Author: Michael Nadeau, The Defi Report; Translated by: Deng Tong, Golden Finance
Our thesis is that there will ultimately be a handful of layer 1 blockchains that achieve mass adoption.
Our view is:
Bitcoin has achieved a monopoly as "Internet currency" or "digital gold" as a global store of value.
Ethereum’s network effects point to L1 becoming a global monopoly of the “open source app store”.
Solana has firmly established itself as the second-largest smart contract network.
We believe these three assets should form the basis of a well-constructed crypto portfolio. Of course, these are large-cap stocks. The biggest gains in this cycle are unlikely to come from these three assets.
Conversely, small-cap stocks with high betas compared to these assets are more likely to outperform. These are high risk/reward investments that can serve as a "hot sauce" for a portfolio with less allocations.
But how hard is it to identify winning assets?
This week, we’re going to take the wraps off of this and show you just how difficult it is to outperform the top L1 native assets.
What is Beta?
In finance, beta is a measure of a stock’s volatility relative to the overall market or a benchmark asset. In this case, we use the bellwether L1 assets as benchmarks: ETH and SOL.
A beta of 1 = the measured asset moves in the same direction as the benchmark asset.
A beta value > 1 indicates that the measured asset is more volatile than the benchmark asset. For example, an asset with a beta value of 1.5 means that if the benchmark asset rises by 5%, the measured asset will rise by 7.5%. Therefore, if the benchmark asset falls by 5%, an asset with a beta value of 1.5 is expected to fall by 7.5%.
A beta value < 1 means that the measured asset is less volatile than the benchmark asset. For example, an asset with a beta value of 0.5 is expected to move 50%, or half the amount of the benchmark asset.
A negative beta means that the measured asset moves in the opposite direction of the benchmark asset. For example, if the benchmark rises by 1%, an asset with a beta of -0.1 is expected to fall by 0.1%.
We use beta to help us understand the risk/return of various assets and as a portfolio management tool - especially during bull markets, high beta assets tend to perform best.
Which assets have a high beta relative to ETH?
Please note that the data compiled in this week’s report is analyzed against daily, weekly, and monthly betas for completeness. That being said, our focus is on monthly data because it removes some of the noise from shorter time frames – and tends to be more suitable for investors with a longer time horizon.
The assets selected are based on projects with strong fundamentals, and large-cap memecoins are included in the analysis.
Finally, the data is based on a 1-year lookback, as we only want to see how these assets are performing under the current bull market conditions (as a forecast of what might happen later in the cycle).
Without further ado, let’s get started with the data.
Key Takeaways
Pepe’s beta to ETH is the highest of all assets across all periods. It appears to be trading similarly to Shiba Inu in the previous cycle.
MakerDAO has the lowest beta against ETH across all time periods. Its monthly beta of 0.39 suggests that if ETH doubles, MKR would only appreciate by 39%.
Generally speaking, the strongest projects with 1) fundamentals, 2) product-market fit, 3) Lindy Effect, 4) strong branding usually have lower betas to ETH – indicating less risk (and potentially less upside).
1-year return vs ETH
Key Takeaways:
Only 4 of the 9 assets selected have outperformed ETH over the past year — showing how difficult it is to beat the bellwether asset in crypto (most VCs struggle to outperform their benchmarks).
MakerDAO stands out here because it has the lowest beta (indicating lower risk) but has outperformed ETH by 39% over the past year.
ENS has the second lowest monthly beta (.74), but has performed second best against ETH over the past year. Again, this indicates lower risk, but still outperforms.
DeFi OGs including Chainlink continue to struggle against ETH.
Pepe is the standout asset in the Ethereum ecosystem this cycle.
Which assets have a high beta to SOL?
Once again, we have selected assets with strong fundamentals and product-market fit for multiple use cases.
*Please note that WIF, JUP, JITO, PYTH, and DRIFT tokens have been publicly traded for less than a year. Performance compared to SOL is measured based on the length of time the asset has been in the market.
Key Takeaways:
Based on daily market movements, Bonk and WIF have the highest betas to SOL. However, based on weekly and monthly market movements, both assets have negative betas. This suggests that over longer time frames, both assets move inversely to SOL.
From a monthly market trend perspective, Jupiter and Marinade are the only assets in the group to have positive beta coefficients. This suggests that SOL itself is quite volatile - as smaller market caps in the ecosystem are less volatile on a monthly timeframe.
1-year return vs. SOL return
Key Takeaways:
It is really hard to outperform SOL in this cycle. The coin is up 638% in the past.
Bonk was the only asset to outperform while publicly trading throughout the year (WIF started trading in Q4, JUP in Q1). And it did so in a big way — up 87x(!).
It is worth noting that some projects have significantly outperformed SOL in a short period of time. For example, Marinade and Orca both appreciated 10 times in 6 weeks in the fourth quarter of last year - highlighting the need for active management of small assets.
in conclusion
There’s a reason most VCs have trouble looking beyond the bellwether assets in crypto. It’s really hard. If you don’t research the market 24/7, have the edge of a quant strategy, or have access to the best seed-stage deal flow, you’re better off strictly allocating to the leading assets.
Congratulations to those who invested in Bonk early last year and stuck with it. You’ve probably outperformed the vast majority of the highest paid fund managers in the world. We’ll note that on crypto Twitter there seems to be more consensus that WIF is the preferred Solana meme token for this cycle — sentiment-wise. However, Bonk has far outperformed expectations. We think it has a good chance of continuing this momentum later in this cycle.
Wondering what SOL's beta to the S&P 500 has been over the past year (using monthly data)? 8.37 (!). That's why it has been the trade of the cycle so far.
Keep in mind that there are a lot of nuances to sift through in how we present the data in this report, primarily related to the time periods measured. As mentioned earlier, some assets outperformed over a short period of time, only to end the year well below their benchmarks - highlighting the need for active management.
This report highlights how difficult it is for altcoins to surpass the top L1s. That being said, historically, altcoins have rallied in the late stages of bull cycles - and we expect this to happen later in the cycle. Keep in mind that it may be new projects that end up outperforming - such as Celestia, Monad, or Berachain (the latter two have not yet launched).
We think it’s prudent to have some exposure to some large-cap quality meme coins (we own Bonk).
