bytefolio

ByteFolio Update 38

Disclaimer: Your capital is at risk. This is not investment advice.

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.

ALTS UNDERPERFORM, DE-RISK

The portfolio has dropped back to B9.80 this week after a spell of concerted pressure on altcoins. This has coincided with lots of questions being asked of one of the largest exchanges in the space, Binance. Binance is a major component of liquidity provision in decentralised finance and trading. Given the FTX bankruptcy, it is unsurprising that traders have de-risked portfolios, which has clearly impacted pricing at the riskier end of the asset class. Crypto needs Binance to endure.

ByteFolio is forced to follow suit, with a couple of sales this week. ATOM, which has looked weak for a while, has broken down to a 0-star on ByteTrend. We also unload CAKE, despite it residing on a 2-star trend relative to BTC. This is because we already own Uniswap (UNI) in this sector, which is better positioned for the long term. Proceeds from both will be invested in BTC.

Keep a close eye on ByteTrend over the next couple of weeks, as this will be the last publication before the New Year. We’re in a period where this market is finely balanced. ETH, MATIC, LINK, UNI, and QNT have all dropped from 5-star to 2-star ratings against BTC over the last week. In all cases, they are a decent way above the longer-term 280-day moving average, so we’re not going to panic. We believe they are solid projects. However, if they do break down to 0-star trends, the process demands we step away.

It’s been a very difficult year in crypto, but to have great times in markets, you need to go through rough patches. Often, the worse it is, the better it becomes. We believe there’s an amazing future for crypto and have thoroughly enjoyed the process of putting this product together, where we aim to one day turn our hypothetical 10 BTC into something much greater. Have a wonderful Christmas, and here’s to a much better 2023.

Bitcoin dominance regained

It’s not all negative. We like the look of BTC, where, as per our recent ATOMIC upgrade, we see several positives.

On-chain activity readings are encouraging (our Network Demand Model is on 4/6).

The interest rate cycle appears to be peaking, which should benefit risk assets.

The sector has already absorbed a massive amount of bad news, which is likely to accelerate regulation. Regulation is effectively legitimisation.

We are 16 months or so from the next bitcoin halving, which has always been a catalyst for a bull run.

One interesting thing to look at is Bitcoin Dominance, which was discussed in ATOMIC last week. Historically, the start of a bull market in bitcoin has first been characterised by an increase in its sector market share (or “dominance”). This is illustrated in the chart below, where dominance, as represented by an increase in the “red sky”, is starting to rise in mid-2018. It’s also a feature at the start of the huge bull market, the last of which really kicked off in late 2020.

Source: ByteTree

Movers & Shakers

Movers (inside the portfolio)

Binance Coin (BNB)

Last week, the largest cryptocurrency exchange, Binance, experienced $6 billion in net withdrawals due to concerns about its financial stability. These concerns were exacerbated after accounting firm Mazars, which had been producing “proof of reserves” reports for Binance, halted its work on these reports due to concerns about how the reports were interpreted by both the public and analysts. Binance has assured that it holds more than $60 billion in assets, enough to honour withdrawals, and that it can fulfil recent withdrawals without issue. However, this mass exodus of customer withdrawals has led to BNB, the native token of the exchange, dropping by over 15% in the last 7 days.

The situation hasn’t been helped by a noisy hedge fund manager called Kevin O’Leary retaliating to Binance CEO Changpeng Zhao (“CZ”), who called him a “liar” in an interview. This was in response to O’Leary’s testimony at a Senate Banking Committee hearing on the collapse of rival cryptocurrency exchange FTX. O’Leary suggested that the downfall of FTX was partially due to Binance selling its FTT holdings. CZ disputed these claims and suggested that Kevin was very close to Sam Bankman-Fried, and thus his view was biased. In our view, this brings O’Leary’s judgement into question far more than CZ’s. O’Leary had been a paid advocate of FTX, and to be deflecting blame from FTX, which appears to be a straight-up case of fraud and greed, is highly disingenuous.

Cosmos (ATOM)

We exit from ATOM this week in ByteFolio. It currently scores no stars against USD, BTC, or ETH on ByteTrend. Although we believe Cosmos is one of the best Layer-0 blockchains and provides great features and services, there have been some internal governance issues in the ecosystem. The Cosmos Hub community is currently divided due to the recent rejection of the ATOM 2.0 upgrade. We will be keeping a close eye on any new developments. We would be amenable to buying back ATOM when and if the issues are resolved and when we see a commensurate trend change.

Polygon (MATIC)

Another feather in the Polygon cap. On 15 December, former US President Donald Trump released an NFT collection called Trump Digital Trading Cards. The collection consisted of 45,000 NFTs, which were minted on Polygon for $99 each. The entire collection was sold out the following day. Currently, the floor price of the collection is 0.3 ETH, or approximately $355. It’s also a sign that opinions towards crypto can change. Don’t forget that this is the same man who said, “Bitcoin, it seems like a scam…I don’t like it because it’s another currency competing against the dollar”.

Bitcoin (BTC)

Microsoft have distanced themselves from the orange coin by banning crypto mining on its online servers. As far as we can ascertain, it’s an insignificant issue for bitcoin, and probably due to practical reasons for Microsoft rather than any great ethical concern, especially as mining can still be granted by written approval. As they say in the announcement, “crypto currency mining can cause disruption or even impairment to Online Services and its users and can often be linked to cyber fraud and abuse attacks such as unauthorized access to and use of customer resources. We made this change to further protect our customers and mitigate the risk of disrupting or impairing services in the Microsoft Cloud”.

Quant (QNT)

CBDCs coming to you soon. On 7 December, the ECB announced it was running a digital euro prototyping exercise. More details here, but experimental work is already being conducted by the five companiesoriginally selected. One of these is Nexi, a digital payments company whose focus for the digital euro project is on “point of sale payments initiated by the payee”. We mention this because Quant, initially via its relationship with SIA (bought by Nexi), is working to integrate the SIAchain infrastructure with Overledger, its interoperability platform.

Shakers (outside the portfolio)

Solana (SOL)

An interesting chart from Token Terminal shows daily active developers broken down by the projects they are working on.

You’d have to be a bit nervous as a SOL holder, although there may be extraneous reasons for the massive surge and subsequent fall. You’d normally expect crypto developers to remain in the space rather than abandon everything altogether.

The second chart removes Solana, which shows a reduction in activity in the space overall. The patterns are resonant with the previous bear market. What is really interesting about this is that the number of developers continued to rise in the last bear market and, despite the recent slippage, has also increased in this dreadful year that is now drawing to a close. This is a good data point to keep an eye on for the long-term health of crypto.

Liquidity

Another chart to catch our eye this week is from Kaiko Research, which ranks top cryptos by both market cap and liquidity. Good to see a couple of our holdings, MATIC and LINK, punching above their weight on the liquidity front. Note also the disconnects in UNI, DOT and LEO, however.