Altcoins
Buying “Ethereum Beta” Altcoins Is a Recipe for Disaster: Research
In a research paper published on July 18, 2024, cryptocurrency researcher Thor Hartvigsen strongly warned against the investment strategy of buying high-beta altcoins within the Ethereum ecosystem as a leveraged tactic, especially with the upcoming launch Ethereum spot ETFs in the United States.
Hartvigsen analysis The article “ETH Beta – A Recipe for Disaster?” offers 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 L2), MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK (all DeFi), PEPE, DOGE (all memes), SOL, AVAX, BNB, and TON (L1 alts), are traditionally considered to offer leveraged exposure to Ethereum’s price movements, assuming higher volatility relative to Ethereum itself.
The report analyzes several critical areas: the comparison of price performance between these altcoins and Ethereum, their correlation coefficients and betas relative to Ethereum, and their risk-adjusted returns as measured by the Sharpe ratio. The researcher highlights the risks and inefficiencies inherent in using these altcoins for increased exposure to Ethereum.
Why Buying “Ethereum Beta” Altcoins Is Generally a Bad Idea
Speaking of price performance, Hartvigsen points out: “The TOTAL3 (altcoin market cap) to ETH market cap is around 1.48. Since 2020, this chart has only been this low on a few occasions, signaling ETH’s outperformance relative to most altcoins.” This historical context sets a grim precedent for those hoping for altcoins to outperform alongside Ethereum’s growth. The researcher points out that despite periodic recoveries to these levels, the overall trend has been downward, a worrying signal for altcoin investors.
“It is worth noting that no L2 token has outperformed ETH YTD, with the top performing token, GNO, up 34%, while ETH has seen a gain of 44%. The worst performers are MANTA, STRK, and CANTO, all down over 60% this year,” Hartvigsen said. As for the top L1 alts, AVAX is the only one down YTD versus ETH. “Of the 8 DeFi tokens in this basket, 3 have outperformed ETH, namely PENDLE (+254%), ENS (+163%), and MKR (+78%). The other 5 are all down YTD, with FXS being the worst performer, down 73%,” the researcher added.
In the meantime, Memecoins Cryptocurrencies have been the best bet of the year so far. “This is also reflected in the performance of Ethereum’s largest native digital currencies. 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 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 ETH’s performance,” Hartvigsen explains.
He further notes that “the correlation between ETH and ETH is obviously perfect and is therefore 100%. The alts that are most correlated with ETH are GNO, SNX, METIS, AAVE, and ARB.” However, while some tokens display a decent correlation with Ethereum, the researcher cautions that these do not necessarily guarantee similar performance results, especially in this crypto cycle.
When it comes to 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 coefficient relative to ETH, namely PEPE, METIS, ENS, and PENDLE,” Hartvigsen says. This suggests that while some altcoins have higher volatility and therefore higher return potential relative to Ethereum, they also carry proportionally higher risk.
The calculation of the Sharpe ratio, which provides a measure of risk-adjusted returns, adds another dimension to the analysis. Hartvigsen notes: “The Sharpe ratio calculations highlight the volatility-adjusted returns of these altcoins, which have varied significantly. This is critical because investors often overlook the increased risk that these “ETH beta” assets carry.”
In concluding his findings, Hartvigsen delivers a clear verdict: “Buy these altcoins “Getting into leveraged Ethereum exposure is, in my opinion, a stupid play, because you are taking on a lot of additional risk that you may not be aware of. If you are looking for leveraged ETH exposure, it makes more sense to simply go long ETH 2x on Aave, for example.” He points out that such a strategy guarantees 100% correlation and a beta of 2, without any unnecessary complications.
At press time, ETH was trading at $3,439.
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