In a research report published on July 18, 2024, Thor Hartvigsen, a cryptocurrency researcher, strongly warned against the investment strategy of purchasing high-beta altcoins within the ethereum ecosystem as a leveraged tactic, particularly with the upcoming launch of ethereum spot ETFs in the United States.
Hartvigsen's x.com/ThorHartvigsen/status/1813929485567140226″ target=”_blank” rel=”nofollow”>analysis The article titled “eth Beta – A Recipe for Disaster?” discusses whether buying eth-correlated altcoins, commonly referred to as “eth betas,” constitutes a good investment strategy. These assets, including tokens such as OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK (all L2), MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK (all DeFi), PEPE, DOGE (all memes), SOL, AVAX, BNB, and TON (alt L1s) are traditionally viewed as offering leveraged exposure to ethereum price movements, assuming higher volatility relative to ethereum itself.
The report discusses several critical areas: price performance comparison between these altcoins and ethereum, their correlation and beta coefficients relative to ethereum, and their risk-adjusted returns as measured by the Sharpe ratio. The researcher highlights the risks and inefficiencies inherent in investing in these altcoins for greater exposure to ethereum.
Why Buying 'ethereum Beta' Altcoins Is Generally a Bad Idea
Discussing price performance, Hartvigsen notes: “TOTAL3 (altcoin market cap) versus eth market cap is around 1.48. Since 2020, this chart has only been this low on a few rare occasions, indicating eth’s outperformance against most altcoins.” This historical context sets a grim precedent for those expecting altcoin outperformance in tandem with ethereum’s growth. The researcher explains that despite periodic rallies at these levels, the overall trend has been downwards – a worrying sign for altcoin investors.
Related reading
“It is worth noting that no L2 token has outperformed eth YTD, with the best-performing token, GNO, up 34% while eth has seen a 44% increase. Among the worst performers are MANTA, STRK, and CANTO, all down over 60% this year,” Hartvigsen stated. Regarding the top alternative L1 tokens, AVAX is the only one that has fallen YTD against eth. “Out 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 YTD, with FXS being 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 biggest gainer in the sample, up +708%, while SHIB is up 74% and DOGE is up 31%,” according to Hartvigsen.
The correlation section of the report delves deeper into the relationship these altcoins have with ethereum. “The sample of altcoins has not been chosen randomly, but consists of tokens that are generally assumed to be correlated with the performance of eth,” Hartvigsen explains.
Related reading
He further notes that “the correlation between eth and eth is obviously perfect and is therefore 100%. The alts most correlated with eth are GNO, SNX, METIS, AAVE, and ARB.” However, even though some tokens show a decent correlation with ethereum, the researcher warns that these do not necessarily guarantee similar performance results, especially in this cryptocurrency cycle.
As for beta, which measures an asset’s volatility relative to the market, the results are revealing. “From this analysis, it is clear that only a few altcoins have a high beta coefficient relative to eth, namely PEPE, METIS, ENS and PENDLE,” Hartvigsen says. This suggests that while certain altcoins exhibit higher volatility and therefore the potential for higher returns relative to ethereum, they also carry proportionally higher risk.
The calculation of the Sharpe ratio, which provides a measure of risk-adjusted returns, brings another dimension to the analysis. Hartvigsen notes: “Sharpe ratio calculations underline the volatility-adjusted returns of these altcoins, which have varied significantly. This is critical as investors often overlook the increased risk that comes with these ‘eth beta’ assets.”
To conclude his findings, Hartvigsen offers a clear verdict: “Buying these altcoins as a way to gain leveraged exposure to ethereum is, in my opinion, a fool’s game, as you are taking on a lot of additional risk that you may not be aware of. If you are looking for leveraged exposure to eth, simply putting a 2x long eth position on, say, Aave is more sensible.” He highlights that such a strategy ensures 100% correlation and a beta value of 2, without any unnecessary complications.
At the time of writing, eth was trading at $3,439.
Featured image created with DALL·E, chart from TradingView.com
