The specifics of the rebalancing cryptocurrency portfolio
The investment portfolio is an economic mechanism to regularly changing market conditions. Therefore, to maintain efficient operation requires regular inspection and debugging, called rebalancing. The distribution of the assets have performed well in the management of traditional investments, but the market of virtual currencies it shows even higher results yield due to high volatility. In the article we examined the essence of the strategy, its application for crypto-currency portfolios and the optimal ratio and time intervals.
The essence and benefits of the strategy rebalancing
The rebalancing of portfolio is the process of adjusting asset, by bringing their ratio to fixed values. As a result of market fluctuations, the assets in the portfolio gradually begin to deviate from the desired percentage. Therefore, to maintain their equilibrium requires regular recovery proportions.
The principle of operation often confuses newcomers, requiring the sale of the most profitable tools and buying depreciating that at first glance completely contradicts the basic principles of investment management. For example, if the portfolio consists of 4 altcoins and the optimal conditions require equal proportions, each operation of the rebalancing should restore 25% of the cost of each asset.
Changes may occur periodically or upon reaching a boundary threshold deviation. About the optimal time frame we will describe below, and as relative changes, it is usually set in the range of 20% of the value of each individual coin.
The diagram shows how the rebalancing, when the threshold of deviation (+/-20%) from the optimal ratio. A similar procedure can occur irrespective of changes in the proportions, and for example, every hour, day, week and so on.
Restore the original percentages can be implemented in several ways:
partial sale of tools exceeding a specified share, followed by a redistribution of funds between the reduced segments;
additional investment to maintain the ratio.
Despite the desire to invest in growing the asset, because of its attractiveness, it must be fought. As the real-world practice and computer models, the impulse only harm the portfolio. The best thing you can do to maximize long-term effectiveness, is to adhere to the strategy and periodically fix profit.
The benefits of using
Rebalancing allows you to keep the risks at a desired level and to smooth out investment returns, forcing you to “sell high and buy low”. This strategy shows a higher yield than long-term retention as traditional and cryptocurrency market. Thus, during the recession, regularly stabilized portfolio suffers less.
Compared to most of the policies rebalancing requires minimal effort. After setting initial parameters and conditions, requires only their regular execution and monitoring of market changes to make timely adjustments in case of detection of signs of “extinction” of the asset. Operations can be performed manually or use a special service. In addition to personal benefit, using this strategy, investors reduce market volatility and complicates manipulation.
Features of use of cryptocurrencies
The initial allocation and subsequent adjustments require a common measure of expressing the value of the assets. In the case of the stock market in addition to Fiat, you can use a virtual currency, for example, the PTS.
In each case, may vary fees, commissions and other terms of transactions. It is necessary to consider and choose the path with the least resistance. You should also set a minimum trading volume, since the deviation may be minor and conduct trading operations with difference is not always appropriate.
Unlike a traditional assets for market virtual frequency of rebalancing plays an important role. Experts attribute this to the typical high volatility of the market.Also need to conduct more monitoring of the dynamics and sustainability of the trend.
The frequency of rebalancing
When comparing different variations of strategies, tools, and time periods to determine the optimal parameters were taken market data from cryptocurrency exchanges 4 may 2017, 3 may 2018. As a result, when the same initial conditions, it was found that periodic rebalancing was much cheaper than HODL.
It was found that the most effective option is to restore the original ratio every hour. The profitability of such strategies were on average 93-264% higher than in HODL. On average, the rebalancing brought in 64% more revenue than the hold.
The optimal ratio and composition of the portfolio
The studies were carried out for portfolios containing from 2 to 40 different coins. It turned out that the best solution is the simultaneous deployment of 10 virtual currencies. The subsequent increase in component efficiency gains is slowing and the complexity of the management increases dramatically. Even the easiest option with 2 virtual currencies were 18% more profitable HODL.
Also considered 3 options for the distribution of the portfolio of the 10 cryptocurrencies:
linear (1%, 3%, 5%… 17%, 19%);
exponential (1%, 1%, 2%, 2%, 4%, 6%, 9%, 15%, 23%, 37%).
The best was the most simple version of uniform distribution. The results of one year, such a portfolio with hourly updates grew by 23.6 times.
It should be noted that the result is also influenced by the choice of a group of assets. The most effective was coins and tokens with a medium market capitalization ($ 9 million – $69 million as of may 4, 2017).
Efficiency under different scenarios of market development
Rebalancing is justified in most normal market situations, such as leap, recovery, lateral movements, and even manipulation. It shows the same results with HODL in the case of a sharp decline and rising cost, then saves a new level. Less effective only with gradual long-term upward and downward movement. Therefore, despite its apparent simplicity, requires periodic thorough analysis of the stock market, and correct adjustments if necessary.
You can also read the features and differences between desktop platforms and web clients.