Bank Failures Are An Advertisement for Crypto

ByteFolio Update 49 | 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.

Amidst the hiatus of the last week, ByteFolio has mildly outperformed BTC. It’s interesting that bitcoin has outperformed the stockmarket during an unnerving period. It’s also interesting that in a week when we have seen three financial institutions collapse that are closely associated with crypto, price behaviour has been remarkably phlegmatic. In US$ terms, ByteFolio fell a mere 0.6% over the week and is up 26% since 2 January.

This price behaviour must be pretty disconcerting for the US authorities, who presumably envisaged industry carnage as they set about “fixing” the crypto system in the wake of the FTX collapse. However, instead of revealing the weaknesses in crypto, the fragility of the fractional reserve banking system is being demonstrated instead. It looks like a spectacular own goal. US policy has turned into an advertisement for crypto when exactly the opposite was intended.

What does crypto solve in this context? The idea of decentralised finance does a couple of things: the first is to remove middlemen and replace them with computerised “truth”. It’s not always possible, of course, because the world is a complex place and arbitration is frequently necessary, but it’s a good starting principle for simple banking facilities. The second is to make a system of bearer assets available, whereby you can own and custody your money. Bitcoin, like gold, is no one else’s liability. It will one day be possible to own and custody other assets in tokenised form without a third party taking a slice of your wealth. These are compelling visions.

They are also visions that are a nightmare for incumbents. Why would credit card companies want a virtually free payments rail to replace an oligopoly that takes between 1.5% and 3.5% in fees from merchants on their payments? Why would JPMorgan want to see people placing their savings in bitcoin or stablecoins when it can charge them a fee for holding their fiat cash? Not only that, it can then gear it up, lend or borrow against it, make profits for its shareholders and pays huge salaries to its employees while returning virtually nothing to the depositor who takes the risk in the first place. Why would Schroders or Hargreaves Lansdowne want to see people put savings into digitalised assets when they can skim off 1.5% for allocating them into automated risk baskets? The list goes on. No wonder there is so much pressure from legacy institutions to discredit it.

We have long been interested in how crypto behaves relative to tech stocks more generally. If the bull thesis is right, we’d expect to see a gradual decoupling. That is best visualised on our BitDAQ chart, which shows bitcoin relative to the Nasdaq. This could be an important moment.

BitDAQ on the Move

Source: Bloomberg

Lastly, we are reminded of the words that Satoshi Nakamoto inscribed onto the “Genesis Block” of the Bitcoin blockchain on 3 January 2009: “Chancellor on brink of second bailout for banks”. The central motive for creating a decentralised, peer to peer payment network was thereby preserved for all time. Satoshi understood that socialising losses leads to currency debasement and sought to build a better alternative. Here we are, 14 years later, and nothing has changed.

Bitcoin’s Central Motive

Source: Bitcoin Blockchain

ByteFolio Actions

In the portfolio this week, we are taking GT to 5%, funded by BTC. We will also be switching the 2.1% position in ENS into ETH. GT has retained its 5-star ByteTrend score in a tough market, while ENS has broken down. We are also encouraged by ETH’s recent outperformance of BTC and wish to reinforce the position.

Shakers

Banking Failures

The unfolding news is the collapse of three large financial entities closely associated with crypto. Silvergate Bank, Signature Bank and Silicon Valley Bank have all been closed down over the last week. It looks like depositors will be made whole in all cases, either via Federal bailouts or acquisition.

As long as this is the case, there appears to be no systematic risk for companies in the crypto space, which, to a large extent, is well isolated by virtue of living outside the traditional financial ecosystem. Cracks are appearing elsewhere, however, with First Republic Bank’s shares collapsing on fears of a run on deposits. It’s a brittle situation which will sorely test the US authorities’ unwillingness to come to the rescue.

Bailouts

HSBC UK Bank has announced its acquisition of Silicon Valley Bank UK (SVB UK) for a nominal amount of £1, according to a recent filing. The acquisition is expected to help HSBC enhance its ability to serve innovative and fast-growing companies in the technology and life sciences sectors, both in the UK and internationally. As of 10 March, SVB UK had loans worth approximately $6.6 billion and deposits worth around $8.1 billion.

