Buying ‘Ethereum Beta’ Altcoins Is A Recipe For Disaster, Researcher Finds

Why Investing in 'Ethereum Beta' Altcoins Is Generally a Mistake

In a research report released on July 18, 2024, crypto researcher Thor Hartvigsen cautioned against investing in high-beta altcoins within the Ethereum ecosystem as a leveraged strategy, especially with the upcoming launch of spot Ethereum ETFs in the United States.

Hartvigsen's analysis, titled "ETH Beta – a Recipe for Disaster?," investigates whether buying ETH-correlated altcoins, known as 'ETH betas,' is a viable investment strategy. These altcoins, including OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK, MKR, AAVE, SNX, FXS, LDO, PENDLE, ENS, LINK, PEPE, DOGE, SOL, AVAX, BNB, and TON, are typically assumed to offer amplified exposure to Ethereum price movements, with higher volatility than Ethereum itself.

The report examines several key areas: price performance, correlation, beta coefficients, and risk-adjusted returns. Hartvigsen highlights the inherent risks and inefficiencies of relying on these altcoins for enhanced Ethereum exposure.

Price Performance

Hartvigsen notes that "the ratio of altcoin market cap to Ethereum market cap is currently at 1.48. Since 2020, it has only been this low on a few occasions, indicating ETH's outperformance relative to most altcoins." This historical context suggests that it may be difficult for altcoins to outperform Ethereum in the future.

Correlation

Hartvigsen's analysis shows that most altcoins have a positive correlation with Ethereum. However, he cautions that this does not guarantee similar performance outcomes, especially in the current crypto cycle.

Beta

When comparing the volatility of altcoins to Ethereum, Hartvigsen found that "only a few alts have a high beta coefficient relative to ETH: PEPE, METIS, ENS, and PENDLE." While these altcoins may offer higher potential returns, they also carry significantly higher risk.

Sharpe Ratio

The Sharpe ratio, which measures risk-adjusted returns, revealed significant variations among altcoins. Hartvigsen notes, "This metric underscores the increased risk associated with these 'ETH beta' assets, which is often overlooked by investors."

Conclusion

Hartvigsen concludes that purchasing altcoins for leveraged exposure to Ethereum is an unwise strategy. "You're taking on a lot of additional risk that you might not be aware of," he says. "If you're seeking leveraged ETH exposure, simply placing a 2x ETH long on a platform like Aave is more sensible." This approach ensures a 100% correlation with a beta value of 2, without the complexities of investing in altcoins.