ByteFolio Update 41

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.

Update: A follow-up flash note was issued after this article was published. LINK was sold on 19 January 2023 - learn more.

Holders of ByteFolio will be pleased with its performance in dollars this week, but not in bitcoin. The BTC value of the portfolio has fallen to 9.65 from 9.99, a function of a tremendous bounce in BTC, which, as discussed in last week’s ATOMIC, has been gaining sector dominance.

This is great news because it hardens the case that the worst is behind us.

If previous cycles are anything to go by, we should expect bitcoin dominance at the start and a broadening of performance as we move forwards. Keep the faith.

We make no changes to the portfolio this week, although some will question why LINK remains since it has fallen to zero stars in BTC. We explain below.

Movers

Bitcoin (BTC)

Where does the ~25% price rise this year leave us now? Take a look at last week’s ATOMIC to get a more granular view of our thoughts on the outlook, but a couple of things to add here. First, from a short-term trading view, it’s spectacularly overbought. You have to go back to the start of the last bull market before finding the Relative Strength this elevated. Second, having been “cheap”, BTC has now hit our fair value level.

The “over-boughtness” in the short term isn’t a negative. It just suggests we’ll run into a bit of resistance at these levels. A rising price is a good thing! The last time the daily RSI was at these levels was when Elon Musk was filling his boots two years ago, but the better analogue for the cycle is April 2019, when BTC was first re-emerging from the jaws of the bear. As you can see below, there was a sudden move from the trough in mid-December 2018 (~US$3,120) to an interim peak on 23 Feb (~US$4,100), a rise of around 30% [1]. The price then traded largely sideways until the end of March before taking off again [2]. By the time the price peaked in June 2019 at around US$12,370, it had moved nearly 4x off the bottom. We’re still early if that’s any guidance.

Source: IG

The point is that a bull market will be characterised by buying climaxes followed by periods of calm. Much as it’s been a step function on the way down, it will be the same on the way up. Too often, investors are scared of rising prices, worried that they’ve “missed it”. But price strength is the market telling you that things are going well. Hence the power of trend analysis.

What is comforting is that by historic measures, bitcoin isn’t expensive. Our internal measure puts fair value at around US$20,800 at the time of writing. Below, I’ve circled the equivalent period from the last cycle for ease of reference. It’s a good rule that it’s better to buy a high-quality asset at fair value than a low-quality asset when it’s cheap.

Source: ByteTree

Binance (BNB)

The fear and uncertainty surrounding centralised exchanges (CEX), as a result of the FTX collapse, linger on. Crypto users are still afraid of keeping their funds on CEXs. Binance, the largest CEX in the industry, has seen outflows of around $12bn, according to Forbes. That said, data from Nansen shows that the exchange still has over $63.7bn in assets on the platform, which is high compared to other top exchanges like Coinbase or OKX, demonstrating a far more resilient customer base than the noise would have you believe.

In our view, Binance is one of the best CEXs in the industry. Despite all the challenges, it is still hiring talent for thousands of roles and plans to increase its staff by 15%-30% in 2023. Moreover, on 10 January 2023, Sweden became the 7th EU country to give Binance regulatory approval to operate in the country. Following Binance’s acquisition of $1bn Voyager assets last month, the exchange has also recently acquired 100% of an Indonesian crypto exchange, Tokocrypto. This shows how strong the exchange actually is.

Relative to BTC, the last six weeks have been tough for BNB, but the long-term uptrend remains robust. ByteFolio remains a happy holder. Ignore the FUD.

Source: ByteTree

Chainlink (LINK)

The keenly observant among you may be asking why ByteFolio hasn’t turfed out LINK now that it has fallen to zero stars in BTC. Fair question. It has been discussed at length, but, for the moment at least, we’ve decided to cling on.

First up is the fact that we’re big fans of the project. Decentralised oracle networks are essential as use cases for the technology expand, and LINK is the leader in the space. Second, we’re aware that the recent price weakness is a classic example of “selling the news”, in this case, the announcement of the start of staking in early December. If other examples are anything to go by (ETH), it would be a mistake to sell at a moment of weakness. Third, looking at LINK in USD and we’ve just been trading in a relatively tight range since mid-May (below).

Unlike, say, FTX, this isn’t a project with a single point of failure, which makes it low risk, in a crypto context at least. We’re aware we could be wrong, so we’ve put in a stop-loss: at -10%, we’ll accept that something is going wrong that we don’t understand. On the flip side, we’re well-placed to add should it show renewed signs of life.

Source: ByteTree

Shakers

Avalanche (AVAX)

AVAX has spiked over 25% in the past seven days on the news of its partnershipwith Amazon Web Services (AWS). The collaboration aims to bring greater institutional adoption to the cryptocurrency market by offering Avalanche’s decentralised application services to AWS’s entire customer base. The partnership could be a key step in exposing more people to blockchain technology, as Amazon operates in more than 100 countries.

Furthermore, the collaboration covers not just the platform wing of Amazon’s cloud computing services, but also enables Amazon Partner Network (APN) to help customers deploy customised offerings on AWS connected to over 100,000 partners. This partnership also allows more people to start and manage nodes on Avalanche, strengthening the network and making it more distributed.

AVAX is something of a fallen angel, but after 7 months’ consolidation may be coming back to life. One to watch.

Source: ByteTree

Regulation

Since the SEC filed charges against Scam Bankrun-Fraud in December, they have taken five additional enforcement actions related to crypto. One is against digital assets exchange Gemini, and another against the crypto lender Genesis. Everything started from a squabble between Gemini and Genesis over $900m of Gemini user assets entrusted to Genesis, which has allegedly been teetering on bankruptcy. Around 370k users of the Gemini “Earn” programme are reportedly out of pocket. In an unexpected turn of events, the SEC sued both companies over the Earn product. SEC Chair, Gary Gensler, said:

“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors”

However, one of the founders of Gemini stated that they’re “working hard together to recover funds” and called the SEC’s charges “counterproductive”. He also stated that:

“the Earn program was regulated by the New York State Department of Financial Services and we’ve been in discussions with the SEC about the Earn program for more than 17 months. They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16.”

The damage has already been done, and the SEC’s action seems to be too little, too late. It is unclear how the 370k users who have lost $900m will benefit from this action, reflecting a somewhat unhelpful and uncompromising stance from the SEC towards the sector. It is also a clear warning to other crypto exchanges and lenders who are tempted to offer similar services with no regulatory approval.

BYTEFOLIO PERFORMANCE

ByteFolio Asset Allocation

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