The best passive crypto investor strategy (Part 2)
In the previous article, I argued that a 50% BTC and 50% cash portfolio with a 20% threshold rebalancing is better than allocating 100% to BTC.
An improvement to that strategy would be
allocating 50% of crypto capital into an index that does not contain BTC (such as Bitwise20 or Bitwise70). On average, such a portfolio would perform in line with a 100% BTC one, but it is more likely to significantly outperform than significantly underperform the 100% BTC approach.
Hereby I will be using the Shrimpy backtesting tool to provide further insight into potentials strategies. This article is just a starting point for any further research. It has not followed a rigorous methodology. I just tried to run a few example backtests.
As we previously discussed, holding Bitcoin is not the best strategy in the bear market. Between 20 December 2017 and 20 April 2020, holding Bitcoin would have resulted in a loss of 58%.
A portfolio consisting of 50% BTC and 50% USD with a 20% threshold rebalancing performed much better over the same timeframe, as expected. It delivered a -19.26% returns vs. -29.04% without rebalancing.
Adding altcoins to the mix has not improved the returns. An portfolio consisting of 50% USDT and 50% equally-weighted basket of top 10 coins by market cap with 2% rebalancing has worsened the returns to -21.35%.
Giving more weight to the crypto portfolio share did not improve returns either. An equally-weighted portfolio consisting of BTC, ETH, USDT, ZRX, and EOS with 5% rebalancing has returned only -25.95%.
The altcoin-heavy portfolio is highly dependent on catching the few ones that end up outperforming Bitcoin. In our dataset they are represented by BNB and LINK. A portfolio consisting of 50% USDT and 50% a basket of altcoins has returned 77.07% over the same period.
Excluding BNB and reducing the USDT amount delivers much lower returns, although still higher than the 50% BTC and 50% USDT portfolio at +42.91%.
Excluding both BNB and LINK, results in performance of -32.19%, which is worse than the reference portfolio.
Conclusion — the best Shrimpy strategy is to have an equally-weighted portfolio with over 10 assets to maximise the chances of picking one of the assets that outperforms Bitcoin.
Rebalancing impact during a volatile market
As can be seen in the two charts below, threshold rebalancing does outperform a simple buy-and-hold strategy with as little as 20% of portfolio allocated to cash. Although it outperforms by 30% the HODL portfolio, its performance still lacks some more active-involvement trading strategies.
