volume remains weak at the breakout, there’s a higher chance of a fake move back into the pattern.

c. Entry points

• Bullish breakout entry: Place your buy order just above the upper resistance line.

• Bearish breakout entry: Enter a short position just below the lower support line.

Did you know? Placing your stop-loss inside the megaphone can help prevent excessive losses if the breakout fails and the price slides back into the pattern, giving you added protection in volatile markets.

d. Profit targets

Measure the pattern’s height by finding the vertical distance between its lowest and highest points, then use a portion of this measurement (commonly around 60%) to determine a balanced take-profit level.

By projecting that percentage from the breakout point, whether above the upper resistance (for a bullish scenario) or below the lower support (for a bearish one), traders can set realistic targets while maintaining a favorable risk-to-reward ratio.

2. Swing trading within the pattern

Swing trading within a megaphone pattern involves capitalizing on the interim price moves between its support and resistance boundaries — without necessarily waiting for a definitive breakout.

a. Identify key lines

• Upper resistance (R1, R2): These lines represent zones where price is likely to encounter selling pressure.

• Pivot line: A midpoint reference that can act as temporary support or resistance, depending on the direction of the price move.

• Lower support (S1, S2): Zones where buying pressure may emerge.

b. Look for buy signals near support

In a bullish megaphone, consider entering long positions near the lower support lines (S1 or S2), especially when you see a bounce or bullish candlestick formation.

Confirm signals with oscillators (e.g., RSI, stochastics) or volume upticks indicating a shift in momentum.

c. Sell signals near resistance

In a bearish megaphone (or even within a bullish one, if you’re comfortable short-selling), traders may look for short entries near upper resistance lines (R1 or R2).

A candlestick reversal pattern or a decline in volume at these resistance levels can reinforce the likelihood of a price reversal.

d. Stop loss and take profit

Place your stop-loss just above the resistance line (e.g., slightly above R2) to minimize losses if the price breaks out higher. 

For take-profit targets, consider exiting near the pivot line or the first support (S1). In cases of strong downward momentum, take partial profits at S1 and aim for S2 with the remaining position.

e. Use the pivot line as a decision zone

The pivot line in the center often serves as a short-term inflection point:

• Above the pivot: The bias may be bullish, favoring long positions.

• Below the pivot: The bias may be bearish, favoring short positions.

If the price consistently hovers around the pivot line with no clear direction, wait for it to test either a support or resistance level to confirm the next swing.

f. Combine volume and indicators

Look for volume spikes at each support or resistance test. An uptick in volume when the price bounces off support or reverses from resistance can signal a stronger move.

Also, tools like the relative strength index (RSI) or moving average convergence/divergence (MACD) can help confirm overbought/oversold conditions, strengthening the case for a reversal trade.

3. False breakout strategy

False breakout megaphone pattern trading involves recognizing when the price briefly breaches the megaphone’s support or resistance, only to quickly return within its boundaries — a scenario often accompanied by low volume.

In such cases, instead of chasing the breakout, traders look for confirmation of the reversal before entering a counter-trend trade. 

This strategy requires identifying key trendlines that define the pattern, monitoring volume for weak breakout signals, and entering a trade once the price re-enters the formation, typically placing stop-loss orders within the pattern to limit losses and setting profit targets based on the measured height of the formation.

Risk management and considerations

Given the inherent volatility of Bitcoin and the wild price swings characteristic of the megaphone pattern, robust risk management is essential to safeguarding your trading capital. Here are several key strategies to incorporate into your trading plan:

1. Volatility awareness

• The expanding range of the megaphone pattern signifies increasing uncertainty. Recognize that rapid swings can lead to both substantial gains and equally significant losses.

• Monitor market sentiment closely and be prepared for sudden reversals, especially during false breakouts where low volume might signal a lack of conviction.

2. Position sizing and leverage

• Position sizing: Determine your position size based on the maximum risk you are willing to take (typically 1%–2% of your trading account).

• Cautious use of leverage: While leverage can amplify profits, it equally increases potential losses. Use leverage sparingly and ensure your risk parameters can accommodate amplified swings.

3. Stop-loss and take-profit levels

• Stop-loss orders: Place stop-loss orders just within the megaphone formation’s boundaries. This positioning helps limit losses if the price reverses unexpectedly.

• Take-profit targets: Calculate your profit targets by measuring the vertical distance of the pattern and projecting a reasonable percentage from the breakout point. This ensures you secure gains while maintaining a favorable risk-to-reward ratio.

4. Adaptive risk controls

Market conditions can shift rapidly. Continuously reassess your trades by:

• Monitoring volume and momentum: Use volume spikes and momentum indicators to adjust your stop-loss or take-profit levels dynamically, ensuring that your exit strategy adapts to the evolving market.

• Using trailing stops: Consider employing trailing stop orders to lock in profits as the price moves in your favor while still allowing room for potential gains.

And that’s it — happy megaphone trading!