Crypto Portfolio Auto Rebalancing Tools
Trading cryptocurrency and making a profit while doing so is a few times a game of chance but in many other times, relies on a well-executed trading strategy. A good strategy is built over time with a good understanding of the market, which obviously happens over time -- the more you trade the more experience you get. You ultimately learn the common mistakes to avoid when investing and which areas to capitalize on in order to make more profits in the future. Having learned more than the basics of the workings of the crypto markets, you might want to have several cryptocurrencies in your trading portfolio. But what is a perfect crypto portfolio? How do you maintain one?
To begin with, investing in a portfolio is by default a wise investment strategy because you want to spread your risks. The mix of these is a carefully thought-out plan based on the risk profile. Investing in different types of cryptocurrencies may help to reduce risk because you spread the capital around different assets, and you can also expose an investor to more opportunity of generating profits from the investment. It may also help to avert huge losses.
For instance, if the price of one coin in a portfolio falls, the resulting loss may be covered by another whose price is going up. Since investing in some coins is riskier than others, the amount invested assigned to each may be different on that basis. While all crypto investments carry some risks, the amount of risk is also different; there are low risk, medium risk, and high-risk coins. The amount of capital is to be divided in percentages depending on these risk categorization, the lowest amount being awarded to most risky. You might also award a fixed amount to each of your coins in a portfolio.
There are many ways of determining which cryptocurrencies and altcoins to include in a portfolio. You might want to include the top ten gainers in terms of price changes in a defined period, top ten losers based on price changes, top ten based on market cap, the bottom ten based on market cap, or better still, you might want to select coins based on their use cases (payment coins, privacy coins, smart contract platforms and utility coins) or due to their popularity or duration on the market. Besides, an investment strategy requires deciding the duration of holding the cryptocurrency (Ethereum and Bitcoin being dominant examples here).
You might also reward allocation percentages based on risk tolerance, time horizon, liquidity needs, goals, and more.
Some of the common portfolio trends include a 50-50 split between Ethereum and Bitcoin as the two "blue-chip" coins. Bitcoin and Ethereum can be used as a hedge against sudden and unforeseen (larger) price dips on other (more) volatile crypto assets in a portfolio, for instance in a 3-way split strategy where one holds the top three coins by market capitalization.
Top 5 is a more aggressive approach where the trader holds top-five coins designating 201% or other percentages to each. You can also consider splitting your crypto portfolio among a mixture of “Blue-chip” coins vs small-cap coins and ICOs.
Portfolio Re-balancing as a Strategy
While a portfolio is a combination of many and different crypto assets, it is not a simple as said. You need a way to constantly find which coins to include in your portfolio, even as the market keeps changing at high frequency over time or within a short time. Rebalancing will be a very useful word and technique, which is what this article focuses on.
Based on their analyses of exchange data starting from May 4, 2017, and ending on May 3, 2018, Shrimpy investigated which one, between HODLing and re-balancing, would render most benefits for cryptocurrency investors. They found that rebalancing performed much better when done in shorter cycles and when the crypto portfolio has many assets (10 assets compared to downwards to 2 assets), as compared to holding in similar conditions.
Generally, rebalancing a portfolio both at a frequency of 1 day down to 1 hour performed much better than HODLING sometimes by more than 50%. That presents a very strong case for portfolio rebalancing compared to HODLing as a strategy although it doesn't mean things could remain or have remained the same. There are many factors to consider when using rebalancing as a crypto buying strategy; the most obvious thing will be to decide what total amount you want to invest overall and in what number of cryptocurrencies.
Re-balancing also allows for the closing of the gap between the assets, which may even be done for specified gains.
The first variable to consider in re-balancing a portfolio is selecting the amount of time between each re-balance: it can be a period of 1 hour, 1 day, 1 week or one month. There are many other variables to keep in mind including portfolio size, asset selection or the type of asset. In addition to all of these, users can also consider trade data, as in back-testing, where trade data from exchanges is utilized to simulate how a strategy can be performed over a given amount of time and the preferences adjusted.
