Rebalancing Strategy for Cryptocurrency and A Free Rebalancing Bot on WAARN.finance

UPDATE: 27 Sept 23 After much considerations on the current market outlook, we have decided to changed our business model to better adapt to this uncertain environment. We will no longer operate a trading bot.

Instead will be open-sourcing our trading tools (the non-proprietary ones), and transition into a community-driven platform business. If you are interested (early membership will be free as we build the platform together), please take a look here: https://waarn-finance.gitbook.io/waarns-philosophy/

UPDATE: 16 Nov 22 Due to recent events with FTX, we will move our operations to other exchanges once the dust settles. We apologize for any inconvenience.

Introduction to Rebalance Strategy

Portfolio rebalancing has long been one of the most common investment techniques. The execution is simple. You choose a list of assets, assign them a proportion from your total portfolio. Then, because of how asset prices move independently, the initial proportion will deviate, so you rebalance them back to the initial proportion every once in a while.

What is rebalancing really?

At its core, rebalancing is simply a buy-low sell-high strategy. It will only really shine through if you already have a good idea on how to construct your portfolio. Asset allocation is key. Depending on your goals, generally you’d want to have a portfolio that gives you the maximum return for the lowest possible risk. For example:

1. One famous portfolio construction is the traditional 60/40 allocation of stocks and bonds, based on the efficient frontier hypothesis conceived by Markoviz in his Modern Portfolio Theory.
2. More recently, another famous example is the All Weather Portfolio by a famous hedge fund manager, Ray Dalio, which has the following construction: 30% US stocks, 40% long-term Treasury bonds, 15% intermediate-term Treasury bonds, 7.5% commodities, 7.5% gold.

How does rebalancing work?

As mentioned above, rebalancing simply acts as an automated way to get the allocation to its original intended proportion. There are generally 2 specific rules to this rebalancing.

1. Based on time period: this is the simple act of rebalancing based on a fixed time period, from 1 month to 6 months to 10 months. You might want to do this, if you don’t expect the prices of your asset to move around much, and the less you rebalance, the less transaction cost is incurred.
2. Based on percentage threshold: this is the more complex rule. Basically, you can monitor when one of the assets has deviated from their original proportion by a certain percentage, and once it breaches that threshold, you rebalance. This is especially useful if you have very volatile assets within your portfolio. Cryptocurrency would be a good example here, where it can move +/- 50% in a matter of hours.

There are two types of rebalancing mechanism: 1. periodically, which rebalances asset at a fixed period; 2. by percentage, which rebalances as asset composition moves away from each other until a fixed percentage deviation is reached

Rebalancing in the world of Cryptocurrency investing

While we can walk you through the intricacies of identifying risks and calculating the efficient frontier, we believe cryptocurrency simply doesn’t have enough historical data or fundamental values to form a long-term assumption. Defi platforms can 10x in a matter of days, and some crashes to 0 in a matter of hours. There are some staying values in older coins such as Bitcoin, Ethereum, and even Dogecoin. However, they are driven by mass psychology more than anything else. That is not to say there is no value; it is simply just that the assets are too new, and historical data won’t really help us, unless you are just investing in the big 2, i.e. BTC and ETH.

Instead, in our humble opinion, we will just recommend 3 approaches to constructing a cryptocurrency portfolio:

Hold a percentage in cash, and use rebalancing as a simple buy-low sell-high strategy: Your investment horizon should be 5–10 years. You should choose coins you have high conviction in, and you should be reasonably confident they will not crash to 0 within 5–10 years. You might not become a millionaire overnight this way, but this will ensure you have a cash reserve to fall back during bear cycles, and you are constantly selling the highs in a bull cycle.

Engage in market timing: while you may not be enough of a technical trader to predict which small-cap coin will be 10x at any given time, you could instead just hold the most likely ones. If you then use a threshold rebalancing rule and set it to something like 30%, you will likely capture most of these gains. The only difficult part of this is that you should be able to market-time the larger bull / bear cycle to an extent. As you may expect, you should implement this during the early bull cycle or during the late bear cycle where the market has ranged for quite some time already. You should also have high convictions in all of the coins you believe will shoot up in value.

Buy & Hold: if cryptocurrency is just a part of your overall portfolio, and you want a sort of set-and-forget and buy-and-hold strategy, we have done much of the research based on 5 years of data for you. Based on the efficient frontier hypothesis, you should simply hold 75% in BTC, and 25% in ETH. You will probably not beat other cryptocurrency traders, but that’s ok; if asset allocation is your goal, cryptocurrency will just serve as a counter-weight to a larger portfolio of many assets for you; e.g., you may have 5% cryptocurrency, 55% stocks, and 60% bonds.

In all of the above recommendations, we believe you should use a mix of rebalancing rules — i.e., use both rebalance by period and rebalance by percentage threshold. If you hold a lot of small-caps coins, you should use a short time frame and higher threshold; alternatively, if you hold only larger-caps coins, you should use a longer time frame and lower threshold.

Ok, so if you’ve got to this point, then perhaps you are interested in constructing a rebalancing portfolio for your cryptocurrency holdings. Here is the good news, at **WAARN.finance**, we offer an unlimited number of rebalancing bots completely free of charge on FTX. We generally do this as an advertising campaign for you to take advantage of, so that you can see our other premium bots which utilize a more complex strategy suitable for those looking for safer returns. So consider it your chance to use these bots for free even if you don’t use our other paid bots.

Configurations

There are really just 3 things you need to do to set up your rebalance bot:

1. Choose the assets you want and the proportion: For this, you should choose the assets you have the highest conviction in. For example, you might be conservative (well, you aren’t conservative if you are investing in cryptocurrency, but I think you get it) — then you might choose a combination of BTC (25%) — ETH (25%) — DOGE (25%) — USD (25%). At every rebalance, this ratio and coins will then be kept.
2. Choose the rebalance period: hopefully, we’ve done a good job explaining this above, but it’s simply how often you want to rebalance. It could be everyday, every 7 days, or every month.
3. Choose the percentage threshold: sometimes, prices do not move much during a set period, so you might choose to only use the percentage threshold. Essentially, with a percentage threshold, the rebalance would only occur after the proportion of your original asset composition deviates more than a certain percentage — and that percentage is the threshold. For our example, let’s say you choose 5%, then if BTC moves down to (20%), that will automatically trigger the rebalancing mechanism.

Making your life easier

There are other bots beside rebalance; we encourage you to take a look at our premium bots which utilize a more complex strategy more suitable for those looking for safer returns. If you do decide to use our paid bots, we will only bill you if you have made money with it — this means no fixed monthly subscription fee, and if the bots don’t make you money, we won’t get anything. What’s better, we take a cut from the yearly returns (billed monthly but only when you get all-time-high profits), unlike most profit-sharing crypto bots out there that take a cut every MONTH you make a profit, even after a string of losses — which is ridiculous.

To make it clear, if the profit-share is 30%, we take 30% of your 12-months return; others take 30% of your 1-month return. We’d like to think ours is a better deal than most other bots out there!

Thank you for reading.

Quantitative Analyst Team at WAARN Finance