ByteFolio Update 39

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.

In the last edition of ByteFolio, we noted that altcoins were underperforming bitcoin en masse. In other words, breadth was deteriorating. The growing red sky means that bitcoin’s dominance of the sector is increasing. This is seen in the chart below, which is also overlaid with the green ByteTree Crypto Average (BCA) line, an approximation of the sector’s broader performance. You can see that it continues to drift lower, while BTC itself has been flat since the November fall.

Source: ByteTree

While growing bitcoin dominance is a feature of a market recovery in its early stages, we can only get fully bullish if it’s accompanied by a rising BTC price. This is because deteriorating breadth in a bear market is a sign of a widespread lack of conviction and support. This remains a time to stay cautious.

In the portfolio, Chainlink has fallen to zero stars relative to BTC, only to recover to one-star last night. The recent decline follows the introduction of staking, a long-anticipated event which, similar to ETH’s performance post-merge, seems to be a case of “sell the news”. We like LINK from a bottom-up perspective and are conscious that a small move higher will put the trend back on a positive footing. For that reason, we continue to hold, but any further deterioration and it will leave the portfolio.

The standout ByteTrend performer is OKB, the token of the OKX Exchange, which Ali covered recently in Token Takeaway. OKB registers a 5-star trend relative to the USD as well as BTC. The collapse of FTX and the question marks surrounding Binance have driven home the importance of centralised exchanges that are well-managed, transparent, secure and well-capitalised. OKX clearly fits the bill. It has soared up the crypto rankings by market cap, reminiscent of Binance’s emergence in 2021.

It is an exchange, and Seran has been tasked with doing a cross-exchange project so we can really see what is going on. Let’s wait for his research.

Lastly, we highlight ATOM, the token of the Cosmos ecosystem. There has been infighting recently surrounding enhancements to the utility of the token and upgrades to the protocol, and a sharp decline in the price accordingly. However, the market seems to have decided that enough is enough and a recent bounce has seen it move to 3-stars relative to BTC. The internal politics are causing disagreement. We stay on the sidelines.

Movers & Shakers

Movers

Bitcoin (BTC)

A quick update on the Network Demand Model, which has retreated to a score of 3/6. This places it in neutral territory. While the network continues to function seamlessly, on-chain activity remains slow. That said, we saw a slight uptick into the year-end.

Source: ByteTree

Unsurprisingly there has been a lot of financial distress in the bitcoin mining sector. Hence, elevated volatility can be observed in bitcoin generation, and the blockchain interval as energy cost pressure and depressed prices play havoc with miners’ P&Ls. This is an important test of the network’s resilience, and thus far, it is passing with flying colours. The self-correcting mechanism has worked faultlessly as all indicators return to where they should be as the difficulty levels adjust. Note that in the “generation” chart below, the difficulty level – and by inference, the network’s security - remains substantially higher than a year ago, when the BTC price was much higher. A lot of miners will have to disappear before the network is in any way compromised.

Source: ByteTree

Source: ByteTree

The resilience referred to above is exemplified in the recent announcementthat Argo Blockchain has restructured . The London-listed bitcoin miner has sold its Helios mining facility to Galaxy, in so doing allaying fears of bankruptcy. This is a classic example of how industries consolidate in bear markets. More is written about companies that collapse in crises than those that have managed their operations sensibly and with an eye to the long term. Yet the latter are far more interesting to the long-term investor.

Good news from The Basel Committee on Banking Supervision (not a sentence that will be written often). According to a CoinDesk article, it has endorsed its global crypto banking rules for implementation by 1/1/25, suggesting that “a bank’s exposure to certain crypto assets must not exceed 2% and should generally be lower than 1%.” While the crypto market has been through a torrid year, this news acts as a long-term legitimisation of the space, a disappointment, no doubt, for those wishing it would disappear.

Shakers

Solana (SOL)

Solana’s SOL made a low of $8.14 on 29 December 2022, a 95% decline from its all-time high in November 2021, wiping over $70bn of value from its market cap. Moreover, the network’s TVL is currently at $433.6m, down from over $15bn in December 2021. Although 2022 was bad for almost all the “Ethereum killers”, factors such as multiple network outages and overloads, along with its connections to FTX and SBF, were the main catalysts for SOL’s downfall. Furthermore, to add gas to the fire, two of the largest Solana-based NFT projects (in terms of 24hr volume), DeGods and Y00t, have announced their plans to migrate to different chains. DeGods will be migrating to Ethereum, and Y00ts to Polygon.

Nevertheless, SOL shot up over 12% in the last 24hrs following a tweet from Vitalik Buterin, which extend support to the ecosystem. He said:

“Some smart people tell me there is an earnest smart developer community in Solana, and now that the awful opportunistic money people have been washed out, the chain has a bright future. Hard for me to tell from outside, but I hope the community gets its fair chance to thrive”.

Although the Solana community is strong and vocal, these are extreme times for the ecosystem. Solana portrayed itself as one of the best players in the NFT space and seeing top NFT projects leaving the network raises many concerns and FUD within the ecosystem. It will be only an uphill battle for both the token and the ecosystem to grow and return to previous highs.

The Spirit of BritCoin is Back

Beginning in 2023, the United Kingdom will offer tax breaks to overseas investors who buy cryptocurrencies from UK-based crypto brokers. This decision is part of the country’s intention to become a cryptocurrency hub, with the goal of attracting worldwide investors by ensuring that they would not be liable to UK tax just by working with UK-based investment managers. The exception is only applicable to cryptocurrency assets held in funds administered by UK-based investment managers.

In contrast, according to a new budget, cryptocurrency traders in Italy will be subject to a 26% capital gains tax. This tax will be applied to crypto trading gains that exceed 2,000 euros per tax period. The budget also makes it clear that the exchange of crypto assets with similar characteristics and functions is not a taxable event. These modifications come ahead of the European Union’s Markets in Crypto Assets regulation, which will establish licencing requirements and operating standards for crypto service providers in the EU.

ByteFolio Performance

ByteFolio Asset Allocation

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