In a research report released on July 18, 2024, crypto researcher Thor Hartvigsen strongly warned against the investment strategy of buying high-beta altcoins within the Ethereum ecosystem as a leverage tactic, especially with the upcoming launch of the spot Ethereum ETFs in the United States.
Hartvigsen’s analysis entitled “ETH Beta – a recipe for disaster?” provides an analysis of whether buying ETH-correlated altcoins, commonly referred to as ‘ETH betas’, is a good investment strategy. These assets including tokens like OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK (all L2s), MKR, AAVE, SNX, FXS, LDO, PENDLE, ETC, LINK (all DeFi) PEPE, DOGE (all memes), SOL, AVAX, BNB and TON (alternative L1s) are traditionally considered a leveraged exposure to movements in Ethereum’s price, assuming a higher volatility relative to Ethereum itself.
The report analyzes several critical areas: price performance comparison between these altcoins and Ethereum, their correlation and beta coefficients relative to Ethereum, and their risk-adjusted returns measured by the Sharpe ratio. The researcher highlights the inherent risks and inefficiencies in banking on these altcoins for enhanced Ethereum exposure.
Why Buying ‘Ethereum Beta’ Altcoins is Generally a Bad Idea
Discussing price performance, Hartvigsen points out, “The TOTAL3 (altcoin market cap) versus the ETH market cap is around 1.48. Since 2020, this chart has only been this low on a few rare occasions, showing the outperformance of ETH versus This historical context sets a grim precedent for those hoping for altcoin outperformance at the same time as Ethereum’s growth. The researcher elaborates that despite periodic recoveries at these levels, the overarching trend has been one of decline – a worrying one. signal for altcoin investors.
“Not a single L2 token has outperformed ETH YTD, with the best performing token, GNO, up 34%, while ETH posted a 44% gain. The worst performers include MANTA, STRK and CANTO, all of which have declined more than 60% this year,” said Hartvigsen. Regarding the top alternative L1s, AVAX is the only one down on the year against ETH. “Of the 8 DeFi tokens in this basket, 3 outperformed ETH, namely PENDLE (+254%), ENS (+163%) and MKR (+78%). The remaining 5 are all down on the year with FXS being the worst performer down 73%,” the researcher added.
Meanwhile, memecoins have been the best bet this year so far. “This can also be seen in the performance of the largest Ethereum native memecoins. PEPE is the biggest gainer of the sample, up +708% while SHIB is up 74% and DOGE is up 31%,” according to Hartvigsen.
The correlation section of the report delves deeper into the relationship these altcoins have with Ethereum. “The sample of altcoins was not chosen randomly, but consists of tokens that are generally assumed to be correlated with the performance of ETH,” explains Hartvigsen.
He further notes that “Correlation between ETH and ETH is of course perfect and therefore 100%. The alts most correlated with ETH are GNO, SNX, METIS, AAVE and ARB.” Despite some signs showing a decent correlation with Ethereum, the researcher cautions that this does not necessarily guarantee similar performance outcomes, especially in this crypto cycle.
In terms of beta, which measures the volatility of an asset compared to the market, the findings are telling. “From this analysis, it is clear that only a few have a high beta coefficient with respect to ETH, namely PEPE, METIS, ENS and PENDLE,” says Hartvigsen. This suggests that while certain altcoins show higher volatility and therefore potential for greater returns compared to Ethereum, they also carry a proportionally higher risk.
Calculating the Sharpe ratio, which provides a measure of risk-adjusted return, brings another dimension to the analysis. Hartvigsen notes, “The Sharpe ratio calculations underscore the volatility-adjusted returns of these altcoins, which have fluctuated significantly. This is critical as investors often overlook the increased risk these ‘ETH beta’ assets pose.”
Summarizing his findings, Hartvigsen offers a clear verdict: “Buying these altcoins as a way to gain leveraged exposure to Ethereum is a fool’s game in my opinion, as you are taking on many additional risks that you may not be aware of. .If you are looking for leveraged ETH exposure, simply going long on Aave makes more sense.” He emphasizes that such a strategy ensures a 100% correlation and a beta value of 2, without the unnecessary complications.
At press time, ETH was trading at $3,439.
Featured image created with DALL·E, chart from TradingView.com
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