How Properly Understanding Beta Can Save You a Lot of Stress in Crypto
This post is the part two in addressing a friend’s question: “For new entrants to crypto who missed this run, what do you suggest they do. Will crypto pullback short term? How to balance this with holding long term?”
This post provides some background information on any of you who might be wondering how to navigate the many different options of deploying capital into crypto markets. One of the most important things is in differentiating between alpha and beta(s).
What do these Greek words mean: alpha, beta? It’s critically important for beginners to understand.
The Beta is the baseline volatility (how much the price moves) for a market, which for crypto we can reduce to BTC price action over a period of time.
I define Alpha as any % returns above the Beta % returns, for the same period of time. On shorter timeframes it can be quite easy to surpass the beta, however over longer periods of time it is extremely difficult.
Understanding Beta vs “Alpha” is critical for newer participants to the space. Over the past three months, BTC has had gains of +72%. Over the past 6 months, BTC has had gains of +172%. This is an exceptional Beta return, and creates an extremely high bar for investors to beat in their search for Alpha.
What are TradFi vs Crypto Betas
If you want to compare to equities, the beta is even more skewed with Coinbase (COIN) and CleanSpark (CLSK) having even larger returns. Those are the risky betas to compare your potential returns to — if you don’t think it’s likely you’ll have beaten them, there’s no shame in just buying BTC and holding. I can almost guarantee that you outperform the S&P 500 aka the TradFi equity benchmark, or market beta.
What about low-risk crypto betas?
For the lowest risk returns, the beta you can use is slightly different. Either USDC lending on Aave or ETH staking typically provide similarly annualized returns of 3–7%.
Although this is much smaller returns compared to the beta of BTC, the volatility is MUCH lower and overall the returns are more reliable over a sufficiently long period of time.
During shorter periods there may be large spikes in the lending/borrowing rates as degens get heated up, but over time it will trend towards sub 7% annual — still enough to make up for inflation of USD$.
So, what’s the takeaway?
Unless you can beat BTC / ETH / SOL (the majors) over the short to mid term, and successfully rotate to stables / majors, you’re better off just holding beta, ie buying BTC or ETH or SOL (or some mix of those three).
This is one of the only industries in the world where the (crypto) beta will outperform all other assets and asset classes, so don’t try and be clever by taking on risks that you (probably) don’t even understand.
Tune in for part three, where I discuss the timeframes that I’m working with in managing my portfolio this cycle. One of the big shortcomings I had last cycle (2020–2022) was a lack of a rigorous and objective time element in my decision making. This was a pivotal factor in giving back the majority of my gains and I refuse to allow that to happen again!
