Passive Investing Comes in Many Forms
When it comes to executing a proper trading strategy and staying consistent with plans of action for investing in cryptocurrency, many people conveniently presume that the proper method to do so is simply what the crypto community refers to as “hodling”. For those who stray away from the often confounding circle of crypto memes, this simply is a subtle reference and reminder to hold on to whatever coins you own. No buys, no sells. The hodler’s mentality is simply to hang on to your bags and let the volatility play out while patiently awaiting your deserved Lamborghini (cue eyeroll).
Hodling mostly gets referenced as a reminder to not get scared off and sell your coins when times get tough in the markets, as they are during the time of this writing. And despite the vague tones of cringe in the intentional misspelling of a common four-letter word for the purpose of “lol’s”, this is actually a good message for true believers in the blockchain.
There is certainly a benefit to passively holding and tuning out noise in the markets. Avoiding kneejerk buy-high, sell-low reactions to large price fluctuations in any investment is one of the keys to making major returns long-term. After all, in the stock market, day traders have historically gotten burned and have made significantly less returns than passive investors. According to Investopedia,
“Despite indexing’s track record, many investors aren’t content to settle for so-called average returns. Even though they know that a minority of actively managed funds beat the market, they’re willing to try anyhow. ETFs (and index funds) provide the perfect tool.”
The above quote’s reference to ETF’s and index funds is still considered mostly to be a mirage in cryptocurrency, as many still presume that day trading is the only way to truly become rich while investing in an asset class that is so heavily volatile. However, it is a misconception that crypto index funds aren’t feasible and have no means to exist. They actually are very much a real phenomenon, and sites like Lvl.co are quickly gaining popularity for offering them to be invested in on a free or low fee basis.
What is Rebalancing?
Passive investing platforms like Level allow cryptocurrency traders and investors to select an allocation strategy that algorithmically “reshuffles the deck” of their portfolios in order to maintain balance according to the parameters they set. Let’s first take a look at an untouched and non-rebalanced portfolio. Let’s say one year ago today, you first invested in cryptocurrency by buying an equal share in five different coins and your balance looked something like this:
- $100 Bitcoin (20%) — $3,420 BTC/USD Price
- $100 Ethereum (20%) — $298 ETH/USD Price
- $100 Ripple (20%) — $0.19 XRP/USD Price
- $100 Bitcoin Cash (20%) — $304 BCH/USD Price
- $100 Dash (20%) — $204 DASH/USD Price
- $500 Total Portfolio Value
As many of you know, a year in cryptocurrency can feel like an eternity, and an awful lot can change in a 365 day timeframe, such as Bitcoin exploding in an unprecedented bull run to a value of just above $19,700. During the time between then and now, Bitcoin notably hit a high of roughly 7.5 times its price from one year ago, and the value of Ripple went north of 18 times its initial August 9, 2017 $0.19 value at one point in early January, 2018. All of that being said, if you were to not touch your coins at all between now and then, your balance would read today as follows (numbers rounded for simplicity’s sake):
- $193 Bitcoin (24.3%) — $6,602 BTC/USD Price
- $124 Ethereum (15.6%) — $369 ETH/USD Price
- $184 Ripple (23.1%) — $0.35 XRP/USD Price
- $204 Bitcoin Cash (25.6%) — $619 BCH/USD Price
- $91 Dash (11.4%) — $185 DASH/USD Price
- $796 Total Portfolio Value
Interesting stuff. Through the massive rise that cryptocurrency enjoyed in late 2017 and slightly less massive fall between January 2018 and now, this portfolio allocation untouched would have netted you a cool +59% return. Congrats! But take a look at how much the percentages of all of your holdings shifted. Your Dash holdings went from being worth 1/5th of your portfolio down to close to 1/9th because the market pushed it down. Meanwhile, the rest of your coins went up to varying degrees over the past year.
No matter what your current stance on Dash is today, general investing strategy dictates that if all intrinsic values of these coins have stayed the same, we should be buying more Dash and selling some of our higher winners like Bitcoin, Ripple, and Bitcoin Cash with the assumption that they will even out in the long run. With rebalancing these assets along the way, we could have had an even higher return than the +59% we ended up with by selling the highs and buying the lows, while maintaining a more even spread of coins. Keeping a true 20% of each coin we initially invested in means selling our peaks and buying our dips in order to maintain our belief in this notion.
