Show Me the Money

ByteFolio Update 56 | 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.

Second-tier coins and tokens continue to trade very poorly. While BTC has had a great run this year, boosted by its macro identification as a form of “hard” money, the market is clearly unhappy with the rest of the sector. We cannot deny that crypto remains a highly speculative asset. Indeed, the recent increases in fees in the Bitcoin and Ethereum networks are, in large part, the consequence of the latest meme crazes.

It probably goes without saying, but because crypto is speculative, its price patterns are supremely important. Constant price erosion will gradually take traders out of the game. That is why we constructed ByteTrend, not just as a way to generate ideas but also to act as a risk tool. And the risk tool says to stay on the sideline, as far as altcoins are concerned.

There are a couple of possible reasons why this might be the case at the moment. First, the US regulatory situation continues to be deeply unhelpful. Movement between crypto and fiat has become ever harder, and where it is possible, the anonymity that used to exist has now largely disappeared because of the AML/KYC requirements. This reduces the incentive to get involved.

Second, the increase in interest rates has entirely changed the risk profile of investing in speculative assets. Why invest in something that is almost totally unproven when you can get 5% in the bank? Crypto projects, for the most part, need the oxygen of fiat money to pay developers and grow ecosystems. If that funding is seen as drying up, no wonder investors are quietly tip-toeing away. In all new technology markets, there is eventually a “show me the money” moment.

The following chart illustrates the altcoin weakness. The red sky shows how strong BTC has been against the ByteTree Crypto Average price (BCA). The green line shows how the BCA has been rolling over.

Source: ByteTree Terminal

Our process forces us to take remedial action in the portfolio. Both MATIC and ATOM have deteriorated to zero stars, so they are ejected, and the proceeds are switched to BTC.

Polygon (MATIC) 0-star Score on ByteTrend in BTC

Source: ByteTree Terminal

Cosmos (ATOM) 0-star Score on ByteTrend in BTC

Source: ByteTree Terminal

That leaves the portfolio predominantly in BTC and ETH, with a trimming of BNB.

Action:

Sell MATIC and ATOM to zero, switch proceeds to BTC.

Movers

Bitcoin (BTC)

It’s busy on-chain. The recent increase in Bitcoin transaction count and fees can mainly be attributed to the growing activity of the BRC-20 token standard. These tokens have existed for just two months but have already reached a market capitalisation of $700 million.

The BRC-20 token standard was created by Domo, an on-chain enthusiast who was inspired by the ERC-20 token standard on Ethereum. Domo launched a token called ORDI on March 8, which has since reached a market cap of over $400m. Other BRC-20 tokens like PEPE, PIZA, and MEME have also gained popularity as Bitcoin experiences a surge of meme coin mania similar to what Ethereum had with Dogecoin and Shiba Inu.

However, the bitcoin blockchain is not well-suited for this kind of high demand, as each block can only process a limited number of transactions due to the max block size being only 1 MB. Consequently, the increase in demand, combined with the small block size, leads to network congestion and high fees. Additionally, you also have to account for applications built on Bitcoin, like Stacks and Bitcoin Ordinals, which have contributed to the overall increase of network on-chain activity.

Meme coins, in general, lack any purpose or value proposition and are mostly used as pump-and-dump schemes. The recent surge of meme coin activity on the Bitcoin Network is not necessarily a positive development, and could have negative consequences in the long run. However, the good news is that meme coin hype tends to be short-lived.

As it dies down, we will also see a decline in fees, which have gone parabolic. Great news for the miners but not for anyone wishing to execute a small transaction. You can see from the chart below how out of line this development is.

Strong fee income, however it happens, is important for the long-term stability and security of the Bitcoin Network. This episode, unfortunately, has all the hallmarks of being short-term, although it continues to demonstrate an effort from the community to enhance bitcoin’s utility.

Source: ByteTree

On a more positive note, the emergence of the BRC-20 token standard provides an opportunity for projects with strong fundamentals and value propositions to thrive.

This explosion of activity has woken up the miners, and we’ve seen a spike in Miner’s Rolling Inventory (MRI). We like to see the miners selling into the market because it demonstrates a healthy demand picture.

Source: ByteTree Terminal

Binance (BNB)

The current congestion was also the decision behind the largest crypto exchange, Binance, temporarily halting bitcoin withdrawals on Sunday. The halt lasted a couple of hours, but it was a halt nonetheless.

While long-term holders won’t care a great deal about this (there is nothing wrong with the blockchain) it demonstrates the impact a clogged network can have on liquidity. Of course, that is the problem that Layer-2 solutions like Lightning are trying to solve. If this episode increases awareness and usage of the Lightning Network, then it will ultimately be seen as a net positive.

Shakers

MX Token (MX)

The ByteTrend score for the MX token currently stands at a 5-star rating against USD, BTC, and ETH. The strong performance can be attributed to the recent token buy-back and burn, which involved the destruction of over 2.1 million MX Tokens. MX is the native token of the MEXC exchange. Token holders get voting rights, discounted subscriptions, free airdrops for voting on new listings, and a 20% transaction fee deduction on MEXC.

MX Token (MX) 5-star Score on ByteTrend in BTC

Source: ByteTree Terminal

In January 2022, it was announced that 40% of MEXC’s profits would be allocated to the repurchase and burning of MX tokens on a quarterly basis. The buy-back and burn program is designed to keep MX circulation supply around 100 million. While token buy-back and burn programs can artificially boost the price of a token, if the token lacks value proposition and utility, it will not have demand in the market. Buy-backs are one thing, but creating a sustainably profitable ecosystem is far more important longer term. We have yet to cover MX in Token Takeaway.

ByteFolio Performance

ByteFolio Asset Allocation