Market Opportunities through ETH ETFs

Introduction

The ETH ETF is about to launch. While most are speculating on the short-term and long-term impacts of these products, another question arises: Can one capture the catalyst of ETH by increasing leverage on ETH beta exposure?

ETH beta refers to altcoins within the Ethereum ecosystem that theoretically should serve as leveraged exposure to ETH. Common examples include LDO or ENS, which traders believe to be more volatile relative to ETH itself. However, the term “ETH beta” has recently been considered a meme due to the poor performance of altcoins in general. Choosing an ETH-related altcoin as leverage exposure is like finding a needle in a haystack, often leading to underperformance over a longer time frame compared to ETH.

Is this time different? With the ETH ETF listing, is the best strategy to bet on altcoins with higher beta relative to ETH? Today’s article explores this question from a quantitative perspective.

Price Performance

The TOTAL3 (market cap of altcoins) relative to ETH’s market cap is about 1.48. Since 2020, this ratio has only been this low on a few occasions, indicating that ETH has outperformed most altcoins.

This chart can be interpreted in several ways. First, these altcoins have historically rebounded at this level. Given the recent bearish sentiment towards altcoins, this might be a potential scenario. However, the chart shows a multi-year downtrend, indicating the difficulty in finding altcoins that can outperform ETH.

Additionally, while the market cap of altcoins might increase, their prices might drop due to low circulation volumes and large unlocks, making reliable “ETH beta” harder to find.

A sample analysis of potential ETH beta tokens includes the following:

• Level 2 Altcoins: OP, ARB, MANTA, MNT, METIS, GNO, CANTO, IMX, STRK
• Level 1 Altcoins: 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 categories of tokens since the beginning of the year (the past 198 days).

Annual Performance Percentage of Level 2 Altcoins

Notably, none of the L2 tokens have outperformed ETH this year. The best-performing GNO is up 34%, while ETH is up 44%. The worst performers include MANTA, STRK, and CANTO, all down over 60% this year.

Annual Performance Percentage of Top Alt L1 Tokens

Top Alt L1 tokens have performed much better, with TON and BNB significantly outperforming ETH. AVAX is the only token that has declined this year.

Annual Performance Percentage of DeFi Tokens

Among the eight DeFi tokens in this basket, three have outperformed ETH: PENDLE (+254%), ENS (+163%), and MKR (+78%). The remaining five have all declined this year, with FXS performing the worst, down 73%.

Year-to-Date Performance Percentage of Meme Tokens

Meme tokens have performed exceptionally well in 2024, especially the largest Ethereum-native meme tokens. Pepe has surged the most, up 708%; SHIB is up 74%; DOGE is up 31%.

Summary

Year-to-Date Performance Percentage:

Correlation

The selected altcoin sample is not random but typically consists of tokens considered related to ETH performance. For instance, random DEX tokens on Solana or Sui would have lower correlation with ETH compared to ERC-20 tokens on the Ethereum network.

The individual year-to-date performances mentioned above are valuable for reference. While past performance does not guarantee future results, some signals may exist. To analyze whether these tokens genuinely act as leveraged ETH beta exposure rather than exhibiting individual behavior, we need to delve deeper.

There’s no perfect way to model this, and the crypto market is far from efficient. Thus, the obtained data must be treated cautiously. One way to study this behavior is by examining the correlation between these altcoins and ETH.

Correlation measures the strength and direction of the relationship between two assets, explaining how they move together. Correlation values range from -1 to 1, with 1 being perfectly positive, -1 perfectly negative.

The chart below shows the correlation between various tokens and ETH. Naturally, the correlation between ETH and itself is 100%. The altcoins with the highest correlation to ETH are GNO, SNX, METIS, AAVE, and ARB.

Among the best year-to-date performers, PEPE, TON, PENDLE, ENS, and BNB all have correlations with ETH of 60% or lower, indicating their performance is driven more by other factors (possibly BTC correlation or individual variables). TON has the lowest correlation with ETH, making it an undesirable choice for leveraged ETH exposure.

Beta

Going further, we can calculate the year-to-date beta of these altcoins relative to ETH. Beta represents an asset’s volatility compared to the broader market (in this case, ETH). ETH’s beta is 1, with higher-volatility altcoins having beta values greater than 1 and lower-volatility altcoins having beta values less than 1.

Altcoin Beta and Correlation with Ethereum

From this analysis, only a few altcoins have high beta relative to ETH: PEPE, METIS, ENS, and PENDLE. Altcoins with high beta are more volatile relative to 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 ETF listing, it may offer good returns.

However, it’s important to remember the limitations of this analysis. There are many external factors influencing the behavior of these assets, not included in this analysis, so consider this as a theoretical exercise rather than direct trading data.

Sharpe Ratio

Lastly, we can calculate the year-to-date Sharpe ratio of these assets to measure their recent performance. The Sharpe ratio measures risk-adjusted returns by subtracting the risk-free rate from the return and dividing by the volatility (standard deviation).

For this analysis, the risk-free rate used is the 8% annual yield provided by Maker’s “DAI Savings Rate”. The higher the Sharpe ratio, the better the performance.

Conclusion

So, what are the main conclusions of this analysis?

1. Only a few altcoins classified as “ETH beta” on Crypto Twitter have outperformed ETH itself.
2. Altcoin performance cannot be solely attributed to ETH correlation or beta. These tokens are also influenced by other assets and individual variables.

Purchasing these altcoins for leveraged ETH exposure is unwise as you might take on many unknown additional risks. If you want to leverage ETH, a direct 2x long ETH position on Aave makes more sense. In this case, you get 100% correlation and a beta of 2.

Lastly, regarding the expectation of ETH performing well post-ETF listing, it’s primarily due to potential inflows from new ETH ETF buyers. These altcoins won’t benefit from this positive buying pressure (they aren’t the upcoming ETF tokens) and face large token unlocks in the coming weeks or months. Don’t overcomplicate things.