Some of the key takeaways from this article
- For Hodlers, it doesn’t make much sense to diversify into top 10 coins. What works is diversification by use case.
- Always hold stable-coins as a small percentage of your portfolio and re-balance periodically.
- Use bots such as Botsfolio to automate portfolio creation during price dips.
Most Hodlers make these common mistakes
On March 13 earlier this year, BTC dipped from $8000 to $3800 is less than 24 hours over fears of Corona led recession. Just a month later, it rose back to over 8000, currently trading close to 10,000. This roller coaster ride can be especially scary if a large part of your investments are in cryptocurrencies. These times can be hard for an average investor who might sell at the bottom when you should be buying. It hurts the overall portfolio. Lets look at a few things that’s probably hurting your crypto portfolio and few things you can do to improve its performance.
1. Diversifying your portfolio by holding top 20 coins
Most cryptocurrencies have high correlations and most of them are strongly coupled with the price of BTC. Hence just coin diversification — buying top 5 or 10 cryptos doesn't help. Diversification works well with equities or other asset classes where the assets are uncoupled. With cryptocurrencies the correlations are usually upwards of 0.8 with most leading currencies, which means diversification is a illusion. You can check these here . You can read more about the research on the topic here.
What this means is it doesn’t matter if you hold BTC alone or some mix of top 10 cryptocurrencies , you portfolio will behave more or less the same. In fact you are increasing risk by adding too many coins and investing in risky coins with smaller cap than BTC. I have back-tested various portfolios and more than often just holding BTC for a long enough period gives better returns than holding say top 10 coins.
So how can you diversify — The answer lies in diversifying based on use cases for blockchain. While correlation will still be high, the underlying factors for different use cases will be as different as they get (think smart contracts vs privacy coins vs prediction markets).
2. Not owing Stablecoins as a part of your portfolio
Most portfolio managers keep a portion of their assets liquid (around 5 to 10%) This is done so that you can buy more in case of an unexpected dip. This helps keeps the portfolio balanced without missing out on maximum possible gains during a upswing. It is important to mention here that most BTC upswings happen over a period of just a few days not months when BTC tends to rise multiple times in value. So while its a good idea to keep maybe 10% of your portfolio liquid, 90% should still be invested to catch those spectacular gains.
A simple method that works is to maintain a small percentage of your portfolio in stablecoins and re-balance periodically to keep the percentages consistent during uptrends and downtrends. This makes you sell high and buy low, automatically.
Lets imagine you have a simple bot for doing this periodically. If BTC falls below your initial entry price, the bot will automatically re balance your portfolio to buy some more bitcoin making sure you are buying low. If bitcoin rises to increase its weight in the portfolio, the bot will sell some BTC to increase Tether selling high when price is higher than your entry level and capturing profits. Its a win-win!
You cannot time the market (but automated trading can help)
Imagine if you sold 1 BTC at 8K, bought back two at 4K, making your net worth now around 20K. Yes, I know its possible only in hindsight as no one can time the market, not even great traders. In fact let to themselves, most people would do the opposite, sell when the market is crashing and buy at ATHs. And so for most people, its just best to HODL over a long period of time.
Now imagine if a trading bot could sell half of your BTC holding in Feb earlier as Global indexes started to plummet and bought back when the BTC had bottomed out at 4K and had started to rise back. You would still have grown your portfolio by 50%. Making these trades looks like a no-brainer but it requires you to follow the markets daily and have strong emotional control, which most people lack the time and energy for. This is why a bot can help. A simple bot with long strategy could sell part of your holdings when prices were high and buy back when the asset is oversold but trend has reversed to increase your overall holding. However this strategy would only make trades maybe a few times every year, making sure you don't over-trade and buy and sell at every fluctuation.
Pro Traders: Using high correlation to your advantage
So you might be thinking how can you profit by holding different cryptocurrencies that are highly correlated? The trick is to use the BTC correlation to your advantage.
A typical fall in BTC price is followed by fall in all coins often more than fall in bitcoin. Look at the image below from Feb 2018 as an example.
Lets use our simple bot again to see what would be the most effective trading strategy for this common scenario
- When bitcoin is falling, the bot can sell altcoins for BTC. This works because we can expect alt-coins to follow BTC soon and fall even farther than bitcoin itself
- Once you have bought bitcoin at a lower price, the bot can sell that to receive Tether. This will ensure that you are capturing gains from alt coins.
- Once BTC stops falling, the bot can buy back BTC at a lower price increasing the overall position.
- Finally when alt-coins have fallen more than BTC, the bot can buy cheap altcoins with the new Bitcoin increasing altcoins as well.
While this strategy works well, it needs immaculate timing for it to execute as these predictable sequence of events happens over a matter of hours if not minutes. That is where the bot comes in. A bot trained to use this strategy will be able to execute this move on almost all sudden dips in bitcoin price and play out this execution well.
Why do this manually when you could automate this?
I know what you are thinking - This imaginary bot stuff sounds great but who has the skills to code those technical strategies into a bot. That exactly the reason we have been working hard to make this bot real and usable for most people, test it out and let others use it to grow their portfolios. While we strongly share our core values with HOLDers, what if you can use these few simple tricks to beat the market giving your portfolio an extra edge. Meet Value Investing Strategy from Botsfolio. Its simple to use, requires no configurations and it does all that I have explained in this article and more. We hope you would find it useful. Please feel free to give us any feedback.