Adding to ETH

ByteFolio Update 52 | 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.

Somewhat amazingly ByteFolio celebrates its first birthday. And what a year it’s been. No sooner did we launch than LUNA collapsed, which precipitated a series of explosions across the industry. The portfolio has moved to a sounder footing since the lows of late November, but ByteFolio is flattered in neither BTC nor USD terms. BTC10 has been turned into BTC8.42, and US$10 into $5.08*.

We could choose not to draw attention to either of those numbers, but that would be disingenuous. In ByteFolio’s defence, it was looking pretty good until December, when BTC started this spell of dominance, while other broader strategies were a mixed bag over the same timeframe. An MVDA Index tracker would have lost you 45%, the BGCI Index around 48%, and the HODL Index 53.4% (all numbers from Bloomberg). At some stage, we expect a revival in the best altcoins, and we hope to reap the rewards.

For the time being, we aim to do better and continue to think about where we can make improvements. One area, perhaps, is being more aggressive at locking in profits when we have them and being bolder in adding, on weakness, to projects in which we have high conviction.

Adding to ETH

We make one adjustment to the portfolio this week, which is to reduce the holding in BNB to 5% and switch the proceeds into ETH. This takes ETH to 21.8% of the portfolio, which is more in line with its sector weighting.

The shift is driven by a couple of factors. First, BNB continues to come under intense regulatory scrutiny, particularly in the western hemisphere. It makes sense to reduce it from being a vet overweight position in the portfolio.

Secondly, we see the Shapella upgrade (which is slated for 12 April) as a positive long-term catalyst. Much research has been done on this upgrade, which will enable around 40% of the US$32.4bn in the ETH contract that is currently locked to unlock. (The other 60% is already in liquid staking contracts managed by the likes of Lido (LDO)). Theoretically, US$13bn could therefore be dumped on the market. The daily value of ETH traded, according to CoinMarketCap, is around US$7.6bn, so it’s significant.

However, a downward lurch presupposes a few things:

Stakers will immediately dump on the market

The market hasn’t already been anticipating this

There is no buying interest to compensate.

We can only make informed guesses at the answers.

It seems unlikely that all supply will be dumped on the market on day 1. It is surely reasonable to assume that original investors in the illiquid staking contract are structurally bullish on ETH and will have little inclination to sell unless there are pressing bills to pay. As per this article, only 56% of them are in profit anyway. Furthermore, this issue has been discussed ad nauseam for the last couple of months and surely accounts for the ETH’s substantial underperformance of BTC, as shown below. At the very least, this trade has been heavily de-risked by the market.

Source: IG

Finally, it is reasonable to believe that a number of institutional investors will only commit to staking once the fork is out of the way. As the fund manager of a digital asset fund, I have an insight in this regard. Also, bear in mind that the portion of ETH staked relative to the circulating supply is small relative to other Proof-of-Stake protocols like Polygon (39.9%), Solana (72.6%) and Cosmos (66.3%) (source: Staking Rewards). Interestingly, despite the impending Shapella Fork, the staking rate has been trending higher, as shown below. It suggests there isn’t as much concern about this event as many believe.

Source: CryptoQuant

*Note that these are unaudited numbers and should be treated with caution.

Action:

Sell BNB to 5%, buy ETH to 21.8%.

Movers

Cosmos (ATOM)

Since the ATOM 2.0 proposal was rejected in November 2022, the media buzz around Cosmos has quietened. That doesn’t mean that development has stopped - far from it.

In December 2022, the community approved a proposal to increase the tax rate on the Community Pool for the Cosmos Hub from 2% to 10%. This means more funding will be available for projects that bring utility to the Cosmos Hub.

More recently, in March 2023, a proposal to upgrade the Cosmos Hub’s security system was approved. The new feature, called Replicated Security, means that consumer chains can utilise the Cosmos Hub’s security without maintaining their own validator sets. In return, the consumer chains will send a portion of fees and inflation to the Cosmos Hub validator and delegators, which will be included in staking rewards. This is a promising development for the Cosmos Hub and has the potential to bring in large amounts of long-term revenue.

On that point, a proposal to launch Neutron on the Cosmos Hub’s Replicated Security will be up for a community vote in the coming weeks. Neutron would allow DeFi applications to securely build and scale across a network of 50+ blockchains connected by the Inter-Blockchain Communication protocol (IBC). From the ATOM token’s perspective, this will generate long-term revenue for the Cosmos Hub, strengthening the utility and demand for ATOM. Should the community vote pass, Neutron could be launched in Q2 2023.

Finally, it was announced last week that the second-largest stablecoin, USDC, will natively be launched on Cosmos in Q2 2023, bringing hundreds of millions of dollars in liquidity to the ecosystem.

