When bitcoin isn't volatile enough for you, do this.

In last week's poll, you all said you wanted to know how to bet on the bitcoin ecosystem with assets other than BTC.

Ask and you shall receive!

Bitcoin Beta - Quick Primer

Investments go up and they go down. Some investments move together in sync. You're up 1%, I'm up 1%. You're down 1%, I'm down 1%.

Other investments move in uncorrelated ways. You're up 1%. I'm down 1%.

And other times, investments can be correlated, but in an exaggerated (or muted) way. When you're up 2%, I'm up 5%. Or you're up 2%, and I'm up but only 1%.

These behaviors are simple examples of market beta (β). Beta is the measure of an investment's volatility relative to the market as a whole. Conventionally beta is defined in context of the S&P 500. For our degenerate purposes, we'll use Bitcoin as "the market" instead of the S&P.

Beta, in summary:

• Coins with a beta over 1 are more volatile, rising or falling more than the market. If bitcoin goes up, these tend to go up more. If bitcoin goes down, these tend to dump more.

• Coins with a beta under 1 are less volatile, following market trends but with smaller changes.

• Coins with a negative beta move opposite the market: they fall when the market rises, and vice versa.

Let’s find some bitcoin beta. I have two ideas:

• large cap, high beta crypto outside bitcoin ecosystem

• Shitcoin bets inside the bitcoin ecosystem 😍

Option 1: Buy Large Cap Coins with High Beta

The easiest way to solve this challenge is to take a list of large cap, liquid coins and calculate their beta to bitcoin. So that's what I did.

Here's the results -- feel free to take a look. https://docs.google.com/spreadsheets/d/1W919CwYmOuwpw3DfOeN3YYJ2zOenSCwQLZow6mhqkpI/edit?usp=sharing

Perhaps not surprising, most of market has a beta right around 1. Risk adjusted, it’s tough to beat just buying bitcoin.

What else stands out? I love Solana at 1.14 over the past 6 months (I own Solana).

Curve (CRV), Aave (AAVE), and Uniswap (UNI) jump out from DeFi world. I love and have used all three of their products on-chain, even if their tokens didn't rip quite as hard in 2021 as they did during DeFi Summer in 2017. I don't own any of these coins at this time.

SHIB and DOGE are both in the top 4 highest beta over the past 6 months (Elon started tweeting about DOGE again this week, btw). Let the meme coin shenanigans continue!

Remember, this beta calculation is only looking at what’s happened in the past. The future could be much different. ¯\_(ツ)_/¯

Option 2 (My Preferred Strategy): Bet in the Bitcoin Ecosystem

The other approach is the go deeper into new and growing projects that run or interact with bitcoin rails.

ThorChain (RUNE)

ThorChain is a decentralized exchange protocol that enables cross-chain trading of assets, including Bitcoin-based tokens like BRC-20. It acts as a critical piece of infrastructure for interoperability between different blockchain ecosystems, including Bitcoin.

In english: ThorChain allows developers to move assets across different blockchains, including bitcoin.

I owned a good bit of RUNE last cycle and ended up holding it too long and watched it crash all the way down before selling at a big loss. That's showbiz, baby.

ThorChain also fits in as both a high beta large cap and a Bitcoin ecosystem play. It's a great example of how the ecosystem thesis can play out. Its had a 1.47 and 1.52 beta to bitcoin, and it stands to do well with more growth on bitcoin from the product side too.

Stacks (STX)

There's also a lot of activity to bring ethereum-like smart contracts to bitcoin. Teams are working on this functionality as "layer 2" solutions (think of a layer 2 as a blockchain that sits on top of another blockchain for reasons).

Stacks is a Layer 2 blockchain designed to enable smart contracts and decentralized applications on top of the Bitcoin network. It allows developers to build dApps that leverage Bitcoin's security and settlement finality. Stacks has its own native token (STX) and enables features like decentralized finance (DeFi) and non-fungible tokens (NFTs) on Bitcoin.

I own STX today as a discretionary investment.

Ordinals (ORDI) and Inscriptions

Ordinals is a protocol that enables the creation and storage of non-fungible data, including NFTs, directly on the Bitcoin blockchain by inscribing data into Bitcoin's transaction signatures. This allows for the minting and trading of Bitcoin-native NFTs without the need for a separate token standard like ERC-721 on Ethereum.

I do not own Ordinals today, but I've almost pulled the trigger a few times. The leading NFT project on bitcoin is called Bitcoin Puppets (it’s ridiculous. click the link), and I do own a small, degenerate bag of the loosely associated PUPS tokens on Solana (which are a solana based rip off of the BRC-20 token on bitcoin -- its not confusing at all... I’m not gambling, you’re gambling!)

Buy Bitcoin Miners

Marathon (MARA) is the largest, publicly traded bitcoin miner. Miners run huge computer infrastructure to execute the proof of work algorithms that run and secure the bitcoin network. It’s a unique business that would require its own post to truly cover. I have never owned any bitcoin miners.

In summary: The key differences, from the product point of view, is in their approaches to expanding Bitcoin's functionality. Stacks aims to bring smart contract capabilities, Ordinals/Inscriptions enable native Bitcoin-based NFTs, ThorChain facilitates cross-chain interoperability, and Marathon earns coin by securing the network.

Portfolio Update

No transactions this week, so instead I'm sharing my portfolio returns (and drawdowns) to give context on just how well these systems can work in a highly volatile environment. Make bets with massive positive skew and let it ride!

The table below shows the Positive Skew portfolio’s returns over the past 6 months and the past 3 months. I've included the S&P 500 and Bitcoin as benchmarks just to give a sense of how wild the crypto shitcoin casino really can be.

Portfolio Returns

The comparison to the S&P really isn't fair, so let's ignore it. The portfolio outperformed Bitcoin by 40x and 12x respectively over these time horizons.

That is inclusive of the April drawdown, where the Positive Skew portfolio declined 2.7x more than Bitcoin from peak. Down in April, but still a great 6 months.

April Drawdown

This is life on the wild end of the risk curve. I calc’d these numbers as of May 7.

More risk, more reward, but also more bloodletting when the market turns against you. That's why I love dynamic portfolio allocation and volatility targeting -- over time it forces you to take profit as both the market and the thesis change.

Jay

Market Vibes