The tl;dr

This post explores daily price performance of public Web3 tokens compared to Ethereum (ETH). We estimate and analyze the Alpha and Beta of around 150 assets over four years, leading to some key insights:

• Most tokens have negative Alpha.

  • This isn't necessarily bad. In high-funding environments, trading into high Beta assets with negative Alpha can be cost-effective.

• However, most of these assets also have a Beta lower than 1.

  • 57% have a Beta lower than 1.

  • Only 30% of assets have positive Alpha.

  • Just 13% have positive Alpha and a Beta above 1.

• 2023 saw the most Beta dispersion, while 2021 had the widest Alpha variation. The current period closely resembles 2022.

• Beta estimates fluctuate significantly over time. No asset consistently acts as "Beta on ETH."

• Some notable observations:

  • Popular Layer 2 solutions  like ARB and OP, contrary to popular belief, don't reliably act as Beta on ETH. Same for the liquid staking pioneer LDO. Despite high Beta in some periods, these assets tend to underperform ETH and have negative Alpha.

  • ENS is a rare exception, currently showing high Beta with positive Alpha. Other than that, high Betas with positive Alpha are mostly captured by some memecoins.

  • MKR is a safe haven and usually performs like that (i.e. has a Beta below 1 and moves less than ETH). Recently though, it shows characteristics of a high Beta asset.

  • Check our interactive dashboard to explore other assets.

Introduction

Alpha and Beta

The Greek letters Alpha and Beta are two important metrics that occupy a central place in financial markets. Investors typically hunt for positive Alpha, which indicates an asset that consistently outperforms the market over time - independent of how the market itself iswas behaving.

On the other hand, Beta is more relevant to those looking for exposure to volatility or the broader market. A Beta higher than 1 means the asset is more volatile than the market, acting as a form of natural leverage. Conversely, assets with a Beta lower than 1 are considered safer, more conservative investments. Assets with negative Beta are rare and thus not relevant to this discussion.

Defining the market

To calculate Alpha and Beta, the first step is defining the market portfolio — an index representing the overall market. In emerging markets like Web3, this is tricky. Deciding which tokens to include in a market index, and how to weight them, can lead to different answers at different times. As a result, investors often look for assets that act as Beta to a specific asset, usually Bitcoin or Ethereum, rather than the market as a whole. The idea is that certain projects act as Beta on an ecosystem, and investors seek out these assets for two main reasons: to gain leverage or to efficiently gain exposure across multiple ecosystems. For example, if you find an asset with a Beta of 2 relative to Ether, you could achieve the same ecosystem exposure with only half the capital required to buy Ether directly. This would then allow you to cover more ecosystems.

The main analysis

Single-Year estimates

The chart below shows a scatterplot of all Beta and Alpha pairs for 2024. Four out of the five assets with the highest Beta (and positive Alpha) during this period were memecoins. The only non-memecoin in this group is ENS, which has surged about 60% compared to Ether in 2024.

Currently, most assets in our dataset have a Beta lower than 1. Only about 43% have a Beta higher than 1, meaning they move more strongly than Ether. Roughly 30% of assets have a positive Alpha overall, and just 12.7% boasting both positive Alpha and a Beta higher than 1. Interestingly, most high Beta assets—30.7% of the total sample and about 70% of those with a Beta above 1—actually have a negative Alpha, consistently underperforming Ether. This isn’t necessarily as bad as it sounds. In times of high funding, it can actually be more cost-effective to trade into high Beta assets with negative Alpha then to pay funding on ETH futures. Meanwhile, 38.7% of all assets show both negative Alpha and a Beta lower than 1. The “dinosaur coins” XRP, LTC, and XMR are examples of such tokens (though their estimates might look better relative to Bitcoin). Aside from XMR, these assets and their respective networks don’t offer much functional purpose, and as these results indicate, neither do the tokens from an asset allocation perspective.

Dispersion is often seen as a sign of a maturing market. Contrary to popular belief, Beta dispersion was highest in 2023, not in the current period. Today, most Beta estimates are more centered around 1 or lower, while 2023 saw a broader distribution. As for Alpha, the 2023 period had little variance, with values centered around a slightly positive mean. In contrast, the current 2024 period is most similar to 2022, with Alpha values centered around a negative mean. Both periods are characterized by weaker price performance following an initial frenzy in Web3 token prices. In 2021, a year often remembered as a raging bull market, there was the most dispersion in Alpha and most tokens not keeping pace when ETH was on the move—proving that even in a rising market, what you hold still matters.

Rolling estimates

Examining individual calendar years reveals that the overall distribution of Alpha and Beta estimates can vary widely. To capture this variability, we subsequently focus on rolling estimates (60-day) of Alpha and Beta. This approach helps analyze how stable these estimates are and how much they change over time. It also allows us to better evaluate how well certain assets act as "Beta on Ether."