Binance (BNB)

A judge in New York has stated that the US government has strong grounds to oppose a $1 billion deal between Binance US and bankrupt cryptocurrency lender Voyager. District Judge Jennifer Rearden has halted the deal, citing objections from the US Attorney that the contract would grant Voyager immunity from breaches of tax or securities law. Rearden suggested that delays in settling the dispute could cost the estate as much as $10 million per month but said she would try to expedite the appeal process. In her reasoning, Rearden appeared sympathetic to government arguments, stating that the exculpation clause in the contract appeared to go beyond what is permitted by the quasi-judicial immunity doctrine. In March, U.S. Bankruptcy Judge Michael Wiles approved the deal. However, Rearden's ruling has put that on hold until the objections are resolved. Voyager and its creditors have not provided any authority to counter the government's arguments, according to Rearden.

Polygon (MATIC)

DeLabs announced in December 2022 that its NFT projects Y00ts and DeGods, which were based on Solana, would be moving to Polygon and Ethereum, respectively. The process of moving Y00ts to Polygon beganat the end of last month, and within a short period of time, approximately 77% ($37m) of all Y00t NFTs had been migrated. DeLabs used a "burn and mint" approach, allowing users to burn their Solana-based NFTs in exchange for new ones minted on Polygon. This migration highlights the preference of average NFT users for Polygon over Solana and is expected to result in increased on-chain activity on Polygon, which is crucial for the growth of MATIC.

Shakers

EU Regulation

Last week, members of the European Parliament’s committees of Economic Affairs and Home Affairs voted in favourof the proposed anti-money laundering (AML) regulation. The AML regulation means to close some regulatory holes left in the EU’s landmark Markets in Crypto-Assets (MiCA) bill.

Notably, decentralised entities, like NFT platforms and DeFi organisations, will now be subject to compliance with AML rules. Provided that these entities are “controlled directly or indirectly, including through smart contracts or voting protocols, by identifiable natural and legal persons”, they will be legally required to conduct customer due diligence checks for transaction worth over 1,000€ and report any suspicious activity. The 1k transaction limit also applies to payments from self-hosted wallets, where amounts exceeding the limit will be allowed if the wallet owner is identifiable. Additionally, “enhanced” due diligence checks will be required on business relations with crypto service providers outside of the EU, while business relations with unlicensed entities will be banned.

This is hardly an unexpected development, but it does have a huge impact on crypto decentralisation and anonymity. While anonymous crypto accounts would be banned under the new regulation, there is still uncertainty around the regulation for coin mixers and similar tools.

MiCA is the world’s first crypto regulation framework of this scale, but it will undoubtedly be used as a base for similar regulatory frameworks elsewhere in the world. The MiCA framework is still undergoing EU approval into law, with the final vote expected to be passed later this month.

Gaming/NFTs

In an example of how value is earned and retained in Web3, Yuga Labs, creator of the Bored Ape Yacht Club NFTs, successfully completed its Second Trip, a 90-minute trial run in the Otherside metaverse world, with around 7,200 players attending. Only holders of the Otherdeed NFTs were invited, along with one guest each.

The experience included interactive gameplay that combined elements of traditional gaming and NFT culture, allowing players to control their avatars and communicate with each other directly. Players were divided into four teams and completed tasks to earn points, with the winning team receiving in-game items as a reward. Feedback from players was generally positive, although some users reported connectivity issues.

Yuga Labs plans to host more Trips ahead of the official launch, focusing on building an ecosystem that will be accessible to token-holders at all times. The company aims to incorporate player feedback to improve the experience and create more community-building opportunities in the future.

Cardano (ADA)

Cardano holders will soon be able to accessEthereum Virtual Machine (EVM) smart contracts directly from their ADA wallets. This is due to a new feature on Milkomeda, which connects blockchains like Cardano and Algorand to EVM contracts. This development will increase Cardano's utility and staking rewards for EVM users.

EVMs serve as virtual computers used by developers to create decentralised applications (dApps). By deploying them on other blockchains, developers can build dApps like those on the Ethereum blockchain. With the new feature, Ethereum application developers can build on Cardano's network using Solidity, without having to learn a new computer language or install new toolkits. It will also allow dApps to be used with Cardano tokens instead of ETH.

Ripple (XRP)

Ripple has released 1 billion XRP in three separate transactions in its latest round of token unlocking. In the first transaction, Ripple unlocked 500 million XRP worth $271.05 million, followed by another 200m XRP valued at $108.42m a few minutes later. The company wrapped up its latest round of token unlocking by releasing 300m XRP from escrow, which is currently worth $534.61m.

This news is not surprising to those who have followed Ripple's activities in recent years, as the company has been conducting a monthly token unlock program since 2018. Despite the XRP price dip caused by unfavourable market conditions and the ongoing Ripple vs SEC lawsuit, Ripple does not intend to crash the price with its monthly token unlock. Instead, the company usually locks back a significant amount of its monthly XRP release to protect the price. It is expected that Ripple will lock back some of the newly released coins before next weekend. Currently, XRP is up 7.9% in the past week, trading around $0.51, after enjoying a tremendous rally to $0.57 on 29 March 2023.

ByteFolio Performance

ByteFolio Asset Allocation