In such a volatile asset class like cryptocurrency, it is important to know that separations over time between two coins do not necessarily mean that one is now simply a more promising coin to own. It could just be a large divergence in value in a short or even long timeframe. Dash may have fallen to the wayside compared to Bitcoin Cash, but will it still be worth less than a third of Bitcoin Cash in a decade? Maybe, but it could also surpass Bitcoin Cash and leave it in the dust. That’s where your research comes in to play, and you can come up with a long-term strategy accordingly.
In the latter scenario where Dash could surpass Bitcoin Cash, you may look back and kick yourself for not scooping up more Dash while it was cheap. Algorithmic trading platforms like Level can easily do that for you. Your initial plan from a year ago was to keep an even percentage allocation on both tokens since you believed in both equally. Why should your belief in Dash now only be worth 1/9th of your portfolio and Bitcoin Cash respectively now 1/4th just because the market dictated their values in those directions? This is the problem that Level has successfully addressed.
So How Does Samsa Do It?
Samsa takes care of this above scenario for you, and smooths over the proportion of your holdings periodically to keep this evenly spread allocation of your portfolio at 20% per coin. If the value of one cryptoasset goes up, Samsa takes those profits and puts them into a coin that has lagged behind. Once it catches up, the profits from the initial lagger are put into the new lagging coin. Rinse and repeat. And it’s all done automatically so that you can “set it and forget it”. This is an absolute luxury for busy investors who do not have time to reallocate constantly, and almost nobody has the time to do this optimally with the speeds in which coin values move up and down.
The revolutionary trading platform allows traders to allocate their investing strategies however they want, and they are able to use recommended index funds with proven track records like Samsa’s Equal Protocols (SEPR). Alternatively, traders can customize their allocation to their own preferences, using the coins they want to trade, as well as the frequency in which to rebalance (eg. 2 hours, 4 hours, 1 day, etc.)
Samsa uses complex algorithms to periodically buy and sell your cryptoassets to maintain your own specified allocation of coins, whether through Samsa’s suggested index funds, or through your own custom allocations. According to CEO Chris Slaughter,
“Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.
For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50.
“Rebalancing,” as a term, has connotations regarding an even distribution of assets; however, a 50/50 stock and bond split is not required. Instead, rebalancing a portfolio involves the reallocation of assets to a defined makeup. This applies whether the target allocation is 50/50, 70/30 or 40/60.”
Passive Investing — The Way to Survive, Then Thrive
What does it mean to be a passive investor in cryptocurrency? And how might traders benefit from more sound strategy via algorithmic technology to trade for them while they remain passive and enjoy their lives? Everyone would love to generate great returns in cryptocurrency, and nearly all of them would like to do it with the least amount of energy and time consumption.
Groundbreaking ideas like Level’s are proving that not all passive investing strategies are created equal, and that you can do more while you hold on to your tokens for the long-term besides simply not touching your precious holdings for weeks, months, or years at a time.
It’s quite easy to become complacent and allow the winners in your portfolio to gradually become larger and larger portions of your portfolio, while watching the losers become less and less prominent. However, assuming nothing has fundamentally changed with any of your assets, it is important to understand that those losing assets still have a great chance of catching up to the winners. In fact, your losers often have a better chance of higher gains than your winners moving forward. So it is helpful, no matter what kind of investment you are making, to rebalance your winners and losers to maintain their appropriate weighting allocation in your portfolio and capitalize on the ebbs and flows of the market.
Taking advantage of the spikes and dips of various coins and constantly shuffling your deck of coins to best optimize the strategy you want is crucial to beat the competing traders out there. Instead of constantly monitoring the charts yourself, looking for perfect entry points, and hoping your limit orders fill, let rebalancing platforms like Lvl.co do the work for you for practically nothing. Maximizing your gains and minimizing your losses while sticking with your investment strategy is a pretty sought after combination, and now it’s finally attainable.
I write in depth cryptocurrency analysis at Level, the passive investing tool for crypto. See what we’re doing at Lvl.co and see our other analysis at our magazine. If you love what you see, give this article 50 claps! If you hate it, show your displeasure with 49.
This article and related content is for informational purposes only. It should not be considered investment advice, and you should consult a financial advisor and do your own research and due diligence prior to making any investments. Where securities or commodities are referenced, it is only for illustrative purposes only, and does not imply any position on securities or commodities classification. To the extent that Level services are offered or discussed, those services are available only for Level whitelisted assets only.