The other is to base a strategy on the threshold where, for instance, priorities may be adjusted when a portfolio reaches a 20% deviation from its target allocations.
1. Periodic re-balancing
This strategy relies on time and is perhaps the simplest of all because re-balancing is done after a given period. The amount set to re-balance crypto portfolio is usually shorter than for other asset classes because the high volatility means rapid fluctuations of prices. Based on an analysis done by Shrimpy of hundreds of thousands of different portfolios over the course of a year, the best period of performance of a portfolio was between 1 hour and 1 day, which is also known as high-frequency re-balancing.
The median performance was highest at 22.55% at a 1 hour re-balance period, then dropping to below 10% at 15 hours-re-balancing periods and remaining nearly constant at that level. That means the best re-balancing time based on their analysis is between 1 and 12 hours although even up to 24 hours works as well. Shorter re-balance periods perform better when more diverse portfolios are employed according to the analysis.
This shorter re-balancing also favors lower trading fees according to their earlier analyses. Additionally, shorter re-balancing periods are also perfect or optimal for exchanges that have higher liquidity.
As discussed previously, high-frequent re-balancing works perfect and is optimal when a higher number of assets are included in the portfolio. Increasing the number of assets from 10 to 2 increased portfolio value by 68% after 1 year. This applies when re-balancing is done daily or after 24-hours for a whole year. By re-balancing the portfolio every single hour, the portfolio value increased by 127% after 1 year. Based on all available data, re-balancing performed better than a Hodl strategy by more than $25.5k.
2. Threshold re-balancing
Threshold re-balancing relies on the user-set threshold deviations from target allocations where the portfolio owner or trader or investor first sets a defined percentage of capital to award to each of the crypto assets in the portfolio and then sets the deviation percentage as the threshold in addition to the target allocation percentage. Re-balancing happens when this threshold is violated.
For instance, you might allocate Bitcoin, Litecoin, BCH, and ETC 25% each in your portfolio. As the market plays over time, the allocations might deviate from these target allocations. The user will set a max threshold beyond which a re-balance should be triggered. Trades are then carried out to achieve the desired allocation when the deviation equals to the maximum threshold.
3. Periodic Invest and Dollar cost averaging
This is a strategy in which you set amount of time needed to automatically buy specified crypto that is then added to the portfolio. It can be new crypto for your portfolio or to simply add coins to your existing ones in the portfolio.
Dollar cost averaging can be used as a strategy to invest in cryptocurrencies where a regular investment of the same dollar amount is repeatedly made in order to accumulate a strong position in the market. This strategy is carried out by experienced investors who leverage discipline and long-term planning to hedge against major market movements no matter where the price moves.
Tools for doing rebalancing
Cryptocurrency portfolio re-balancers are, in most cases, the tools utilized in the automated re-balancing of a portfolio because manual re-balancing can take lots of time. Like we have already seen, if re-balancing is desirable, a high frequency is as well, for optimal results.
Shrimpy has now managed a total trading volume of over 500 million and per day total trade of over 120 k. The tool allows API-connecting with other platforms to allow users of the latter to connect to major exchanges such as Binance, Bittrex, KuCoin, Kraken, Coinbase Pro, and more. For those platform needing to allow their customers to set up a strategy for trading crypto, to trade cryptocurrency automatically such as with trading bots right from their crypto portfolio tools, Shrimpy API is a good consideration.
With it, users can backtest their strategies against a 5-years detailed historical data which is collected directly from each individual cryptocurrency exchanges connecting to Shrimpy. In these back-tests, each trade is simulated precisely because the tool extracts bid-ask market data.
