ByteFolio Update 46

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.

How many times have you heard the phrase, “this is the most hated bull market”? As far as I can recall, just about all early stages of bull markets in my 25 years in markets have been loathed. There are a few reasons for this: first, they come in the teeth of bad news. Professional investors and journalists specialise in retrofitting narratives to price action, so it makes no sense for markets to be moving higher when things are awful. Second, in a similar vein, there are very few commentators telling you things might be looking up. Good news doesn’t sell. Third, a hated bull market is a sort of truism. It’s just telling you lots of people are missing out. If they were invested, it wouldn’t be hated.

It’s a similar story in crypto. Look at the headlines, and you won’t find much in the way of good news. In fact, you’ll find barely any crypto news at all in the mainstream media, who have declared it dead and buried. It’s a bit embarrassing to find it’s still alive.

Yet the price action is unequivocally constructive. In the aftermath of one of the largest frauds in financial history, and as the US regulators embark on a carpet bombing of on/off ramps to the formal banking sector, crypto has raised a merry one-fingered salute to the experts. Price strength is rippling across the sector. How hated is that?!

In the early stages of this move, ByteFolio has struggled to keep up with the bitcoin price. But we’re sanguine about that, partly because we’re nicely higher in US$ terms and secondly, we expect the better altcoins to start showing their true colours and emerge from the pack.

ByteFolio makes one change this week, which is to replace Monero (XMR) with Chainlink (LINK). XMR has given back its relative gains and is unlikely to give us the performance we desire if the adoption of blockchain technology (as opposed to privacy) becomes the dominant narrative. Readers will be aware that we have flip-flopped around LINK. Still, we reiterate our fundamental appreciation of the project and its dominance of decentralised oracle networks, and the price behaviour has improved.

LINK’s ByteTrend chart is worth a glance. It is the sort of mouth-watering picture we are looking at with several other crypto names. While it’s had a decent move from a low of ~US$5.50 to ~US$8.10, it’s barely discernible on the long-term chart.

LINK is a 5-star ByteTrend in USD

Source: ByteTree

Yet for the first time since November 2021, it is in a 5-star trend against the US$, with both moving averages sloping higher. Indeed, the hypothetical “6th Star” (the shorter-term moving average rising above the longer-term) should imminently turn on as well. Here’s a zoomed-in version of the above.

Source: ByteTree

We see similar technical setups for a couple of other crypto tokens, which we haven’t written about yet and, therefore, won’t insert into the portfolio. They’re probably a bit over-cooked right now, but readers who sympathise with the “invest, then investigate” modus operandi might want to look at Filecoin (FIL) (mentioned below in Shakers) and VeChain (VET), for example.

Movers

Regulation (China)

The crypto Twittersphere went into a brief state of frenzy last week as someone tweeted that Hong Kong was about to announce that crypto is on the cusp of becoming fully investible. It would have been quite the U-turn since China declared all crypto transactions illegal in September 2021. As it turns out, HK has announced a framework for regulating Virtual Asset Service Providers (VASPs), which effectively means that, similar to the UK, only professionals can be trusted to invest in crypto. But at least it’s a start in providing some sort of framework for the sector.

Regulation (USA)

We’re big fans of Caitlin Long, who has done a huge amount to push a legitimate and responsible crypto agenda to regulators. Have a look at her open letter, where she compares the early days of the US mutual fund management industry to what we see in crypto now. If this is right, future economic historians will credit Gary Gensler with about as much regulatory perspicacity as Andrew Volstead (hint: the Volstead Act of 1919 prohibited the sale of alcohol).

Polygon (MATIC)

Since the beginning of this year, MATIC has almost doubled, putting it firmly at the top end of the ByteTrend tables. The surge in price is a direct reflection of the network’s activity. From a high of 9.1 million daily transactions on the Polygon PoS chain on 16 June 2021, a low of 2.1 million was reached on 20 October 2022. Since then, the number has moved steadily higher, reaching 2.9 million transactions yesterday. For comparison, Ethereum’s maximum daily transactions reached 1.9 million on 9 December 2022. Additionally, the Daily Active Users (DAU) on Polygon surpassed Ethereum’s DAU on several occasions in January 2023.

On 14 February, Polygon announced the launch of the Polygon zkEVM Beta Mainnet, which is scheduled for 27 March. zkEVM (Zero-Knowledge Ethereum Virtual Machine) is a layer-2 scaling solution that improves the scalability and privacy of the Ethereum network. Developers can simply copy and paste their existing Ethereum code to build on the Polygon zkEVM without any modifications required. As a result, Ethereum tooling can be used on Polygon zkEVM to provide a seamless and hassle-free scaling experience. This makes the Polygon ecosystem very attractive to developers. It also raises the question of whether, at some point, more value will accrue to the dominant scaling solutions rather than to Ethereum itself. We’ll keep an open mind and watch the numbers.

Shakers

zkSNARK vs zkSTARK

zk-SNARK and zk-STARK are zero-knowledge proofs that are utilised for privacy-preserving computations. While they both aim to achieve the same end goal of privacy preservation, they differ in several ways.

zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) is a proof system that allows one party (the prover) to prove to another party (the verifier) that they possess knowledge of a secret without revealing information about the secret itself. zk-SNARKs are known for their efficiency, which means they can produce short proofs and consume less computational power. However, they require a trusted setup, which can be a potential point of weakness if not done properly. Zcash’s ability to keep all transactional information private, was the first instance of implementing zk-SNARKs on a large scale.

On the other hand, zk-STARK (Zero-Knowledge Scalable Transparent Argument of Knowledge) is a proof system that eliminates the need for a trusted setup, making it more secure than zk-SNARK. Unlike zk-SNARK, zk-STARKs are transparent, which means that the proof can be verified without additional information or specialised software. However, zk-STARKs are relatively large and require more computational resources to generate and verify proofs.

In summary, zk-SNARKs and zk-STARKs both offer privacy-preserving solutions, but they have different trade-offs in terms of security, efficiency, and complexity. Which one to use depends on the specific use case and requirement.

Why is this important? Zero Knowledge Proof (ZKP) technology addresses the challenge of ensuring security while maintaining anonymity in the blockchain sector. It could offer an effective solution to the regulatory challenges that decentralised applications (dApps) encounter due to the lack of proper Know Your Customer (KYC) procedures. While ZKP technology is intricate and relatively new, it presents a secure and appealing approach for blockchains to validate identities and on-chain data. We anticipate that more ZKP solutions will emerge in the future, an important stepping-stone on the journey to widespread adoption.

Filecoin (FIL)

Source: ByteTree

The Filecoin token, FIL, experienced a significant price surge last week. The bullish price movement is due to the upcoming launch of the Filecoin Virtual Machine (FVM). The FVM upgrade will enable the development of decentralised applications (dApps) on the Filecoin network through the introduction of smart contracts.

FVM is set to launch on the 1 March 2023, and will make the network a full-fledged layer-1 blockchain. The platform’s interoperability with the Ethereum Virtual Machine and layer-2 blockchains will reduce user gas fees and increase transaction speed, making it more attractive to the DeFi community.

ByteFolio Performance

ByteFolio Asset Allocation

Action: Sell XMR to 0%, buy LINK to 5%