ByteFolio Update 45

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.

ByteFolio creeps higher this week relative to BTC, but prices in general have been weaker due to negative regulatory developments for crypto in the USA. The last few weeks have seen a concerted and coordinated effort to sever crypto’s ability to interact with the banking system.

We discuss the implications later on, but the importance of the US market in price formation can be seen in the chart below. It shows that bitcoin has been heavily driven by that market since the collapse of FTX.

Source: Bloomberg, ByteTree

How US politicians and regulators behave towards crypto is clearly important, given the dollar’s hegemonic position in world affairs, so this is obviously a setback (and a genuine worry for any free-thinking Americans). But it is not terminal. Crypto will of course survive and thrive elsewhere, and the benefits of its development will accrue to those countries that don’t take such an illiberal stance.

The portfolio adds back to Binance Coin (BNB) today, taking the position to 15.6% at the expense of ETH, which is cut to 5%. BNB has stabilised since selling off relative to BTC in December, while ETH slides to a zero-star trend score versus BTC. We also believe Binance, given its global offshore status, will be a beneficiary if investors are driven out of the US market.

BNB 4-star ByteTrend Score in BTC

Source: ByteTree

ETH 0-star ByteTrend Score in BTC

Source: ByteTree

The underweight stance for ETH should be considered in conjunction with overweight holdings in MATIC and UNI, parts of the Ethereum ecosystem. While UNI has more or less tracked ETH, MATIC has performed well and remains in a strong uptrend. It now represents 12.5% of the portfolio, a position we are happy to hold.

MATIC 5-star ByteTrend Score in BTC

Source: ByteTree

Movers

Regulation

It is increasingly clear that a coordinated effort to asphyxiate crypto is underway in the US. Dubbed “Operation Chokepoint 2.0”, the basic idea is to strangle the industry by cutting it off from any access to the traditional banking sector. More detail in this article by Nic Carter.

As he says:

“…in recent weeks, the intensity of efforts to ringfence the entire crypto space and isolate it from the traditional banking system have ratcheted up significantly. Specifically, the Biden administration is now executing what appears to be a coordinated plan that spans multiple agencies to discourage banks from dealing with crypto firms.”

This, once again, demonstrates the willingness of the US government to operate on the margins of the law, using its control of traditional banking rails to impose its will. Similar to the confiscation of Russian sovereign assets at the outset of the Ukraine war, the US government has no hesitation, it would seem, in flexing its exorbitant privilege to achieve political ends. This is coercion at its worst because it is an attempt to destroy an industry that is operating legally, not via the use of law, but via the use of thinly veiled threat. It is the behaviour one normally associates with the Mob and, as Carter details, is being increasingly used to push multiple partisan agendas on an extra-judicial basis.

The sector’s price behaviour has been remarkably resilient considering. It is a reminder that crypto is a global and not a US phenomenon. Why should a bitcoiner in the Philippines, Nigeria or Brazil care what happens in the US? The innovation and creativity that this new technology offers will now have to be undertaken outside the US, a huge opportunity for those countries willing to embrace it. It is also a reminder that this is why crypto exists: to create an alternative, decentralised system of value transfer and wealth management, away from centralised and autocratic control.

So as far as crypto is concerned, the US now stands on the same side of the room as China. Regardless of whether you love or hate crypto, this should be construed as a deeply worrying development. It’s about as un-American as the goosestep.

Ethereum (ETH) and Staking as a Service (Kraken)

As an example of the regulatory crackdown discussed above, the SEC allegedthat Kraken’s staking-as-a-service program is an unregistered security offering. To settle the charges, Kraken has shut its staking program for US customers and paid $30m in fines. In a recent CNBC interview, Gary Gensler highlighted that Kraken offered 4%-21% yield on its staking-as-a-service program without disclosing the full information and the risks involved with the product.

Mocking Gary Gensler, Kraken’s co-founder Jesse Powell tweeted:

“Oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking? Wish I’d seen this video before paying a $30m fine and agreeing to permanently shut down the service in the US. How dumb do I look. Gosh.”

It’s again a clear indication that SEC could attack other US exchanges with similar charges. It’s also worth considering that Kraken now accounts for 7.4% of all staked ETH deposits. Presumably, now that its programme is ending, it will have to unstake as soon as practically possible, creating more uncertainty around the supply and demand picture at the Shanghai fork. A reason for the recent weakness in ETH/BTC, perhaps?

Uniswap (UNI)

As discussed in last week’s ByteFolio, Uniswap was voting to deploy onto Binance’s BNB blockchain using the Wormhole bridge. Voting ended on 10 February, with 66% of the community members favouring the deployment, while 34% were opposed. The main opponent was Uniswap’s largest investor, Andreessen Horowitz (a16z), which had pushed for LayerZero to be used as the cross-chain bridge. However, a16z’s 15 million “no” votes did not block the deployment, and Wormhole was ratified as Uniswap’s partner.

Uniswap is expected to launch its DEX on BNB Chain by the end of March 2023, which currently is available on Ethereum and its layer-2 scaling solutions. Upon deployment on the BNB Chain, Uniswap will compete directly with Pancake Swap, which is the largest DEX on the BNB Chain with $2.39 billion in TVL.

Monero (XMR)

On 9 February, Dubai’s virtual asset regulator releasedregulations for the local crypto/blockchain industry. Among other things, they prohibited the use, issuance, and all activities related to privacy-enabled cryptocurrencies like Monero (XMR). Monero’s public ledger allows XMR to remain anonymous, meaning that no transactions or ownership can be traced back or identified.

Japan also pulled the plug on privacy-enhanced crypto in 2019, and various crypto exchanges like Huobi and BitBay delisted XMR for AML reasons. We will be keeping a close eye on similar developments worldwide. If the crackdown against privacy tokens keeps on getting intense, we’ll probably let go of XMR from ByteFolio.

Shakers

Artificial Intelligence (AI) Tokens

AI-focused tokens, such as Alethea’s ALI and Fetch.ai’s FET, have shot higher over the past month due to increased interest in the AI sector. The recent launch of OpenAI’s ChatGPT, which raised $10 billionfrom Microsoft, has further fuelled this trend.

However, we are sceptical. The move in these tokens looks highly speculative and follows the well-trodden meme coin path. It’s a great demonstration of the eccentricity and humour in the space, but if you weren’t there first, it might not be a great idea to join the party now.

ByteFolio Performance

ByteFolio Asset Allocation

Action: Buy BNB to 15.6%, sell ETH to 5.0%