Written by: THOR
Compiled by: TechFlow
introduction
ETH ETFs are coming online. While most people are speculating on the short-term and long-term impact of these products, another question is: Can this catalyst for ETH be captured by adding leveraged ETH beta exposure?
ETH beta refers to altcoins within the Ethereum ecosystem that should theoretically serve as leveraged exposure to ETH. Common examples include LDO or ENS, which traders believe are more volatile relative to ETH itself. However, recently the term "ETH beta" is mostly considered a meme due to the overall poor performance of altcoins. Choosing an altcoin related to ETH as leveraged exposure is like looking for a needle in a haystack, and usually leads traders and investors to underperform ETH over longer time frames.
So, is this time different? As ETH ETFs are launched, is the best strategy to bet on altcoins with higher beta relative to ETH? Today’s post will explore this question from a quantitative perspective.
Price performance
TOTAL3 (altcoin market cap) relative to ETH market cap is around 1.48. This ratio has only been this low on a few occasions since 2020, suggesting that ETH is outperforming most altcoins.
Chart: hyphin; Source Created with Datawrapper
This chart can be interpreted from several perspectives. First, these altcoins have historically typically rebounded at this level. Given the recent high bearish sentiment towards altcoins, this could be a potential scenario. However, this chart shows a multi-year downtrend, indicating that it is difficult to find altcoins that can outperform ETH. Additionally, while altcoin market cap may increase, prices may fall due to the low circulation and large unlocking of many tokens. Therefore, finding reliable "ETH beta" is more difficult.
The sample of tokens analyzed as potential ETH betas includes the following:
[L2’s]
OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK
[Alt L1’s]
SOL, AVAX, BNB, TON
[DeFi]
MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK
[Memes]
PEPE, DOGE, SHIB
Zooming in, the chart below shows the performance of ETH and these four token categories year-to-date (over the past 198 days).
L2 Annual Performance Percentage
Chart: Thor Hartvigsen; created with Datawrapper
It is worth noting that no L2 token has outperformed ETH this year, with the best performer GNO up 34% and ETH up 44%. The worst performers include MANTA, STRK, and CANTO, all down more than 60% this year.
Top Alt L1 Annual Performance Percentage
Chart: Thor Hartvigsen; created with Datawrapper
The top Alt L1 tokens have performed much better, with both TON and BNB clearly outperforming ETH. AVAX is the only coin to be down this year.
DeFi Annual Performance Percentage
Chart: Thor Hartvigsen; created with Datawrapper
Of the 8 DeFi tokens in this basket, 3 have outperformed ETH, namely PENDLE (+254%), ENS (+163%), and MKR (+78%). The remaining 5 have all fallen this year, with FXS being the worst performer, down 73%.
Meme Token Year-to-Date Performance Percentage
Chart: Thor Hartvigsen; created with Datawrapper
In 2024, meme tokens have performed well, especially among the largest Ethereum native meme tokens. Pepe has the largest increase, up 708%; SHIB is up 74%; and DOGE is up 31%.
Summarize
Year-to-date performance percentage
Diagram: Created by Thor Hartvigsen using Datawrapper
Correlation
The sample of altcoins chosen is not random, but rather tokens that are generally considered to correlate with ETH performance. For example, a random DEX token on Solana or Sui would have a lower correlation with ETH than an ERC-20 token on the Ethereum network.
The individual performances from the year to date above are instructive, and while past performance is no guarantee of future results, there may be some signals. If we want to analyze whether these tokens are truly levered beta exposure to ETH, rather than just individual behavior, we need to dig deeper. There is no perfect way to model this, and crypto markets are far from efficient. Therefore, the data obtained must be treated with caution. However, one way to study this behavior is to look at the correlation between these altcoins and ETH.
Correlation measures the strength and direction of the relationship between two assets and can help explain how they move relative to each other. Correlation values range from -1 to 1, with 1 being a perfect positive correlation and -1 being a perfect negative correlation.
The chart below shows the correlation between various tokens and ETH. The correlation between ETH and ETH is clearly 100%. The altcoins with the highest correlation with ETH are GNO, SNX, METIS, AAVE, and ARB.
Chart by Thor Hartvigsen created using Datawrapper
Chart: Thor Hartvigsen; created with Datawrapper
Of the top performing tokens YTD, PEPE, TON, PENDLE, ENS, and BNB all have correlations with ETH of 60% or less, suggesting their performance is more due to other factors (perhaps BTC correlation or individual variables). TON has the lowest correlation with ETH, so buying this asset to capture leveraged ETH exposure is not ideal.
Beta
Going a step further, we can calculate the year-to-date beta of these altcoins relative to ETH. Beta is used to represent the volatility of an asset relative to the underlying market (in this case, ETH). ETH has a beta of 1, altcoins with higher volatility have betas greater than 1, and altcoins with lower volatility have betas less than 1.
Altcoin beta correlation with Ethereum
Chart: Thor Hartvigsen; created with Datawrapper
From this analysis, only a few altcoins have high beta coefficients relative to ETH, namely PEPE, METIS, ENS, and PENDLE. Altcoins with high beta coefficients are more volatile relative to ETH itself. Combining the results of our correlation and beta analysis, it can be suggested that PEPE is one of the better ETH beta assets, which may provide a good return if ETH appreciates due to ETF listing. However, it is important to remember the limitations of this analysis. There are many external factors that affect the behavior of these assets, which are not included in this analysis, so please treat it as a theoretical exercise rather than data that can be used directly for trading.
Sharpe Ratio
Finally, we can calculate the year-to-date Sharpe ratio for these assets to measure their recent performance. The Sharpe ratio measures volatility-adjusted returns by subtracting the risk-free rate from the return and dividing by the volatility (standard deviation). The risk-free rate used for this analysis is the 8% annual yield offered by Maker's "DAI Savings Rate". The higher the Sharpe ratio, the better the performance.
Diagram: Created by Thor Hartvigsen using Datawrapper
in conclusion
So, what are the main conclusions of this analysis?
First, only a handful of altcoins categorized as “ETH beta” on Crypto Twitter have been able to outperform ETH itself.
Second, the performance of altcoins cannot be attributed entirely to ETH’s correlation or beta. These tokens are not only correlated with assets other than ETH, but are also affected by individual variables.
It is unwise to buy these altcoins to get leveraged ETH exposure, as you may be taking on many unknown additional risks. If you want to invest in ETH with leverage, it makes more sense to go long 2x ETH directly on Aave. In this case, you can get 100% correlation and a beta of 2.
As a final note, the expectation that ETH will do well after the ETF is listed is mainly due to potential inflows from new ETH ETF buyers. These altcoins will not be subject to this positive buying pressure (they are not the upcoming ETF tokens) and have a large number of tokens unlocked in the next few weeks or months. Don't make it too complicated.
