Bitcoin Soldiers On

ByteFolio Update 51 | 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.

Last week’s reduction of alts and increase in BTC has slowed but not stopped the bleeding of the portfolio. The NAV stands at 8.55 BTC, with BTC moving from 45.4% to 46.1% of the book, largely at the expense of the MATIC, ATOM and GT.

We make no changes to the portfolio this week.

Polygon (MATIC) has been going through a rough period of late and has declined from a 5-star to a 1-star trend (relative to BTC) over the week. However, looked at in US$ terms, it’s not as alarming. Over the last year, it has been in a gentle uptrend. The recent drop-off in scores is more a reflection of an easing off from the February spike than a sign of something more sinister. At 13%, it’s already a large weighting, so we won’t be adding, but it looks to be back in buying territory.

MATIC Scores a 2-star ByteTrend score in USD

Source: ByteTree

Bitcoin dominance is still the inescapable topic du jour. We have now reached a point where crypto breadth is as bad as it’s been since early 2018. There is virtually nothing outperforming BTC at the moment. But also note that back in 2018, this wasn’t the signal for a bull market, and we shouldn’t automatically assume that will be the case now.

In the chart below, we overlay the breadth chart with the ByteTree Crypto Average (BCA), an aggregation of prices in the space. Investors in early 2018 still had a long wait until the bull started properly charging, despite huge BTC dominance.

Source: ByteTree

Stepping away from the technicals, Bitcoin dominance makes a lot of sense.

First, concerns stemming from the SEC’s war on crypto have prompted a flight from stablecoins. It appears that investors are reaching the conclusion that bitcoin is a higher quality store of value than stablecoins, regardless of its volatility. At least it’s yours and not reliant on traditional finance’s custodial arrangements (Circle had parked US$3.3bn at Silicon Valley Bank to back USDC). The overall stablecoin decline can be seen in this chart:

Source: The Block

We can also look at the growth in the space if we strip out Bitcoin. The chart below shows the market cap of all crypto, including stablecoins and tokens. It has basically been going sideways since last year’s crash and is actually lower than in August 2022.

Source: CoinMarketCap

Under the circumstances, that’s far from a disaster, but this is Bitcoin’s moment.

A growing appreciation and acceptance of Bitcoin as a long-term safe harbour is the second driver. The confluence of collapsing banks, stubborn inflation and political instability is reminding investors of the value of hard assets and sound money. We believe there is an increasing interest in gold at the moment as a portfolio diversifier, and bitcoin is ever more frequently included in that conversation. (Indeed, in one conversation we had with a family office, bitcoin had replaced gold, simply from a fiduciary perspective. The argument runs that Bitcoin’s storage is far less risky than gold’s, the latter being very hard to physically move around, while it is normally stored in the vaults of banks which have been fined billions for multiple indiscretions and are vulnerable to government edicts).

New investors in the space will probably acquire the most secure, most liquid and most decentralised digital asset because this is the wealth management solution they are after. They are not after an investment in blockchain infrastructure, which is what most of DeFi represents. As long as that remains the case, there is no logical reason why bitcoin’s dominance can’t continue.

Action:

No action.

Movers

Regulation

Coinbase’s CEO Brian Armstrong recently tweetedabout the company's improved morale despite receiving a Wells notice from the SEC regarding staking and asset listings. Armstrong attempted to rally his team and the crypto community through his tweets about the notice, the company's legal position, and commitment to customers.

However, some have criticised his response, accusing him of downplaying the seriousness of the investigation and acting with arrogance. It remains to be seen whether Armstrong's public display of confidence will benefit or harm Coinbase's future as the company must navigate the regulatory landscape. But the point must surely be that finally, they can have this conversation in a court of law and not be subject to the arbitrary whims of a body that seems to be reaching far beyond its scope of competence.

Polygon (MATIC)

Immutable, a platform dedicated to empowering and supporting the Web3 gaming ecosystem, has announced a strategic partnership with Polygon to capture the growing Web3 gaming industry. Polygon has also previously expressed interest in Web3 gaming, and this partnership will allow it to further strengthen its position in the Web3 gaming space by providing a foundation for Immutable's tools.

