Thread by @jdorman81

1) This is a Pro $LEO / Con $ETH thread:

Now that I have your attention, before everyone flips out and sends angry responses picking me apart, this is purely about financial/investing engineering & not technology, morals, popularity or importance.

2) Disclaimer: @arca owns both ETH & LEO.

Disclaimer 2: I fully understand the difference between a protocol and a token, decentralization vs centralization, utility vs security. This argument is purely about risk/reward investing and relative value portfolio construction.

3) In terms of up/down capture, $LEO may be the best token ever created & $ETH may currently be one of the worst. What is up/down-capture? It measures beta: Up-capture measures how well your token does relative to the market's upside, and down-capture measures the opposite.

4) $WAVES is a good example of terrible up/down capture. Over the last 6 months, WAVES has captured 38% of BTC's upside, but 95% of BTC's downside. Other examples of bad up/down cap: $XLM has captured 60% of BTC's upside, but 120% of BTC's downside. $XRP: 72% up / 123% down.

5) On the flipside, $LINK has shown tremendous up/down capture over the last 6 months, capturing 110% of BTC's upside, but only 58% of its downside. Others with good up/down cap: $FXC: 110% up / 61% down. $BNB: 85% up / only 47% down.

6) Some tokens have very little skew between up/down capture. For example, $LTC captures 110% of $BTC upside and 118% of BTC downside -- which basically means it's a high beta play on BTC (more upside AND more downside). $XTZ has 90% up / 95% down, so it's a lower beta play.

7) $LEO currently has 70% up-capture and 52% down-capture vs $BTC (small sample size). $ETH has 97% up-capture and 123% down-capture. I think LEO's up/down ratio will continue to get better, and ETH will continue to get worse for the following reasons:

8) Pro $LEO case: Bitfinex's business model is predicated on volumes, and volumes increase when prices go up AND when prices are volatile. Therefore, Bitfinex revenues have high up-capture, and due to the token burns, this accretes directly to $LEO token holders.

9) You can see this happening in real time -- LEO token burns increase (because revenue increases) due to $BTC volatility, not necessarily BTC price increases. This week's burn was huge.

10) Conversely, the $LEO team can be somewhat opportunistic with when they turn "pending burn" into "live burn", and may try to buy LEO when the market is down. As a result, LEO will have very good down-capture b/c there will always be a strong bid on down days.

11) Con $ETH case: I will again reiterate that I am not anti-Ethereum, and understand why $ETH will and should flow through everyone's wallets at some point. I'm just not bullish on $ETH as an investment based purely on relative value.

12) $ETH vs ERC20 tokens can be compared to Gold vs Gold miners. Gold-mining stocks have VERY high betas to Gold, so if you are bullish on Gold, you're often better off owning miner stocks. Similarly, owning high-beta ERC-20 tokens may be a better way to bet on ETH's success.

13) This requires more research as many ERC-20 tokens will never go higher (see: "why Alt season will never happen":

https://twitter.com/jdorman81/status/1145897192244166658

). But a select few will have massive up-capture vs ETH as their success hinges on ETH succeeding (i.e. $LINK & other middleware).

14) So if $ETH has poor down-capture vs BTC (it trades down more than BTC when the market goes down) and other ERC-20 tokens have better up/down capture vs ETH, a portfolio never has to actually own $ETH itself.

15) This does not mean you shouldn't own $ETH, and doesn't mean you need to own $LEO. Up/Down capture is just a relative term. Something can have horrible up/down capture and still go higher; something with good up/down capture can still go lower. The data is also fluid.

16) But risk/reward skews favorably towards investments with high up-to down-capture ratios, & position sizes can be larger (and thus more impactful) when down-capture is low (lower downside is more important than higher upside).

Data provided by gra.com

Sorry, linked to the wrong website... this is General Risk Advisors: genriskadvisors.com

Anyone who cares about equity, fixed income and crypto risk analytics should contact them.