Altcoins
Buying Altcoin “Ethereum Beta” Is a Recipe for Disaster: Research
In a research report published on July 18, 2024, Thor Hartvigsen, a cryptocurrency researcher, strongly warned against the investment strategy of buying high-beta altcoins within the Ethereum ecosystem as a leveraged tactic, especially with next launch of spot Ethereum ETFs in the United States.
by Hartvigsen analyses titled “ETH Beta – A Recipe for Disaster?” provides an analysis of whether buying ETH-related altcoins, commonly known as “ETH beta,” is a good investment strategy. These assets, including tokens such as OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK (all L2), MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK (all DeFi), PEPE, DOGE (all memes), SOL, AVAX, BNB, and TON (L1 alternatives), are traditionally viewed as offering leveraged exposure to Ethereum’s price movements, assuming greater volatility than Ethereum itself.
The report analyzes several critical areas: the price performance comparison between these altcoins and Ethereum, their correlation and beta coefficients against Ethereum, and their risk-adjusted returns as measured by the Sharpe ratio. The researcher highlights the inherent risks and inefficiencies of targeting these altcoins for greater exposure to Ethereum.
Why Buying Altcoin “Ethereum Beta” Is Generally a Bad Idea
Speaking about the price action, Hartvigsen points out: “TOTAL3 (altcoin market cap) to ETH market cap is around 1.48. Since 2020, this chart has only been this low on a few rare occasions, signaling ETH’s outperformance compared to most altcoins.” This historical backdrop sets a grim precedent for those hoping for altcoin outperformance alongside Ethereum’s growth. The researcher explains that despite periodic rebounds to these levels, the overall trend has been one of decline, a worrying sign for altcoin investors.
“Notably, no L2 token has outperformed ETH YTD, with the top performing token, GNO, up 34%, while ETH has seen a 44% gain. The worst performers include MANTA, STRK, and CANTO, all down over 60% this year,” Hartvigsen said. As for the major L1 alts, AVAX is the only one down on the year versus ETH. “Of the 8 DeFi tokens in this basket, 3 have 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.
In the meantime, memecoins have been the best bet so far this year. “This can also be seen in the performance of the largest Ethereum-native memecoins. PEPE is the biggest gainer in the sample, up +708% while SHIB is up 74% and DOGE is up 31%,” according to Hartvigsen.
The correlation section of the report delves into the relationship these altcoins have with Ethereum. “The sample of altcoins was not chosen randomly, but consists of tokens that are typically assumed to be correlated with ETH performance,” Hartvigsen explains.
He also notes that “the correlation between ETH and ETH is obviously perfect and therefore 100%. The most correlated alts with ETH are GNO, SNX, METIS, AAVE, and ARB.” However, while some tokens do show a fair amount of correlation with Ethereum, the researcher cautions that these do not necessarily guarantee similar performance results, especially in this crypto cycle.
In terms of beta, which measures an asset’s volatility relative to the market, the results are telling. “From this analysis, it is clear that only a few altcoins have a high beta relative to ETH, namely PEPE, METIS, ENS, and PENDLE,” Hartvigsen says. This suggests that while some altcoins exhibit higher volatility and thus the potential for higher returns than Ethereum, they also carry a correspondingly higher risk.
The Sharpe ratio calculation, which provides a measure of risk-adjusted returns, adds another dimension to the analysis. Hartvigsen notes, “Sharpe ratio calculations emphasize the volatility-adjusted returns of these altcoins, which have varied significantly. This is critical because investors often overlook the increased risk these ‘ETH beta’ assets carry.”
Concluding his findings, Hartvigsen offers a clear verdict: “Buy these altcoins as a way to gain leveraged exposure to Ethereum is, in my opinion, a foolish play since you are taking on a lot of additional risk that you may not be aware of. If you are looking for leveraged exposure to ETH, it makes more sense to simply put up a 2x long ETH on, say, Aave.” He points out that such a strategy guarantees 100% correlation and a beta of 2, without unnecessary complications.
At press time, ETH was trading at $3,439.
Featured image created with DALL·E, chart from TradingView.com