# So you think you can outperform ETH & SOL? _Which crypto assets have high beta to the top L1 assets?_ August 2, 2024 • Michael Nadeau --- # So you think you can outperform ETH & SOL? ## Which crypto assets have high beta to the top L1 assets? Michael Nadeau August 02, 2024 Hello readers, Long-time subscribers know that our thesis is that there will be a small handful of layer 1 blockchains that ultimately achieve mass adoption. It’s our view that: - Bitcoin has already achieved a monopoly for “internet money” or “digital gold” as a global store of value. - Ethereum has network effects pointing to the L1 becoming a global monopoly as an “open source app store.” - Solana has firmly established itself as the #2 smart contract network. We think these three assets should form the foundation of a well-constructed crypto portfolio. Of course, these are the large caps. The largest gains in this cycle are unlikely to come from these three assets. Instead, it’s more likely that small caps that have a high beta to these assets will outperform. These are the high-risk/reward plays that can act as “hot sauce” on a portfolio with smaller allocations. But how hard is it to identify the winning assets? This week we lift up the hood to show you *just how difficult *it is to outperform the native assets of the top L1s. Topics covered: - [What is beta and what does it tell us?](#what-is-beta) - [Projects with a high beta to ETH](#which-assets-have-a-high-beta-to-et) - [1-year returns vs ETH](#1-year-returns-vs-eth) - [Projects with a high beta to SOL](#which-assets-have-a-high-beta-to-so) - [1-year returns vs SOL](#1-year-return-vs-sol) - [Conclusion & portfolio construction](#conclusion) ***Disclaimer:**** Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice. Please do your own research. * Let’s go. ## What is beta? In finance, “beta” is a measure of a stock’s volatility in relation to the overall market or a benchmark asset. In this case, we’re using the bellwether L1 assets as our benchmarks: ETH and SOL. - A beta of 1 = the asset measured moved in line with the benchmark asset. - A beta of > 1 means the asset measured is more volatile than the benchmark asset. For example, an asset with a beta of 1.5 indicates that if the benchmark rises 5%, the measured asset would rise 7.5%. Consequently, if the benchmark asset drops 5%, the asset with a 1.5 beta would be expected to drop 7.5%. - A beta of < 1 means the asset measured is less volatile than the benchmark asset. For example, an asset with a beta of .5 would be expected to move 50%, or half, as much as the benchmark asset. - A negative beta indicates that the measured asset moves inversely with the benchmark asset. For example, if the benchmark goes up by 1%, an asset with -.1 beta is expected to decrease by .1%. We use beta to help us understand risk/reward for various assets and as a portfolio management tool — especially during bull markets when high beta assets tend to do their best. ## Which assets have a high beta to ETH? Note that the data compiled in this week’s report is looking at *daily, weekly,* and *monthly beta *for completeness. With that said, our focus is on the monthly figure as it strips out some of the noise over shorter time frames — and tends to be more suitable for investors with longer time horizons. The assets selected were based on projects that have strong fundamentals, with large-cap meme coins included in the analysis. Finally, the data is based on a 1-year look back, as we only want to understand how these assets are performing in the current bull market conditions (as a projection of what *could *happen in the later stages of the cycle). Without further adieu, let’s jump into the data. Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report ##### Key Takeaways - Pepe has the highest beta to ETH of all assets across all periods. It appears to be trading similar to how Shiba Inu traded last cycle. - MakerDAO has the lowest beta to ETH across all periods. Its .39 monthly beta indicates that if ETH were to double, MKR would appreciate only 39%. - Generally speaking, the strongest projects that have 1) fundamentals, 2) product market fit, 3) lindy, 4) strong brands generally have a low beta to ETH — indicating less risk (and possibly less upside). ## 1-Year Returns vs ETH Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report ##### Key Takeaways: - Only 4 of the 9 assets selected outperformed ETH over the last year — an indication of how difficult it is to beat the bellwether assets in crypto (most VC firms struggle to beat the benchmarks). - MakerDAO stands out here as it has the lowest beta (indicating lower risk) but outperformed ETH by 39% over the last year. - ENS had the second lowest monthly beta score (.74) yet the second-best performance vs ETH over the last year. Again, this indicates lower risk while still outperforming. - The DeFi OGs including Chainlink continue to struggle against ETH. - Pepe has been the stand-out asset within the Ethereum ecosystem this cycle. [](https://glassnode.com/?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol) *Today’s issue of DeFi Report is brought to you by Glassnode — the leader in sophisticated blockchain and market data, offering unique insights into capital flows, asset fundamentals, and market sentiment in Bitcoin, Ethereum, stablecoins, and more. * ## Which assets have a high beta to SOL? Once again, we chose assets with strong fundamentals and product market fit across multiple use cases. Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report *Note that WIF, JUP, JITO, PYTH, and DRIFT tokens have been trading publicly for less than one year. Performance vs SOL was measured based on the length of time the assets have been in the market. ##### Key Takeaways: - Bonk and WIF have the highest beta to SOL based on daily market movements. However, both assets have negative beta based on weekly and monthly market swings. This suggests that over longer time frames, these two assets are moving *inversely* to SOL. - Jupiter and Marinade are the only assets of the bunch with positive beta from a monthly market movement perspective. This is an indication of the high volatility of SOL itself — as the smaller caps within the ecosystem had less volatility over the monthly time frame. ## 1-Year Return vs SOL Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report ##### Key Takeaways: - It’s been really hard to outperform SOL this cycle. Full stop. The token is up 638% over the last. - Bonk is the only asset that outperformed while trading publicly for the entire year (WIF began trading in Q4, JUP in Q1). It did so in a BIG way — rising 87x (!). - It’s worth noting that some projects significantly outperformed SOL during brief periods. For example, both Marinade and Orca appreciated 10x over a 6-week period in Q4 of last year — highlighting the need for active management in smaller cap assets. Data: [Investing.com](http://Investing.com?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=so-you-think-you-can-outperform-eth-sol), The DeFi Report ## Conclusion - There’s a reason most VCs struggle to outperform the bellwether assets in crypto. It’s *really *hard. If you’re not studying the markets 24/7, have an edge with a quant strategy, or have access to the best seed stage deal flow, you’re probably better off allocating strictly to the majors. - Congratulations to those who invested early in Bonk last year and held on. You likely outperformed the vast majority of the highest-paid money managers in the world. We’ll note that there seems to be more consensus in WIF as the go-to Solana meme coin for this cycle — sentiment-wise on crypto Twitter. Yet Bonk wildly outperformed. We think there is a good chance it will continue to do so later in the cycle. - Curious what SOL’s beta was to the S&P 500 over the last year using monthly data? 8.37 (!). That’s why it’s been the trade of the cycle so far. - Please keep in mind that there is a lot of nuances to sift through as it pertains to how we presented the data in this report (primarily as it pertains to the time periods measured). As noted, some assets outperformed during brief periods but finished the year significantly down from their benchmark — highlighting the need for active management. - This report highlights how difficult it can be for alts to outperform the top L1s. With that said, historically alts have rallied late in bull cycles — a scenario we expect to play out later in the cycle. Keep in mind that it may be new projects — such as Celestia, Monad, or Berachain (the latter two have yet to launch) that ultimately outperform. - We think it’s prudent to have some exposure to large-cap, quality meme coins (we hold Bonk). Crypto assets are highly volatile and risky. Thanks for reading and please do your own research. Take a Report. And Stay Curious. ***Disclaimer****: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.*