L2s and LSTs - native leverage?

Layer 2 solutions like ARB and OP are often considered "Beta on Ether." However, when looking at rolling Beta estimates, it’s clear these values are quite volatile. In the past months, Beta estimates have ranged from 0.5 to 1.5. While these assets began the year with high Beta, they failed to consistently outpace Ether, meaning they didn’t provide the expected native leverage they were supposed to. Only recently have they regained a Beta higher than 1. Additionally, their Alpha estimates have been negative since about March, leading to poor price performance and failing to deliver leverage within the Ethereum ecosystem. As a result, from a portfolio construction perspective, they have underperformed Ether significantly. The reasons for this underperformance are not immediately clear, but one could speculate that investor unlocks and supply inflation are factors.

LDO, often viewed as leverage on ETH due to its role as the leading liquid staking protocol on Ethereum, has also shown negative Alpha for most of the trading period. While LDO’s Beta estimates are also volatile, it has generally maintained a higher Beta. However, periods of very low and negative Alpha combined with a Beta that fluctuates greatly over short periods mean that LDO doesn’t exhibit the characteristics of efficient Beta. It appears at most suitable for active portfolio managers. The LDO/ETH price reflects much of this behavior.

Other noteworthy observations

Below we show rolling estimates for a few other interesting tokens and briefly discuss these results. Feel free to play around with the dashboard, or fork the repository and explore yourself.

MKR: Often seen as the central bank of DeFi and generally considered a safe-haven asset, MKR usually exhibits a Beta lower than 1, meaning it moves less than ETH. However, this trend has recently shifted, possibly due to its "endgame" strategy and anticipation of a token revamp. Or because of Grayscale’s new MKR ETF. Interestingly, MKR had positive Alpha throughout most of 2023, potentially benefiting from the higher interest rate environment, which allowed it to capture more value compared to your average "degen" coin.

RBN: After recently converting to AEVO, RBN initially showed a high Beta and impressive Alpha, growing strongly and independently of ETH. This trend reversed dramatically around late April/early May, just a few weeks before the token conversion. This event could be considered a classic case of "sell the news," although it happened a few weeks too early. During its migration to AEVO (with a simple 1:1 conversion), RBN exhibited significant negative funding on centralized exchanges. Ultimately, hedging through these Futures could have been very profitable.

GNO: As an asset from the 2017 ICO era, GNO is free from the usual low float/high FDV issues, and investor vesting isn’t a significant concern. Closely integrated with the Ethereum ecosystem, GNO moved in tandem with ETH for most of 2023, albeit slightly underperforming. However, in late 2023, GNO started outperforming ETH, showing substantial positive Alpha independent of the market, while its Beta remained stable around 1. Recently, it seems to be giving back some of that outperformance, with negative Alpha in the past few weeks.

ENS: Not as old as GNO (at least the token). No investors, just a team, a treasury and the community. Pretty consistent (absolute) inflation through treasury vesting, which in fact is not low. A recent appchain announcement might have triggered a repricing. As of now, ENS is the standout performer of the past few months and the only non-memecoin among the top 5 Beta assets of 2024. With a positive Alpha, ENS could be primed to outperform further in the coming weeks and months.

Conclusion

As we move forward, the landscape for Web3 tokens will likely continue to evolve, driven by both market dynamics and technological advancements. The ongoing fluctuations in Alpha and Beta suggest that investors need to stay agile, closely monitoring these metrics to optimize their strategies. With the potential for regulatory developments, increased institutional interest, and the growing impact of factors like token unlocks and ETF flows, the correlation between ETH and other assets could shift in unexpected ways. Investors might find new opportunities in assets that were previously overlooked or undervalued. As the market matures, those who can adapt quickly and anticipate changes in Alpha and Beta will be better positioned to capitalize on emerging trends. Whether seeking leverage through high Beta assets or searching for hidden Alpha, the key will be in staying informed and ready to pivot as the Web3 space continues to redefine itself. Personally, we believe that an asset allocation strategy based on the notion of something acting as “Beta on ETH” is flawed and as such will disappoint. Finding value independently of Ether’s price fluctuations might be harder but more rewarding in the end.

From a research standpoint, a few interesting questions have come up during this work that remain unanswered.

• What is driving Alpha or Beta decay? Could it be token unlocks, or is it simply a natural process leading to both Alpha and Beta decay, driven by constant market rotations?

• How do Alpha estimates correlate with funding rates for ETH?

• Why should any token fundamentally serve as Beta on ETH? Many tokens don’t have intrinsic value capture tied directly to the Ethereum network and its usage.

• How will ETF flows impact these assets? Can any asset have meaningful Beta in an environment in which Ether is deflationary due to EIP-1559, while also attracting traditional investors through ETFs?

If any curious reader wants to explore these questions together, or can think of other relevant questions, we would be happy if you reached out to us.