ByteFolio Update 48

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 rising crypto optimism has been deflated somewhat via a combination of concerns about the crypto-related banks in the US and market caution about a more stubborn inflation outlook. ByteFolio took a small hit as new entrant Ethereum Name Service (ENS) fell steeply, and MATIC continued to consolidate after its recent outperformance. Overall, however, we consider the outlook to be constructive. On-chain activity is solid (the transaction activity on the bitcoin network is very encouraging), and the technical setup remains fine.

Source: ByteTree

I watched the recent Elvis film this weekend. It’s amazing to think that his gyratory on-stage antics were seen as a probable cause for irretrievable moral and social decline. He was subsequently banned from so much as wiggling a little finger on TV, not that he conformed.

The episode chimed in the context of the current crypto-bashing by the SEC. It was a reminder that for all the claims of being the land of the free, the USA has always been quick to ban new stuff when it threatens the established order. In that sense, it’s no different from most other countries – it is the fear of the new. The saving grace is that processes are in place to gradually adopt and embrace the new as times and conventions change. We must hope and believe that this will be the case with crypto.

No changes have been made to the portfolio this week. Below we comment on the travails at the US crypto-facing banks and the latest from Synthetic, MakerDao, EOS and Lido - some of the very few looking strong against BTC at the moment.

Movers

Regulation

The valuations of the two most prominent crypto-friendly banks in the US tell a story, not just of an industry out of favour but also of growing regulatory pressure. The chart below shows the savage de-rating of both Silvergate and Signature banks.

The Silvergate and Signature Price to Book Ratios

Source: Bloomberg

It’s certainly rattling the crypto industry and more evidence that the authorities are making life as difficult as possible. Both banks are either terminating agreements with crypto players or downsizing exposure. In Signature’s case, this has been well-flagged, and it’s worth making the point that they are far from abandoning the crypto space.

In this light, it is remarkable that prices have held up so well. The reason for this is perhaps two-fold: first, banks outside the US remain open for crypto business and are hopeful of benefitting from the situation. For example, CoinDesk reportsthat BCB Group is positioning itself to fill any holes left by Silvergate. Secondly, it shows that the industry doesn’t rely on US policy-making. This is a global phenomenon. In the end, this is a story of adoption, and that continues to expand.

Bitcoin (BTC)

The growth of crypto globally is well illustrated in Nigeria, where the shambolic redesign of the Naira, let alone miserable economic conditions, are driving people towards bitcoin. I am indebted to a reader for forwarding me this Forbes articlewhich illuminates why the foundations for wider bitcoin adoption in Africa are so firmly entrenched. It is very hard to see this being reversed. It also raises the question of why the US is taking such an aggressive stance towards this new technology. Stablecoins, because they are almost all denominated in US$, present the US with an unparalleled opportunity to extend the dollar’s international hegemony. They would be foolish to drop that ball.

Ethereum (ETH)

Having told you last week that the Shanghai Hard Fork would happen in March, in true Ethereum-style, news reaches us that the upgrade is slightly delayed. This will in fact happen in the first couple of weeks of April, with the Goerli test launch slated for 14 March. The ecosystem remains braced for the unlocking of 17.1 million ETH (around US$26.9bn).

Shakers

EOS (EOS)

We draw your attention to EOS, a blockchain that raised a remarkable $4 billion in its initial coin offering (ICO) and whose price action has markedly perked up. It struggled in its early years but is coming back to investors’ attention with plans for a consensus mechanism upgrade, an Ethereum Virtual Machine (EVM) solution, and a renewed growth strategy. The EOS Network Foundation is leading the effort to attract application developers with EVM compatibility, aiming to welcome more Solidity developers and users. The EVM mainnet is set for releaseon 14 April, with plans for updates and improvements over the following weeks and months.

The EOS foundation has also launched a grants program to fund developers working on decentralised applications (dApps) and DeFi applications. The EOS EVM is expected to be the fastest EVM, faster than BNB, Solana, Polygon and Avalanche. With these initiatives, EOS is looking to regain its place as a major player in the layer-1 sector.

EOS 5-star ByteTrend in BTC

Source: ByteTree

We wrote about EOS last October when we identified a couple of issues that were holding it back, not least that it’s late to the party. Perhaps it can make up for lost time. We will adopt a watching brief for the time being.

Lido (LDO)

Rumours that Lido, the largest Ethereum staking service, had received a Wells Notice from the US Securities and Exchange Commission (SEC) caused panic on social media and led to a 10% drop in the price of Lido's LDO token. The rumour was first spread by crypto podcaster David Hoffman, who later retracted his statement.

LDO 5-star ByteTrend in BTC

Source: ByteTree

For the uninitiated, a Wells Notice is a letter from the SEC detailing charges it is considering bringing against a recipient. The receipt of a Wells Notice means that the SEC may bring a civil action against the person or firm named therein, giving said person or firm a chance to offer information as to why such an action shouldn’t be brought. The SEC seem to be firing off quite a few of these notices at the moment, including one to stablecoin issuer Paxos.

It is unclear how the SEC would have delivered the notice to Lido, which is technically operated by the Lido DAO and lacks a formal leadership structure. As discussed earlier, the market response to the rumour demonstrates how nervous the market is regarding a broader crypto industry crackdown.

Synthetix (SNX)

Having just moved to a bullish 5-star ByteTrend score relative to BTC, Synthetix is another one to watch.

SNX 5-star ByteTrend in BTC

Source: ByteTree

Synthetix is a decentralised synthetic asset platform built on top of Ethereum and Optimism. It enables the issuance of tokenised derivatives or synthetic crypto tokens (“synths”), which are, in effect, tokens imitating an underlying asset. Synths are derivative products that are pegged to the underlying asset such as USD, EUR or even cryptocurrencies such as ETH or BTC.

The Synthetix platform also facilitates decentralised trading, much like dYdX. Over the past few months, Synthetix has seen steady growth in its 30-day average trading volumes, which have increased from $4.4m in December 2022 to over $25.5m as of 6 March. Furthermore, the number of total stakers on Synthetix has also been steadily growing and now stands at just under 60k.

Source: Dune. 30-day-average Synthetix volumes.

We examined SNX in more detail in August last year, and it remains firmly on the ByteFolio watchlist.

MakerDAO (MKR)

Following the regulatory crackdown on centralised stablecoins, MakerDAO, the host of the largest decentralised stablecoin (DAI), has had a great start to the year. Namely, the MKR token has risen around 80% to date.

MKR 5-star ByteTrend in BTC

Source: ByteTree

It appears that the catalyst is the recently proposed mechanism to use MKR tokens as collateral, which follows on from last year’s Endgame Documentation. This will drastically increase the utility of MKR, which is a major factor in driving up its token price. However, concerns have been raisedthat this is similar to UST’s mechanism, which suggests that it could leave the network governance vulnerable.

Additionally, governance tokens like MKR tend to be more volatile, less liquid, and less predictable than BTC and ETH. If the minimum collateralisation ratio of 150% on borrowed DAI positions is not met, it could lead to a mass margin-call scenario. That said, if this is executed properly with a low borrowing cap and high collateralisation ratio, it could potentially be a significant catalyst for MKR's growth.

ByteFolio Performance

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