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? Is the best strategy to bet on altcoins with higher beta relative to ETH as ETH ETFs are launched?

Price performance

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.

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, suggesting that it is difficult to find altcoins that can outperform ETH. Additionally, while altcoin market cap may increase, prices may fall due to low circulation and large unlocks of many tokens. Therefore, finding reliable "ETH beta" is more difficult.

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.

L1 tokens have performed much better, with both TON and BNB clearly outperforming ETH. AVAX is the only token to be down this year.

Among DeFi tokens, three have outperformed ETH, namely PENDLE (+254%), ENS (+163%), and MKR (+78%). The remaining five have all fallen this year, with FXS being the worst performer, down 73%.

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%.

Year-to-date performance percentage

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 very informative, 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 behaviors, we need to delve 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.

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 is not ideal.

Only a few altcoins can 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 through leverage, it makes more sense to directly 2x ETH long.

The expectation that ETH will perform well after the ETF is listed is mainly due to the potential inflow of funds from new ETH ETF buyers. These altcoins will not be affected by this positive buying pressure (they are not the ETF tokens that are about to be listed) and have a large number of tokens unlocked in the next few weeks or months. Maybe they will fall instead of rising.

If funds permit, you can use a large position in Ethereum and a small position to try to profit from copycat assets. You should also look for assets with a high correlation with Ethereum. If you don’t have many positions and want to be safe, just invest in Ethereum. If you want to take risks, go for copycat assets (I suggest you go with Ethereum). You can’t have your cake and eat it too. It’s unrealistic to want both stability and profit. You can consider this yourself based on the size of your funds.

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