Investment strategies under ETH ETF positive news: Leverage on ETH or bet on altcoins?

Authored by: THOR

Compiled by DeepTech TechFlow

Introduction

ETH ETF will be launched soon. While most people are speculating on the short-term and long-term impacts of these products, another question is: Can we capture this catalyst of ETH by increasing the exposure of ETH beta with leverage?

ETH beta refers to AltCoins within the Ethereum ecosystem, which are theoretically meant to serve as leveraged exposure to ETH. Common examples include LDO or ENS, which traders believe have greater fluctuations compared to ETH itself. However, recently the term ‘ETH beta’ is mostly considered a meme, as AltCoins have performed poorly overall. Choosing an AltCoin related to ETH as a leveraged exposure is like finding a needle in a haystack, often resulting in traders and investors underperforming ETH over a longer time frame.

So, is this time different? Is it best to bet on AltCoin with higher beta relative to ETH when ETH ETF is listed? Today’s article will explore this issue from a quantitative perspective.

Price Performance

The AltCoinMarket Cap of TOTAL3 relative to the ETH Market Cap is about 1.48. Since 2020, this ratio has been this low only a few times, indicating that ETH has outperformed most AltCoins.

Chart: hyphin; Source created using Datawrapper

There are several ways to interpret this chart. First of all, these AltCoins usually Rebound at this level in history. Given the recent bearish sentiment towards AltCoins, this may be a potential scenario. However, this chart shows a downward trend over the years, indicating that it is difficult to find an AltCoin that can outperform ETH. Furthermore, although the AltCoin market capitalization may increase, the price may decrease due to the low circulation of many Tokens and a large number of unlocks. Therefore, it is more difficult to find a reliable ‘ETH beta’.

Analysis of potential Token samples for ETH beta include the following:

[L2’s]

OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK

[Alt L1’s]

SOL, AVAX, BNB, TON

[DeFi]

MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK

[Memes]

PEPE, DOGE, SHIB

Zooming in, the chart below shows the performance of ETH and these four types of tokens since the beginning of this year (198 days ago).

L2 Annual Performance Percentage

Chart: Thor Hartvigsen; Created using Datawrapper

It is worth noting that no L2 Token has outperformed ETH this year, with the best performing GNO pumping 34%, while ETH pumped 44%. The worst performers include MANTA, STRK, and CANTO, all of which have fallen by over 60% this year.

Top ALT L1 Annual Performance Percentage

Chart: Thor Hartvigsen; Created using Datawrapper

Top ALT L1 Tokens have performed well long-term, with TON and BNB clearly outperforming ETH. AVAX is the only Token that has fallen this year.

Annual Performance Percentage of Decentralized Finance

Chart: Thor Hartvigsen; Created using Datawrapper

Out of the 8 DeFi Tokens in this basket, 3 outperformed ETH, namely PENDLE (+254%), ENS (+163%), and MKR (+78%). The remaining 5 have all declined this year, with FXS being the worst performer, dropping by 73%.

Meme Token Performance Percentage Year-to-Date

Chart: Thor Hartvigsen; Created using Datawrapper

In 2024, meme Token performed outstandingly, especially in the largest Ethereum native meme Token. Pepe saw the largest increase, pumping 708%; SHIB pumped 74%; DOGE pumped 31%.

Summary

Year-to-date performance percentage

Chart: Thor Hartvigsen uses Datawrapper to create

correlation

The selected altcoin coins are not random samples, but are typically considered Tokens with correlation to ETH. For example, random DEX Tokens on Solana or SUI have lower correlation with ETH compared to ERC-20 Tokens on the Ethereum network.

The above year-to-date individual performances are instructive, and while past performance is no guarantee of future results, there may be some signals. If we’re going to analyze whether these tokens are actually exposed as a leveraged beta of ETH, rather than just individual behaviors, we need to dig deeper. There is no perfect way to model this, and the encryption market is far from efficient. Therefore, the data obtained must be treated with caution. However, one way to study this behavior is to look at these correlations between AltCoin and ETH.

Correlation measures the strength and direction of the relationship between two assets and can help explain how they move in relation to each other. The correlation value ranges from -1 to 1, where 1 is completely positively correlated and -1 is completely negatively correlated.

The following figure shows the correlation between various Tokens and ETH. The correlation between ETH and ETH is obviously 100%. The AltCoins with the highest correlation to ETH are GNO, SNX, METIS, AAVE and ARB.

Charts created by Thor Hartvigsen using Datawrapper

Chart: Thor Hartvigsen; Created using Datawrapper

Among the best performing Tokens from the beginning of the year, PEPE, TON, PENDLE, ENS, and BNB have a correlation of 60% or lower with ETH, indicating that their performance is more influenced by other factors (possibly BTC correlation or individual variables). TON has the lowest correlation with ETH, so purchasing this asset to capture leveraged ETH exposure is not ideal.

BETA

Furthermore, we can calculate the beta coefficient of these AltCoins relative to ETH from the beginning of the year. Beta is used to represent the volatility of an asset relative to the underlying market (in this case, ETH). The beta value of ETH is 1, the beta value of more volatile AltCoins is greater than 1, and the beta value of less volatile AltCoins is less than 1.

AltCoin beta and correlation with Ethereum

Chart: Thor Hartvigsen; Created using Datawrapper

From this analysis, only a few AltCoins have a high beta coefficient relative to ETH, namely PEPE, METIS, ENS, and PENDLE. AltCoins with high beta coefficients are more volatile than ETH itself. Combining our correlation and beta analysis results, PEPE can be suggested as one of the better ETH beta assets. If ETH appreciates due to the listing of ETF, it may bring good returns. However, it is important to remember the limitations of this analysis. There are many external factors that affect the behavior of these assets, which are not included in this analysis, so please consider it as a theoretical exercise rather than data directly used for trading.

Sharpe Ratio

Finally, we can calculate the year-to-date Sharpe ratio of these assets to measure their recent performance. The Sharpe ratio measures the risk-adjusted return by subtracting the risk-free Intrerest Rate from the return and then dividing by the volatility (standard deviation). The risk-free Intrerest Rate used for this analysis is the 8% annual yield provided by Maker’s ‘DAI Savings Intrerest Rate’. The higher the Sharpe ratio, the better the performance.

Chart: Thor Hartvigsen uses Datawrapper to create

Conclusion

So, what is the main conclusion of this analysis?

• First of all, only a few AltCoins classified as ‘ETH beta’ on Crypto Twitter can outperform ETH itself.
• Secondly, the performance of AltCoins cannot be entirely attributed to the correlation or beta of ETH. These Tokens are not only related to assets other than ETH, but also influenced by individual variables.

Buying alts to leverage ETH exposure is unwise as you may incur many additional unknown risks. If you want to invest in ETH with leverage, it is more reasonable to do a 2x ETH long position directly on Aave. In this case, you can get 100% correlation and a beta value of 2.

Finally, the expectation that ETH will perform well after being listed on the ETF is mainly due to the potential influx of funds from new ETH ETF buyers. These AltCoins will not be affected by this positive buying pressure (as they are not ETF Tokens about to be listed) and there will be a large number of Tokens unlocking in the coming weeks or months. Don’t make things too complicated.