ByteFolio Update 43

ByteFolio Update 43

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.

The portfolio has risen slightly in BTC terms over the week, but there is little question that bitcoin is in the ascendant at the moment. This means that this is not the environment to be taking a silly amount of risk. Own the big guns and enjoy the start of the bull market.

We debated trimming both BNB and ETH now that they have retreated to 1- and 0-star trends, respectively, versus BTC on ByteTrend, but we hold off for the time being. Attentive readers will remember that we substantially reduced the BNB holding on the 12 December when it was at 0.016 versus 0.013 now. Failing a material collapse, we are content to keep exposure to a network that, according to the developer, has more unique addresses than Ethereum.

We comment on factors holding ETH back below, but for the moment, the position is also being treated with leniency. At 10.1% of the portfolio, it is an underweight position versus its 18.4% share of the crypto universe, and the trend behaviour is soggy rather than hair-raising. As shown below, it (280-day MA) has been moving sideways versus BTC for the best part of a year.

Source: ByteTree

Breadth has improved enormously across the cryptosphere. This would be consistent with the start of a bull market, but given recent behaviour, contrarians might look at the chart below and reach for the sell button. However, we believe that we are at the start of a bull market and see any weakness as a buying opportunity.

Source: ByteTree

Movers

Ethereum (ETH)

The Ethereum POS merge has raised concerns about regulation and centralisation. The SEC’s Howie test, used to determine whether an asset is a security, raised questions about the new proof-of-stake ETH. This sparked worries about the SEC viewing ETH as a security and the potential impact it would have on the ecosystem. These concerns stem from the centralisation of validators, as research from Nansen analytics showed that just five entities controlled 64% of staked ETH. This centralisation makes it easier for a small number of validators to control the network, leading to censorship and a lack of trust in the system.

The next major Ethereum update, Shanghai, is almost here and could make or break the network. Currently, validators cannot withdraw their staked ETH or any staking rewards. This will be enabled by the Shanghai update, which is expected in March. Prior to that, the public test net is scheduled for February, which will give insight into how the upgrade will go. The release of the public test net and the shadow fork of the beacon chain will also indicate the upgrade's success.

One of the major concerns around the Shanghai upgrade is the impact it will have on the market. Since its launch in December 2020, 16 million ETH, worth over $25 billion, has been deposited into the staking smart contract. The release of all the locked-up ETH could have a significant impact on the market, which is something that is being closely watched. The developers are mindful of the community's interest in withdrawing their ETH and are testing various withdrawal conditions. The success of the upgrade will be an important milestone for Ethereum and will shape its future in the crypto market.

Uniswap (UNI)

On 17 January, the Uniswap governance forum received a proposalto deploy the Uniswap v3 protocol on the BNB Chain. The proposal received overwhelming support from the Uniswap community, with 80% of voters voting in favour. The proposal highlighted many potential benefits, including an additional $1bn in TVL and an influx of 1-2 million new users.

Uniswap has dominated the DEX space for a long time, and we believe that there is a high chance that Uniswap will continue to dominate this sector when moving from Ethereum to the BNB Chain. Network activity on the BNB Chain is expected to increase when Uniswap traders migrate over. This is bad news for PancakeSwap (CAKE), which is currently the largest DEX on the BNB Chain, as we expect to see a sharp decline in its market share with the added competition.

Shakers

Last week, the Chainlink network achieved a significant milestone by surpassing $7 trillion in transaction value enabled (TVE) since the start of 2022. TVE is a measure of the aggregate USD value of on-chain transactions facilitated by Chainlink oracles across 12 different blockchains. This impressive feat demonstrates the growing demand and widespread adoption of the Chainlink Network as a trusted source of reliable and secure data for decentralised applications. The milestone further solidifies Chainlink’s position as a leader in the decentralised oracle space and serves as a testament to the network's ability to meet the growing demands of DeFi.

AAVE (AAVE)

AAVE, which enables users to lend and borrow crypto, is one of the largest liquidity protocols in the industry with over $6.6bn in TVL. This month, the AAVE price is up by 50%, which is linked Ethereum's upcoming Shanghai update. Instead of staking on the Mainnet, ETH holders will be able to stake their ETH on platforms like Lido Finance, receiving the stETH (staked ETH) token in addition to staking rewards. The stETH tokens can be used as collateral on AAVE to borrow other tokens. Currently, on AAVE's largest market (AAVE v2, Ethereum), there is over $1.5bn worth of stETH locked.

Currently, however, AAVE has a bear market problem with fund utilisation. AAVE v2 on Ethereum has $3.69bn available for borrowing, but only $1.73bn is being utilised (borrowed). This discrepancy has caused the lending APY to be very low and the borrowing APY to be very high. For example, WETH on AAVE has a utilisation rate of only 44%. Consequently, the stable borrowing APY is 5.34% compared to 1.19% for lending. Under-utilisation and the discrepancy in rates are the biggest limitations for AAVE reaching its full potential. That said, this is symptomatic of a bear market. As risk appetite increases, utilisation will rise, driving the value of the protocol higher.

ByteFolio Performance

ByteFolio Asset Allocation

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