The UK government “facilitated” (our emphasis) the sale under "resolution" powers aimed at winding up failed lenders without causing broader economic damage. The Bank of England confirmed that SVB UK would be put into insolvency on Friday night but added that the lender had a limited presence in the country. However, US regulators have promised that SVB UK depositors would be able to access their funds and would not suffer any losses. Finance Minister Jeremy Hunt has also reassured the public that deposits would be protected without requiring taxpayer support and that he had acted urgently to safeguard the country's tech sector.

USD Coin (USDC)

USDC is capitalised at US$40.6bn (CoinMarketCap.com), making it the second largest stablecoin by market cap after Tether (USDT). The revelation that around US$3.3bn of USDC’s cash assets were deposited at Silicon Valley Bank kicked off a wave of panic selling on Friday afternoon, with the coin depegging down to around 0.90c in the dollar at one stage. Calm has since been restored, as shown below.

USDC Depegs

Source: CoinMarketCap

What’s perhaps more interesting is that although there have been redemptions, they are far from overwhelming. The market cap of USDC is back to where it was about three weeks ago (first chart below), and it looks like most of the redemptions were flipped straight into USDT (second chart below). The net effect for system liquidity is therefore negligible.

USDC Market Cap in USD

Source: CoinMarketCap

USDT Market Cap in USD

Source: CoinMarketCap

Liquity (LQTY)

A brief introduction to the sort of development in the space that makes us excited. Liquity is a decentralised, immutable and easy-to use lending protocol that allows users to borrow against ETH. It operates in a non-custodial and governance-free manner. Liquity enables users to borrow LUSD, a USD stablecoin, using ETH as collateral with a minimum collateralisation ratio of 110%. Borrowers are charged a one-time fee as low as 0.5%, with no interest rate, and there is no maturity date for repayments. Liquity's native token, LQTY, can be used for staking to earn a share of the platform's fees.

Although there are risks associated with using LUSD (e.g. depegging) and loan liquidations in a volatile market, unlike centralised banks, there is no risk of complete failure in the event of a bank run. Decentralised lending protocols like Liquity can provide a real-world solution for traditional finance.

No surprise perhaps, that in the current climate, the tokens have been performing well.

LQTY on a 5-star ByteTrend Score Relative to BTC

Source: ByteTree

Movers

Chainlink (LINK)

Chainlink has released a beta version of Chainlink Functions, a platform that allows developers to connect smart contracts to any Web2 API and execute custom computations on the highly secure and reliable Chainlink network. This platform will enable developers to create powerful hybrid applications using existing infrastructure from Web2 platforms like AWS and Google Cloud. It will also allow for easy and secure connections from smart contracts to off-chain resources.

Chainlink Functions is a self-serve platform that enables developers to fulfil their external data and computation needs without having to interface with Chainlink Labs or Chainlink node operators. Developers can use Chainlink Functions to connect to any public or private data API, IoT devices or enterprise system. With Chainlink Functions, the connectivity, security, and reliability of a decentralised application are left to the Chainlink Network, freeing developers to focus on their decentralised applications.

Chainlink Functions opens up a wide range of use cases for Web3 developers, including access to social media signals, AI computation, messaging services, and more. Furthermore, Chainlink is encouraging developers to explore and contribute to a community website where they can share the off-chain connections they built using Chainlink Functions.

Polygon (MATIC) and Binance (BNB)

On 8 March, Binance announced that it has integrated the Polygon network into its Binance NFT marketplace. This integration has broadened the range of NFT collections available on the platform, allowing Binance NFT users to purchase, sell, and list Polygon-based NFTs.

At present, only a limited number of Polygon NFT collections are available on Binance NFT, but the platform plans to introduce additional collections in the future. Polygon is already a popular NFT platform for renowned brands and individuals, and exposing these NFT collections to Binance NFT marketplace users is expected to increase trading and activity in the Polygon ecosystem.

ByteFolio Performance

ByteFolio Asset Allocation

Action: Buy GT to 5%. Sell BTC to 34.2%. Sell ENS to zero. Buy ETH to 12.4%.