ByteFolio Update 34

ByteTree's Crypto Leaders

ByteFolio brings together ATOMIC, ByteTrend and Token Takeaway to create ByteTree’s model portfolio, known as ByteFolio. This is a selection of crypto tokens, which are weighted according to their risk/reward characteristics. ByteFolio has a modest turnover and will not suit traders. It will appeal to investors who wish to diversify beyond bitcoin, with the aim to beat it.

Recent weakness across the board has seen the portfolio lose some ground against bitcoin this week. Given the furore surrounding the collapse of FTX, this is hardly surprising, and we remain in a highly nervous environment where rumours abound about the financial strength of other crypto institutions.

The process hasn’t triggered any action this week, although ByteTrend watchers will see both ATOM and LINK dropping to 1* in BTC, so we watch those closely. We can’t identify any obvious structural problems with either but highlight the latest news on Cosmos below as a possible cause of recent weakness.

Binance Coin (BNB), Polygon (MATIC), and Monero (XMR) remain on 5* in BTC, while ETH is on 4*, so our largest holdings continue to hold up well on a relative basis. Let’s not get carried away, though. They’re all on zero stars against the US$.

ByteTrend - Movers & Shakers

Movers & Shakers draw attention to any important developments to portfolio holdings, as well as any interesting developments that we are drawn to outside the portfolio. It gives you a clearer idea of what we’re thinking and why, and how we’re expressing that (or not!) in the model portfolio.

Movers (portfolio holdings):

BTC (Bitcoin). One bit of positive news is that the ByteTree Network Demand Model (NDM) turned bullish on Bitcoin at the end of last week, as per the flash  note  sent out on Friday. It upgraded to a score of 5/6, which was last seen in May 2021, so this doesn’t happen often. Our belief has always been that the value of bitcoin is a function of its usage. We have finally reached a level consistent with past cycle lows.

ATOM (Cosmos). The ATOM token currently scores 1* in BTC on ByteTrend, down from 4* just 10 days ago. The drop is most likely due to the Cosmos Hub governance participants rejecting ATOM 2.0, an upgrade proposal touted as bullish. ATOM has been criticised for having a high inflation rate, and this upgrade was set to address that. The suggested change to ATOM’s monetary policy was set to be accomplished over a 36-month period. Initially, 10 million ATOM tokens would be issued every month, taking inflation to roughly 41%. But by the end of the period, this would have decreased to 300k tokens per month, or inflation of just 0.1%. ATOM 2.0 was also set to bring many other interesting features and  initiatives. Ultimately, it looks like the proposal suffered from over-ambition, with simply too many complex changes being put forward in one go. This doesn’t change our fundamental view on the long-term viability of the project. We’d expect future changes to come through in a piecemeal fashion rather than in one lump.

ETH (Ethereum). Over the weekend, the hacker behind the $600 million FTX exploit began exchanging millions of dollars’ worth of ETH for Ren Bitcoin (renBTC), a token that represents Bitcoin on the Ethereum blockchain. It’s a big chunk of selling pressure and presumably one of the factors behind ETH’s recent underperformance. That said, it’s clearly a temporary phenomenon creating a short-term price distortion. Long-term investors (are there any?) with spare cash (is there any?) may be looking at this as an opportunity.

Shakers (outside the portfolio):

1. SOL (Solana). Network effects in reverse? Solana has been battered by the FTX collapse, with its native token, SOL, currently down around 95% from its all-time high. The negative impact is mostly due to its ties with FTX. According to a recent blog from Solana, Alameda Research purchased 50.5 million SOL from the Solana Foundation, which at US$11.82 is now worth around $600m. Moreover, Solana Labs also sold over 7.56 million SOL (approx $90m) to Alameda Research. However, a large portion of these tokens are locked and are gradually being unlocked every month till 2028, while another chunk is due to be unlocked in 2025. The Solana Foundation also had around $1m in cash or equivalents on FTX and 3.24 million in FTX Trading Ltd common stock shares. Additionally, the Solana Foundation also held over 3.4 million FTT tokens and over 134.5 million tokens of Serum, a Solana-based DEX founded by SBF. Both FTT and SRM are down around 98% from their all-time highs. In addition to the direct financial impact, Binance, Crypto.com, and OKX recently halted deposits and withdrawals of USDC and USDT on the Solana Network. To compound Solana’s misery, Tether announcedthe swapping of $1bn worth of USDT from Solana to Ethereum due to decreased demand. SOL holders will be hoping it can’t get any worse, but the challenge will be to retain developers, app builders, and users.

Action: no action