In a research report released on July 18, 2024, Thor Hartvigsen, a crypto researcher, strongly cautioned against the investment strategy of purchasing high-beta altcoins within the Ethereum ecosystem as a leveraged tactic, particularly with the forthcoming launch of the spot Ethereum ETFs in the United States.
Hartvigsen’s analysis titled “ETH Beta – a Recipe for Disaster?” provides an analysis of whether buying ETH-correlated altcoins, commonly referred to as ‘ETH betas,’ constitutes a good investment strategy. These assets, including tokens like OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK (all L2’s), MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK (all DeFi) PEPE, DOGE (all memes), SOL, AVAX, BNB and TON (alternative L1’s) are traditionally viewed as offering leveraged exposure to movements in Ethereum’s price, assuming a higher volatility relative to Ethereum itself.
The report dissects several critical areas: price performance comparison between these altcoins and Ethereum, their correlation and beta coefficients relative to Ethereum, and their risk-adjusted returns measured by the Sharpe ratio. The researcher highlights the inherent risks and inefficiencies in banking on these altcoins for enhanced Ethereum exposure.
Why Buying ‘Ethereum Beta’ Altcoins Is Generally A Bad Idea
Discussing price performance, Hartvigsen points out, “The TOTAL3 (altcoin market cap) against the ETH market cap is at around 1.48. Since 2020, this chart has only been this low on a few rare occasions, signaling the outperformance of ETH against most alts.” This historical context sets a grim precedent for those hoping for altcoin outperformance concurrent with Ethereum’s growth. The researcher elaborates that despite periodic recoveries at these levels, the overarching trend has been one of decline—a troubling signal for altcoin investors.
“Notably, not a single L2 token has outperformed ETH YTD, with the best performing token, GNO, up 34%, whereas ETH has seen a 44% gain. Worst performers include MANTA, STRK, and CANTO, all down more than 60% this year,” Hartvigsen stated. With regard to the top alternative L1’s, AVAX is the only one down on the year vs ETH. “Of the 8 DeFi tokens in this basket, 3 have outperformed ETH, namely PENDLE (+254%), ENS (+163%) and MKR (+78%). The remaining 5 are all down on the year with FXS as the worst performer down 73%,” the researcher added.
Meanwhile, memecoins have been the best bet this year so far. “This can also be seen in the performance of the largest Ethereum-native memecoins. PEPE is the largest gainer of the sample, up +708% while SHIB is up 74% and DOGE 31%,” according to Hartvigsen.
The correlation section of the report digs deeper into the relationship these altcoins have with Ethereum. “The sample of altcoins has not been chosen at random but consists of tokens usually assumed to be correlated with the performance of ETH,” Hartvigsen explains.
He further notes that “Correlation between ETH and ETH is obviously perfect and therefore is 100%. The alts most correlated with ETH are GNO, SNX, METIS, AAVE, and ARB.” However, despite some tokens showing a decent correlation with Ethereum, the researcher cautions that these do not necessarily guarantee similar performance outcomes, especially in this crypto cycle.
In terms of beta, which measures the volatility of an asset compared to the market, the findings are telling. “From this analysis, it’s clear that only a few alts have a high beta coefficient in relation to ETH, namely PEPE, METIS, ENS, and PENDLE,” Hartvigsen states. This suggests that while certain altcoins exhibit higher volatility and thus potential for greater returns relative to Ethereum, they also carry a proportionately higher risk.
The calculation of the Sharpe ratio, which provides a measure of risk-adjusted return, brings another dimension to the analysis. Hartvigsen remarks, “The Sharpe ratio calculations underscore the volatility-adjusted returns of these altcoins, which have varied significantly. This is critical as investors often overlook the increased risk these ‘ETH beta’ assets carry.”
Wrapping up his findings, Hartvigsen offers a clear verdict: “Buying these altcoins as a way to get leveraged exposure to Ethereum is, in my opinion, a foolish game as you’re taking on a lot of additional risk you might not be aware of. If you’re looking for leveraged ETH exposure, simply putting on a 2x ETH long on e.g., Aave is more sensible.” He emphasizes that such a strategy ensures a 100% correlation and a beta value of 2, without the unnecessary complications.
At press time, ETH traded at $3,439.