Customers can also do periodic and threshold re-balancing strategies on Shrimpy to re-balance their portfolio when needful, in order to keep them aligned with their target allocations and goals. It also supports the auto-rebalancing of portfolios. For instance, the tool can help to automatically buy or sell crypto as wished in the strategy, in order to balance the user's portfolio. Users can also research to learn strategies to manage their digital assets and portfolios. In addition to managing their portfolio, users are able to track the performance of their crypto portfolio across all accounts on hardware or cold storage solutions, in one place.
With its built-in indexing tool, Shrimp can also be utilized by a customer who wants to build their own crypto index fund strategy.
The tool also provides social tools where users can connect to each other to buy or learn or buy or copy crypto-trading strategies or to trade with their own devised strategies. The social trading features allows for users to share trading strategies with other users in a diverse community or better still, to follow trading strategies in their diverse community.
It can also provide users with market insights by them accessing aggregated portfolio data from other users of Shrimpy. Their official partners include KuCoin, CoinStats, Totle, CoinAPI.io, CryptoTrader.Tax, Cointracker among others.
To do thresholding in Shrimpy, the "Re-balance Period" feature under the "Portfolio" tab is used. Navigate to "Advanced Settings" and find threshold re-balancing. You can then set variety of parameters such as the absolute deviation for each of the asset as well as the maximum frequency to prevent excessive trades from taking place, that may result from a rapidly moving market. The period is 15 minutes which means if the portfolio re-balances it cannot re-balance again for at least 15 minutes.
Once you are logged in, Shrimpy gives you ability to hook several crypto exchanges including Binance, Bittrex, Coinbase Pro, Kucoin, Poloniex, Kraken, Huobi, Gemini, Bibox, Bitmart, & HitBTC. In addition to general features of adding portfolio and re-balancing, Shrimpy also allows for social following and cold storage.
Shrimpy has different process of creating APIs for each of the exchanges you want to connect your account as a customer. There also are different wait times to for the API keys to be active depending on the exchange. For instance, with Coinbase Pro, the waiting period is 48 hours. Another issue is that the exchanges minimum trade requirements may be considered when the wallet balance is low. Once you connect the APIs, you then use Portfolio tab to select and pick allocations for each of the selected coins, then set for automatic rebalancing and then save the protfolio.
From the Social tab, you might also look up other people's portfolios that have been made public, and there is also an option of making yours public for others to see. You can also premium-subscribe to the Leaderboard tab which shows other people's asset allocations and the performance of those portfolios so you can also follow them or share yours to be followed by other users.
You can also leverage Shrimpy to provide data regarding most popular coins in all portfolios, the rate of return, popular rebalance times, and more data.
Before you can go live with your crypto trading strategy, the Backtest tab allows you to backtest the set up strategy relying on data so you can see how it will perform in real life trading. You can pick a basket after the other to perform such backtests. Backtesting feature requires premium subscription.
3Commas crypto trading terminal allows its users to automate crypto trading free of charge (available for Junior plan and only only on Huobi Global and if the deposit is less t less than $750), test trading before running a strategy, and to automate rebalancing as well. With only $35/month, you can trade without limits, use simple bots and personal signals TradingView. With the free account, you can gain full access to all features including 4 types of trading bots, Marketplace, SmartTrade, portfolio autobalancing and more.
With SmartTrade, a user is able to open trades and plan for both Stop Loss and Take Profit, sell existing position at target price, se long/short bots, use bots with QFL method and use composite bots. Portfolio management feature is available from $75/month alongside use of personal signals at TradingView as well as Simple, composite and Bitmex.
It supports Binance, Bittrex, Bitfinex, KuCoin, Huobi, HitBTC, CEX, YoBit and Poloniex crypto exchanges.
With 3commas, you can even follow and copy portfolio from a successful investor and you can then set this to re-balancing as per your strategies.
MultiToken is an ERC-20 token whose main function is storing and re-balancing tokens, with the added benefit of allowing for deposits can be distributed to a multitude of tokens in any proportion and put into a MultiToken smart contract. Thus the re-balancing is done via smart contracts.
