Stablecoin Flows Signal L1 Winners, Artemis Finds

Artemis research shows stablecoin capital flows predict L1 crypto returns, delivering a 1.67 Sharpe and profits even in bear markets.

Crypto analytics firm Artemis has published new research linking stablecoin capital flows to layer-one blockchain returns. 

The findings reveal a weekly-rebalanced long-short factor with a 1.67 Sharpe ratio over five years. The strategy generated an annualized return of 83.6% with near-zero correlation to broader market movements. 

Notably, it posted gains even during periods when Bitcoin was deep in the red.

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Stablecoin Capital Flows as a Cross-Sectional Return Predictor

Artemis built the factor, called Stablecoins 1, by tracking stablecoin flows between chains. 

The strategy rebalances weekly and goes long chains receiving strong inflows while shorting those losing capital. Over the five-year backtest period, the raw factor produced a maximum drawdown of -43.9%.

Artemis applied a volatility-targeting overlay to the raw factor. That version brought the Sharpe down to 1.17 but trimmed the maximum drawdown to -31.9%. 

The firm estimates a conservative out-of-sample Sharpe of 0.96 after applying a degrees-of-freedom haircut to account for overfitting risk.

The annualized alpha stood at 73.8%, with a t-statistic of 3.31 and a p-value of 0.001. That makes it statistically significant at the 1% level after controlling for market exposure.

Market-Neutral Performance Across Crypto Bear Markets

One detail Artemis highlighted was the factor’s behavior during downturns. 

Across 30 months where Bitcoin posted negative returns, the raw Stablecoins 1 factor averaged a gain of 6.8% monthly. Bitcoin averaged -10.9% over those same months.

The market beta for the factor sits at -0.03, and the R-squared is just 0.1%. That means broad crypto market moves explained almost none of the strategy’s returns. 

Artemis described it as the most market-independent alpha source in its current factor stack.

The factor also showed the lowest pairwise correlation with every other factor Artemis has built, with a maximum correlation of 0.16. 

Even in a spanning regression controlling for all other factors simultaneously, it retained a t-statistic of 2.54 and an R-squared of just 6.1%.

Mid-Cap L1s and L2s Drive the Bulk of Returns

Artemis noted that the long leg of the strategy generated 84% of total returns. 

The factor primarily rewards mid-cap layer-one and layer-two networks receiving strong stablecoin inflows. It does not rely on structural shorts against large-cap chains.

Five networks led the performance: Polygon, Mantle, Optimism, BNB Smart Chain, and Sei. Together, they accounted for 84% of total returns over the backtest period.

Yearly performance showed resilience across different market cycles. The strategy returned 262% in 2021, 47% in 2022, and 315% in early 2025. 

Its only losing year was 2024, returning -13%, which Artemis linked to stagnant aggregate stablecoin supply growth during that period. Performance recovered once ecosystem expansion resumed.

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