A recent study has highlighted that rebalancing cryptocurrency portfolio could outperform the holding strategy. The holding strategy is employed by long term investors. They hold their assets irrespective of current market conditions as they believe that prices will rise in the long term. Cryptocurrency hodlers have held on to their digital currencies despite seeing a sharp correction.
Rebalancing vs Hodling Cryptocurrency Portfolio
Hodl is a term associated with holding crypto assets with a long term horizon. The spelling mistake makes the term unique only to cryptocurrencies but it is equivalent to hold. Shrimpy, which undertook this study is a financial service provider which helps its clients rebalance their cryptocurrency holdings so that they make maximum profit.
It undertook a study to compare the average returns for cryptocurrencies by holding them with a long term view against rebalancing the portfolio at regular short intervals. The study found out that reallocating funds in a portfolio among cryptocurrencies in a bear market could outperform the returns by holding these assets.
Rebalancing outperforms Hodl by 64 percent
Shrimpy undertook a technical analysis of historically available data about cryptocurrency trading prices from cryptocurrency exchanges. It ran a back test on the data and compared the average returns between the two strategies. It took account of any trading fee that the exchanges would have levied on the trade. It studied rebalancing model for periods of 1 hour, 1 day, 1 week and 1 month. The study began with including two cryptocurrencies in the portfolio which was then increased gradually to 10.
It ran 1000 backtests to analyze potential returns. The report outlines,
“It can be observed that the highest performing portfolios all utilized a 1 hour rebalance period. This is even the case when including all outliers. A period of one hour performed the best with a 177% gain over buy and hold.”
The median result indicates that the rebalancing strategy will outperform the holding strategy by 64 percent. Profits from trading crypto currencies in rebalancing strategy would fall under the purview of short term capital gains tax. Shrimpy took this into consideration and concluded that 92 percent of all portfolios that are rebalanced will still manage to outperform holding strategy.
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