With MultiToken, you can either use auto re-balancing although other options such as manual re-balancing performed by fund managers, and multitokens operated by a DAO system which decides when to re-balance.
Multitoken is a decentralized tool which is looking into making rebalancing more practical by combining assets into one multitoken and thus making it practical and safe to store the cryptocurrency in one place, organize work with assets and in calculating them. The investor can still check the ratio of assets because they are shown in percentage.
The tokens so held are also able to be freely moved and traded. Once the user sets their priorities, the smart contract will remember the original proportions of assets, and when the price of a token changes, the specified ratio in the smart contract is violated, triggering an interest for arbitrage. The smart contract then allows the arbitrager to exchange cheaper tokens for more expensive ones, and thereby restoring the original proportions.
ITF Portfolios by Intelligent Trading is a cross-exchange portfolio management and automated re-balancing tool that can help users to manage and rebalance portfolio based on their custom strategies and to perform backtests on each of the strategies before live trading. With this tool, users can pick and choose custom allocations of each of the portfolio assets.
The tool is being developed but targets security tokens.
The team just released a paid version of the software which will cost $20/month, payable in ITT or ETH. A user will be able to try it for free for 7 days. The rebalancing is done automatically. The ITF’s Telegram Bot, which has over 4500+ users allows users to access alerts and signals that will help them filter noise in the crypto markets and to manage their portfolio based on market information.
How can you know risk?
Barely any tool can provide all and exact information about risk to trader when trading a given cryptocurrency. The risk may be coin-specific or may be due to market conditions or other external factors. Nevertheless, there are some ways you might use to estimate those risks, compare among cryptocurrencies and probably take a decision on which crypto to invest and which ones to remove from portfolio or use the information to spice up your trading strategy.
In most cases, portfolio tracking tools allow you to track portfolio percentage gains and loses in price which can give crucial information because price changes may be taken as reflecting all risks of that particular asset whether market-based, coin-specific or otherwise.
The CryptoCompare Portfolio Risk Analysis tool, for instance, helps one to gain some basic information about risk of a given cryptocurrency they want to hold in their portfolio and may be trade in future. The risk analysis tool analyzes a few factors that will help an investor do so.
To use it, head over to "Portfolio" at CryptoCompare website after login and then click on Risk Analysis. It reveals four different charts, namely Wallet/Exchange exposure, Crypto exposure, Liquidity Exposure (Time Until Liquidation), and Volatility exposure.
The crypto exposure chart helps you to track your portfolio composition showing which coins one is most exposed (kind of risk factor for each) and how price affects your portfolio value the most. It can help to shuffle priorities and invest coins which present least risk or those that have lowest risk profile as per the portfolio diversification theory.
The Liquid exposure (time until liquidation) chart helps to know when you are at a risk of not finding counterparty if you wanted to close a position or may be that you will have to wait longer. It measures the time until liquidation calculated based on the last thirty days average volume of a coin against the base currency of your portfolio, and the quantity of that coin you currently hold. It does not, however, measure liquidation time basing on current market buy-sell orders and won't reflect market conditions but only estimates your portfolio's liquidity risk based on past transaction volumes.
The volatility exposure chart inside of the same tool provides information about price swings of your portfolio; the bigger the movements expected in a portfolio value, the higher the volatility. Volatility can be taken to be a risk in crypto trading, and this tool calculates volatility based on 30-days price changes and then annualizes the result.
Cryproprofiler is another tool we previously covered, and which helps investors or traders to profile cryptocurrencies based on risk factors, and which may be helpful to use. It makes use of in-depth metrics including using volatility, valuation, social media sentiments and mentions etc. It also analyzes and compares crypto based on a user's risk profile as expressed in their profiles.
Outside of portfolio tracking tools, there are many other ways through which you can manage risk of a cryptocurrency portfolio.