Rebalance vs. HODL: A Technical Analysis
Tags: Blockchain, Cryptocurrency, Bitcoin, Investing, Investment

This demonstrates the median percent for which rebalancing at varying intervals outperformed HODL for a portfolio which contains ten assets.

We observe from the 10 asset portfolio results that the trends discussed in the 2, 4, 6, and 8 asset portfolios continue. This includes the larger spread for shorter rebalance periods and a higher average performance for shorter rebalance periods. We can also see from these results that only 10 portfolios out of 4,000 performed worse than HODL if they had rebalanced even 1 time each month. This means if you randomly selected 10 assets and rebalanced at least once a month, you would have had a 99.75% chance of outperforming buy and hold over the last year. This is truly incredible. The median performance for a portfolio with 10 assets and a rebalance period of 1 hour was 234% BETTER than HODL.

Complete Comparison

Now that we have all of the data, we can simplify the results into a 4 x 5 grid that illustrates the performance of each portfolio and rebalance period. Since the upper bound on most graphs is much higher than the lower bound, we will calculate the median. This also means that 50% of the portfolios were above and 50% of the portfolios were below this value. So, if when creating your portfolio, you randomly selected assets without performing any research, you would have a 50% chance of performing better than the listed value.

Also, the listed value is the percent gain over buy and hold. So, a value of 10% would mean rebalancing performed 10% BETTER than HODL.

The median performance demonstrates that the higher the rebalance period with the higher number of assets presents the highest gains for rebalancing. Each value represents a percent increase OVER buy and hold. That means a value of 18 means the median of that group performed 18 percent BETTER than buy and hold. This demonstrates, even the absolute worst case performs better than by and hold, even after considering taxes.

We can draw two major conclusions from this grid. First, we have obvious correlations between the rebalance period and the performance. As the rebalance period becomes shorter, the performance of the portfolio increases. A second correlation we can see is between the number of assets and performance. As the number of assets in the portfolio increases, there is an increase in performance. Therefore, the best performing portfolios were those that have both a short rebalance period and a large number of assets.

To round out the complete comparison, we will combine every backtest to create an overall comparison.

Combining all of the backtests over all portfolios and rebalancing periods produces a complete picture comparing rebalancing and HODL. We observe a median complete performance of 64%. This means, if you were to randomly select a portfolio size between 2 and 10, randomly select a rebalance period between 1 hour and 1 month, and randomly select the assets in your portfolio, you would have a 50% chance of performing 64% better than buy and hold if the only difference was rebalancing.

The results show a median performance increase of 64% over all portfolio sizes, rebalance periods, and coin selections.

Tax Implications (US Specific)

According to the latest news, crypto trades are taxed as short-term capital gains at the rate of your current income bracket if the assets were held for less than a year. Long-term capital gains will be taxed at a discount when assets are held for more than a year. Since there are a lot of misunderstandings revolving around taxes, I will try to break down some of the implications here. All calculations will be based on an individual income of $120,000.

An individual making $120,000 is well within the top 10% of incomes in the US. They are also in a federal income tax bracket of 24%. This means any short-term capital gains will be taxed at 24%, which is equal to the personal income tax. That same individual making $120,000 will pay long-term capital gains at 15%.

We can see quickly that there is a 9% difference in taxes between long and short term capital gains. We can compare this difference to the 64% boost in returns observed through rebalancing. What we see is that rebalancing significantly outperforms HODL even after factoring in tax implications of frequent trading. In fact, 92% of all portfolios which rebalanced over the past year beat HODL, after taxes.

That’s not the entire story, however. Rebalancing only trades a portion of the portfolio at any given time. This means part of a portfolio which uses rebalancing would not have been traded by the end of one year. These untouched portions can be taxed as long-term capital gains, reducing the overall taxes that are incurred as a result of rebalancing. The amount can be quantified by examining the volatility difference between all cryptocurrencies over the last several years. This would give us an idea of what percentage of a portfolio would typically be considered long-term capital gains. Since a proper simulation would require careful design, we will save this analysis for another post.

Conclusions

There are two major relations we can draw from this study. The first relation is that increasing the number of assets increased the performance of a portfolio. The second relation is that decreasing the rebalance period (increasing rebalance frequency) increased the performance of a portfolio. Therefore, the ideal portfolio was rebalanced frequently and also contain numerous assets.

It should be remembered that all of these portfolios were selected on a completely random basis. There was no research or elimination process when determining which assets should be incorporated into the portfolios. There is a significant amount of improvement potential for an individual who actively researches and selects promising assets.

Rebalancing beat HODL by a median of 64%. After taxes, this represented 92% of all possible cryptocurrency portfolios.

Rebalancing with Shrimpy

Now that we have determined that rebalancing was objectively better than HODLing, we need a way to capitalize on this knowledge. This is where the Shrimpy application can help. Shrimpy is a completely free service that automatically rebalances your portfolio. However, that’s not all it does. It is the easiest way to manage your portfolio. Quickly select assets, instantly allocate a portfolio, and monitor your investment over time. It’s the less stress, more gains solution to portfolio management.

Sign up today by clicking here.

If you still aren’t sure, try out the demo to see everything we have to offer!

Additional Reading

Crypto Users who Diversify Perform Better [New Research]

Portfolio Rebalancing for Cryptocurrency

The Crypto Portfolio Rebalancing Backtest Tool

The Whitepaper for Portfolio Rebalancing in Crypto

Common Rebalance Scenarios in Crypto

10 Tips for Creating a Killer Cryptocurrency Portfolio

How to Avoid Scams with these 24 Cryptocurrency Red Flags

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Leave a comment to let us know your experiences with rebalancing!

The Shrimpy Team