There has been a lot of discussion around long ETH beta trading, with most people believing that with the smooth passage of the ETH ETF, ETH will rise again, opening up room for ETH beta to rise. While this is a logical idea, does the data support this view?
Research data from research firm ASXN shows that during the observation period, ETH beta underperformed ETH in absolute terms and after risk adjustment. In addition, all observed tokens, except SOL and ENS, underperformed BTC in relative and risk-adjusted terms. Asset performance varies more across cycles, and altcoins generally performed poorly in this cycle, making asset selection more important than ever.
prerequisites:
The observation period is from May 1 to July 23, 2024. The probability of ETF approval was revised on May 6, so the "ETH ETF" transaction has been at the center of market discussion since then.
Past performance is not indicative of future performance.
Asset Selection: Assets have been categorized and price performance has been averaged with equal weighting. Some representative altcoins have been selected here, but changing this asset mix could drastically affect the overall results (e.g. adding PEPE).
YTD (Year to Date):
Memecoins are the only track to outperform ETH so far this year, thanks in large part to the exceptional liquidity created by the memecoin craze, albeit a relatively short-lived one on the Ethereum mainnet. Alt L1, ETH DeFi, and L2 underperformed ETH, with L2 performing the worst.
May 1 - July 23:
A closer look at the performance of each track and asset during this period shows the same trend: all tracks underperformed ETH, including memecoin. Similar to the situation year-to-date, L2s was the worst performer. Interestingly, ENS performed well, with a return rate of 77%. The top three assets during this period were ENS (+77%), SOL (+32%), and ETH (+15%).
Given their relationship to ETH, L2 and DeFi have a stronger fit with ETH beta than memecoins or Alt L1. A deeper dive into the sector’s individual asset performance reveals that no L2s have outperformed ETH during this period. On average, L2s are down 36%, with the gap between the best performing L2 (Matic) and ETH being 40%, which is a significant difference.
Compared to ETH, DeFi performed slightly better, with an average return of +11.32% during the observation period. However, this performance was mainly boosted by ENS, with the average performance without ENS being -4.33%. Among all L2 and DeFi, the only asset that performed better than ETH was ENS, and AAVE also had a decent return, only 4% lower than ETH.
Correlation coefficient
The correlation coefficient shows the degree of linear relationship between the observed value and ETH. The correlation coefficient ranges from -1 to 1. The closer the correlation coefficient is to 1, the stronger the positive relationship is. On the contrary, the closer it is to -1, the stronger the negative relationship is.
All tokens are positively correlated with ETH, indicating that their prices tend to move in sync with Ethereum. The highest correlations are with ARB (0.83), OP (0.8), and SNX (0.8), indicating that these assets have a strong positive correlation with ETH. On the other hand, AEVO has a relatively low correlation (0.4), indicating that AEVO has a weaker relationship with ETH than other assets.
Beta vs ETH
The beta value measures the volatility of observations relative to ETH. Beta is a metric that indicates the sensitivity of an asset's price movements relative to a benchmark (in this case, ETH). A beta value of 1 means that the asset moves in line with ETH. A beta greater than 1 indicates that the asset is more volatile than ETH, meaning it tends to amplify ETH's movements. Conversely, a beta less than 1 indicates that the asset is less volatile than ETH.
Most tokens have a Beta value of about 1, indicating a tendency to fluctuate in sync with ETH. It is worth noting that PENDLE has the highest Beta value of 1.5, indicating that its volatility is significantly higher than ETH and tends to amplify ETH's volatility. On the other hand, BNB has a lower Beta value of 0.6, indicating that its volatility is less than ETH and tends to suppress ETH's volatility.
Sharpe Ratio
The Sharpe Ratio value provides insight into the risk-adjusted performance of the observed asset relative to ETH. The higher the Sharpe Ratio, the better the risk-adjusted performance. For this calculation, the Dai Savings Rate (DSR) of 7% is used as the risk-free rate.
ENS has the highest Sharpe ratio of 2.45, indicating that it provides the best risk-adjusted returns among the assets analyzed, followed by SOL with a Sharpe ratio of 1.86. On the other hand, STRK has the lowest Sharpe ratio of -3.22, indicating that it performs poorly on a risk-adjusted basis. Only ENS and SOL provide better risk-adjusted returns than ETH (1.24).
Some tokens have negative Sharpe ratios, including OP (-1.58), ARB (-1.35), and MATIC (-1.63). This suggests that their returns do not compensate for the risk taken.
Indicators denominated in BTC
When one evaluates Beta vs ETH, one should also evaluate how these assets compare to BTC, which is an often overlooked metric. In BTC terms, L2s are down 67%, Alt L1s are down 9.2%, DeFi is down 34%, Memes are down 2.4%, and ETH is down 4.4%.
The Sharpe ratios in the above chart provide insight into the risk-adjusted performance of various tokens relative to BTC during the observation period. ENSBTC stands out with an annualized Sharpe ratio of 2.05, followed by SOLBTC with an annualized Sharpe ratio of 1.26 and ETHBTC with a Sharpe ratio of -0.02. All other tokens have negative Sharpe ratios and do not provide more positive returns than BTC.