On the flip side, Render, a decentralised GPU-based rendering solution, is planning to migrate its token burn and mint equilibrium (BME) model from Polygon to Solana. The decision was the result of a lively debate within the Render community, weighing the benefits and drawbacks of each platform. Supporters of Solana cited its efficient runtime, active developer community, low transaction fees, and speed as advantages over Polygon, which was criticised for its centralisation, reorg tendencies, and user experience concerns. In the end, 55% of the community preferred Solana, while only 12% favoured Polygon, with others suggesting Ethereum, Cosmos, Aptos, and other platforms.

This move by Render could slightly impact Polygon's position as a popular choice for building, potentially influencing other projects to explore alternative options. However, it should be noted that Polygon has had a substantial number of dApps and NFTs launched on its network in recent years. It is unlikely, in our view, that Render's migration will have a significant impact on Polygon's overall popularity and usage, but it is an issue worth keeping an eye on. It is also a reminder of the competitiveness in the space and the fact that, at this early stage, network effects are not as powerful as some would make out.

Shakers

Tron (TRX)

The SEC's enforcement actions against the crypto industry have expanded beyond exchanges and stablecoins to individual tokens. On March 22, 2023, the SEC filed charges against Justin Sun, the founder of TRON, and his companies for selling TRX and BTT without registering them as securities. Furthermore, they have been accused of engaging in wash trading, a fraudulent activity that gives the impression of active trading without any actual change in ownership, and paying celebrities to promote their tokens without disclosing their compensation.

After the charges were announced, TRX saw a 16% drop from its high on March 22. Although the token price recovered the next day, the threat from regulators remains. It might be wise to avoid the TRON ecosystem now, considering that the ecosystem is not only facing lawsuits for selling unregistered securities but also for manipulating the market and engaging in illegal promotions.

Stacks (STX)

The stance that the recent spike in fees denotes a healthier Bitcoin Network isn’t one that is universally shared. The counter-narrative argues that the emergence of Ordinals (effectively NFTs, which consume more block space) is driving an increase in fees, which makes transactions more expensive and ultimately risks clogging up block space, driving down network activity. Furthermore, is it really necessary to innovate beyond bitcoin’s role as sound money? There are big questions here, but the history of technology is that it doesn’t stay still for long, and any enhancement in the use case is likely to bring in smart minds and capital.

STX Scores a 5-star ByteTrend score in BTC

Source: ByteTree

It has also reignited interest in Layer-2 solutions such as Stacks (STX), which is one of the very few tokens outperforming BTC at the moment. The assumption is that a project like Stacks will step in as the Bitcoin Network reaches its limitations, much like when the Ethereum fee spike kicked off a frenzy about ETH-killers and Layer-2 solutions in late 2021. We’ll be keeping a close eye on STX now that it is consolidating recent gains.

Arbitrum (ARB)

Further to our observations about Polygon and increased competition within the Layer-2 and zk-scaling ecosystem, we understand that Arbitrum has been gaining market share in DeFi and NFT sectors. It has certainly gained more airtime since the recent airdrop.

The ARB token, Arbitrum's governance mechanism, generated more than $2 billion in trading volume in the first 24 hours since its launch. Bitget and Huobi led in trading volumes, with over $250 million worth of ARB traded, followed by decentralised exchange Uniswap, which netted over $500,000 in fees for liquidity providers.

Despite the enthusiasm surrounding the ARB token launch, market observers remain wary of short-term volatility, especially with the airdrop's surge of retail attention. However, the integration of ARB tokens into Arbitrum's broader decentralised finance system could potentially provide new momentum for bullish sentiment. There is also a possibility of Arbitrum gaining more market share over time. Currently, Arbitrum is the fourth largest chain in the industry in terms of Total Value Locked after Ethereum, Tron, and BNB Chain.

ByteFolio Performance

ByteFolio Asset Allocation