Any serious cryptocurrency investor will be keen on making 2018 count as this may be their last chance of profiting wildly from the crypto “bubble”. At least I feel that way. If we’re going to have a repeat of 2017 in 2018 (in terms of total market cap growth), then such growth cannot be expected in 2019.
The Failed Day Trader
My story starts like this. I decided to setup a personal portfolio for 2018 and prevent the largely unfruitful day trading and token hopping exercises I performed last year. Actually last year, I lost half of my total investment trying to beat the market. I made all the rookie mistakes. Didn’t understand market cycles or how charts worked. I typically hopped from coin to coin as soon as I entered loss positions for extended periods of time. You know that behavior when your current holding is in the red and shows no hope of recovery and then you see another coin that you have always liked going green for days.
You typically reason that by selling your losing position and joining the bull train, you will be able to cover your losses by the gains that accrue from the bullish coin. And then because you do not understand simple ideas like resistance, correction, over-bought stock and all-time highs, you buy in with a market order (so that you can get in as fast as possible). Just as you are enjoying the new ride, suddenly the price stops going up at its usual velocity, followed by a little bit of oscillation and then after some minutes you have a long red candle — you are in a loss position again! Not being able to manage your “loss-battered” emotions, you lose confidence and quickly sell out to prevent ‘what happened the last time’. Thereby adding more losses to your folio.
Realizing how much you have lost and how the market is still green in most places, you immediately set out to chase your losses. So you go again, log into the exchange and the first thing your eyes pick is the coin you just left. It has started greening up again! Now you beat up yourself for being such a loonie that you chickened out too fast. With more confidence this time around, you buy in; believing you can still get a 20% gain before the bull run ends since it appears there is still a lot of demand. As a smart guy, you set your sell limit order to 10% profit from the price you newly bought in and decide to chill out on Telegram while the coin rises. Ten minutes later you are back to the market to see how your coin is doing. Oops, you are already down by 15%.
The market had just tested the new price resistance and failed. Tired of moving around and losing money, you decide to just wait out and see what happens next. Over the next two hours, you find yourself watching the price of your beloved coin oscillate into a down trend and a deeper loss for your wallet. And in just one day, your overnight-millionaire dreams have vanished into thin air. This was exactly how I spent my first few months trying to beat the market without education. Of course, I started learning the intricacies of day trading and by the end of last year I was able to break even again and make some profits (thanks to the bullishness of the market). But then after reviewing the year, day trading was obviously one of those things I didn’t want to participate in as such again. It was too stressful and demanding to the point of making some days very unproductive. So, I set out to look for a new strategy to make massive gains from this high-growth market which was more or less passive.
The Refined Trader
The obvious first step from my experience was to setup a portfolio. Jumping from coin to coin in a non-strategic way has already shown itself to be a tiring and low yield activity. So, the first step in the simple strategy I have been hyping is to create a solid portfolio. How complex your portfolio is, depends on how much time you are willing to invest into researching the portfolio, managing the portfolio and your risk tolerance. I am not going to give any opinion here as to which coins or tokens may deserve a place in your portfolio, doing your own research will make you more confident. Instead I’m going to focus on the key part of this simple strategy. It is what all professional portfolio managers do. It is called rebalancing. For those who are not familiar with the term, it simply means to adjust the values of your portfolio holdings from time to time according to a predefined weighting system.
How Rebalancing Works
Typically, you set up a portfolio by picking some assets (coins and tokens) you really like and then buy a particular amount of each of them. So, let’s say you selected ten coins that you really are bullish about and you had a total of $1000 to invest, you could decide to invest $100 on each of the ten coins. In this case, the weighting is equal and for each coin, it is 10% or 0.1. Depending on your risk tolerance, you may instead decide that some base coins like BTC and ETH should take up 20% each, while the rest take 7.5% each. Both of these examples are what is referred to as a weighting system.
Now what usually happens after you buy your coins according to a selected weighting system is that the market will start distorting your weightings. Some coins will increase in price significantly such that they have higher allocation in the portfolio than originally specified. Others will drop in price. Over time, these shifts in allocation may lead to undesirable effects such as exposing you to a higher risk level than you can bear. To solve this issue, periodic rebalancing of your portfolio is important. You need to reset the weightings by selling profitable positions and consolidating losing positions. It is however important to note that rebalancing is not a trivial task in the world of satoshis and ethers. Make sure you read to the very end of the article. I have a gift for you.
Rebalancing Maximises Your Return on Investment
It is not a secret in the money management world. Rebalancing a portfolio periodically almost always produces better returns than a completely passive portfolio even in a bear market. Here’s why:
Rebalancing is a systematic way of buying low and selling high. Don’t forget, the goal of a day trader is to buy low and sell high based on daily volatility of coin prices. However, this task is very difficult. It involves market timing and guess work like I described above. You have to inherently predict the low and the high. If you don’t use bots for this kind of activity, emotions and irrationality can quickly become your undoing, leading to more losses than gains. With rebalancing however, you don’t have to stress over daily coin prices. You don’t care which coin “can still go higher” or which coin is “crashing fast”. When the time to rebalance comes, you simply use the profits on your profitable or stronger positions to buy more of your losing positions at discounted prices. Simple analogue of buying low and selling high. Another very insightful way of looking at it is that rebalancing helps you implement the popular dollar cost averaging technique in a microform. You can read about Dollar Cost Averaging here.
Real Results From Implementing This Strategy
To illustrate the points made in the previous section, I present to you some experiments performed by Sebastian Patiño-Lang as found in this GitHub repo. Essentially, he constructed a portfolio of top 20 coins with the highest price values at the beginning of 2017 and simulated the ROI of the portfolio up until December 1, 2017 with a total initial investment of $1000 and equal weighting for all coins. He back-tested two situations — without rebalancing and with daily rebalancing (fees factored in). You can see the huge discrepancy in returns for yourself below:
- The orange line shows that without rebalancing, the portfolio earned a ROI of 2,385% (24x the investment)
- The blue line shows that with rebalancing (fees factored in), the portfolio earned a ROI of 6,400% (65x the investment)
In a very volatile market like the crypto market, the simple strategy I have presented in this article shines at its brightest. This is the strategy I have adopted this year for my portfolio and I’m already seeing returns.
AND HERE’S THE CATCH — Remember I said rebalancing a crypto portfolio was not a trivial task? Well I am glad to announce to you that I teamed up with Sebastian (the author of the Github repo above) to create a software service that makes it trivial! We are launching the service soon and we promise you will never have to break a sweat to rebalance your portfolio again.
UPDATE: We have launched the service at https://coinpulley.com
If you would like to see the nice results other users are sharing already,
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This article is not to be construed as investment advice.