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Ethereum ETF may not be good for altcoins

Ethereum ETF may not be good for altcoins

BlockBeats2024/07/19 10:46
By:BlockBeats
Original title: "'ETH Beta' - a Recipe for Disaster?"
Original author: Thor
Original translation: Peisen, BlockBeats


Editor's note:
On July 18, as issuers successively submitted S-1/A and other documents of spot Ethereum ETF to the US SEC, the fees of 9 spot Ethereum ETFs have been announced and trading will start next week. Crypto researcher Thor used linear analysis to analyze the correlation between each altcoin and Ethereum to explore whether ETF will benefit altcoins while benefiting Ethereum. BlockBeats translated the original text as follows:


Introduction


In a few days, ETH ETF will be launched. While most people speculate on the short-term and long-term flows of funds in these products, another question arises: Can this momentum of ETH be captured by adding leveraged ETH beta exposure?


ETH beta refers to altcoins within the Ethereum ecosystem that, in theory, should be leveraged exposure to ETH. Common examples include LDO or ENS, and traders trade these altcoins based on the view that they are more volatile relative to ETH itself. Lately, the term "ETH beta" has mostly been a joke, as altcoins have generally underperformed. Choosing an altcoin related to ETH as leveraged exposure is like finding a needle in a haystack, often resulting in traders and investors underperforming ETH over longer time frames.


So, will this time really be different? With the launch of the ETH ETF, is the best strategy to bet on altcoins with higher beta relative to ETH? Today's post will explore this question from a quantitative perspective.


Key Points

· Price Performance

· Correlation

· Beta

· Sharpe Ratio

· Conclusion


Price Performance


The ratio of TOTAL3 (altcoin market cap) to ETH market cap is ~1.48. This chart has only been this low on a few rare occasions since 2020, which shows that ETH has outperformed relative to most altcoins.


Ethereum ETF may not be good for altcoins image 0


There are a few ways to interpret this chart. First, these altcoins have historically fluctuated around this level. Given the recent high bearish sentiment towards altcoins, this may happen again. However, it is clear that this chart is in a multi-year downtrend, which shows that finding the right altcoins that can outperform ETH is difficult. What the chart does not show is that while the market capitalization of altcoins may rise, prices may fall due to the low circulation and large unlocking of many tokens. Therefore, finding reliable "ETH beta" becomes more challenging.


The sample of tokens analyzed as potential ETH beta includes the following:


[L2 projects]

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


[Copycat L1 projects]

SOL, AVAX, BNB, TON


[DeFi projects]

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 tokens year-to-date (past 198 days).


Ethereum ETF may not be good for altcoins image 1


Notably, no L2 token has outperformed ETH this year, with the best performing token being GNO, up 34% while ETH is up 44%. The worst performers include MANTA, STRK, and CANTO, all down over 60% this year.


Ethereum ETF may not be good for altcoins image 2


The top alt L1 tokens have performed much better, with both TON and BNB significantly outperforming ETH. AVAX is the only one of these tokens to be down this year.


Ethereum ETF may not be good for altcoins image 3


Of the 8 DeFi tokens in this basket, 3 outperformed ETH, namely PENDLE (+254%), ENS (+163%), and MKR (+78%). The remaining 5 have all lost performance this year, with FXS the worst performer, down 73%.


Ethereum ETF may not be good for altcoins image 4


2024 was characterized by the dominance of meme coins, which is also reflected in the performance of the largest Ethereum native meme coin. Pepe was the biggest gainer in the sample, up 708%, while SHIB was up 74% and DOGE was up 31%.


Summary:


Ethereum ETF may not be good for altcoins image 5


Correlation


The sample of these altcoins was not randomly selected, but rather consisted of tokens that are generally considered to correlate with ETH performance. For example, it is reasonable to assume that a random DEX token on Solana or Sui would have a lower correlation with ETH than an ERC-20 token on the Ethereum network.


The YTD performance of the individual tokens above is indicative, and while past performance is no guarantee of future results, there may be some signals in them. If we want to analyze whether these tokens are truly acting as leveraged exposure to ETH, rather than just individual (alone) behavior, we need to dig deeper. There is no perfect way to model this phenomenon, and it is clear that crypto markets are far from efficient. Therefore, the data obtained must be taken with a pinch of salt. However, one way to study this behavior is to look at the correlation between these altcoins and ETH.


Correlation measures the strength and direction of the relationship between two assets and helps explain how they affect each other. Correlation values range from -1 to 1, with 1 indicating a perfect positive correlation and -1 indicating a perfect negative correlation.


The chart below depicts the correlation between various tokens on the left and ETH. ETH's correlation with ETH is obviously perfect, hence 100%. The altcoins with the highest correlation with ETH are GNO, SNX, METIS, AAVE, and ARB.


Ethereum ETF may not be good for altcoins image 6


Among the top performing tokens year-to-date, including PEPE, TON, PENDLE, ENS, and BNB, these tokens all have correlations with ETH of less than 60%, suggesting that their performance is more influenced by other factors, perhaps BTC's correlation or individual variables. TON has the lowest correlation with ETH, so buying this asset to capture leveraged ETH exposure is not an optimal option based on this analysis.


Beta


Going a step further, we can calculate the YTD beta coefficients of these altcoins relative to ETH. Beta is used to indicate the volatility of an asset relative to the underlying market, in this case ETH. ETH has a beta of 1, altcoins with higher volatility have beta values greater than 1, and altcoins with lower volatility have beta values less than 1.


Ethereum ETF may not be good for altcoins image 7


From this analysis, it can be seen that only a few altcoins have high beta coefficients relative to ETH, namely PEPE, METIS, ENS, and PENDLE. Altcoins with high beta coefficients are more volatile relative to ETH. Combining our results in the correlation and beta analysis, it can be speculated that PEPE may be a good beta asset for ETH and could provide a good return if ETH appreciates due to the listing of the ETF. However, it is important to keep in mind the limitations of this analysis. There are many external factors that affect the performance of these assets that are not included in this analysis. Therefore, I would again caution to treat this as a theoretical analysis rather than data that can be used directly for trading.


Sharpe Ratio


Finally, we can calculate the year-to-date Sharpe Ratio of these assets as another way to assess their recent performance. The Sharpe Ratio measures volatility-adjusted returns and is calculated by subtracting the risk-free rate from the return and then dividing it by the volatility (standard deviation). The risk-free rate used in this analysis is the 8% annual interest rate provided by Maker's "DAI Savings Rate". The higher the Sharpe Ratio, the better the performance.


Ethereum ETF may not be good for altcoins image 8


Conclusion


What are the main conclusions we can draw from this analysis?


First, only a few altcoins, known as "ETH beta", have been able to outperform ETH itself.


Second, the performance of many altcoins cannot be attributed solely to correlation or beta with ETH. These tokens are not only correlated with other assets besides ETH, but also affected by individual variables.


I think it is unwise to buy these altcoins to get leveraged exposure to ETH, because you will be taking on a lot of additional risks that you may not be aware of. If you want to get leveraged exposure to ETH, it would make more sense to do a 2x ETH long strategy directly on Aave, for example. In this case, you can achieve a 100% correlation and a beta of 2.


Finally, the argument for ETH doing well post-ETF involves potential positive inflows from new ETH ETF buyers. These altcoins don’t experience this positive buying pressure (they are not the tokens that are about to be ETFed), and there are usually a lot of tokens unlocked in the next few weeks or months. Don’t overcomplicate things.


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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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