Research: portfolio rebalancing ROI

Rebalancing a cryptocurrency portfolio is a strategy that helps maintain a consistent risk-return profile by periodically adjusting asset allocations. This involves selling overperforming assets and purchasing underperforming ones, thereby mitigating the risks of overexposure to any single asset. The primary benefit of rebalancing lies in the principle of mean reversion, where assets that have risen too much are sold off, and those that have fallen are bought, capitalizing on the potential for market correction. This approach helps keep the portfolio aligned with its long-term goals, even in a volatile market.

By regularly rebalancing, investors can reduce risk through diversification, as it prevents overconcentration in any one cryptocurrency, which could lead to significant losses in case of a downturn. Additionally, rebalancing encourages disciplined, emotion-free decision-making by adhering to a predefined strategy, rather than reacting to market fluctuations. This systematic approach can enhance long-term portfolio performance by managing volatility and ensuring that the portfolio remains aligned with the investor's risk tolerance and objectives.

This research simulates the ROI of different digital asset portfolios using different rebalancing thresholds, based on historical data. The research compares these returns to the ROI of a non-rebalanced portfolio of the same assets, BTC performance, and more. For clarity, the most effective rebalancing thresholds were used in each case, but research shows that the range of effective thresholds is very wide. Each rebalancing transaction incurs a 0.3% commission.

Objectives

• Determine which strategy brings higher ROI: a rebalanced portfolio, a non-rebalanced portfolio, or a bet on a single asset.
• Identify the ROI of different types of portfolios: aggressive, medium-risk and low-risk.
• Identify which rebalancing thresholds show the highest ROI for each portfolio type.
• Discover which long-term BTC-focused strategy shows higher ROI: hold only BTC or create a portfolio of BTC and USD and rebalance it regularly.
• Calculate the ROI of a rebalancing portfolio if one of the assets falls in market value by more than 50%.

Portfolio examples

Rebalancing by time

Portfolio of BTC, ETH, SOL, BNB and DOGE (20% each) rebalanced by time-based threshold over 4 years (from August 2020 to July 2024).

The most effective time-based threshold provided a return of 9433% in four years. It outperformed a non-rebalanced portfolio (2422% ROI) of the same assets by 7010%.

The rebalanced portfolio outperformed BTC (531% ROI) by 9001%.

Moreover, the rebalanced portfolio outperformed each of the assets individually, even though its risk was diversified. Thus, the rebalanced portfolio outperformed ETH by 8661%, SOL by 4382%, BNB by 6953%, and DOGE by 6053%.

The best result was shown by the rebalancing threshold of 1442 hours (rebalancing every two months). However, as you can see in the chart below, any time-based threshold outperformed a non-rebalanced portfolio (2422% ROI). Moreover, there is a large zone of thresholds from 100 to 5000 hours, the results of which exceed the return of each of the assets separately.

Rebalancing by ratio

Portfolio of BTC, ETH, SOL, BNB and DOGE (20% each) rebalanced by ratio threshold over 4 years (from August 2020 to July 2024).

The most effective ratio-based threshold provided a return of 11262% in four years. It outperformed a non-rebalanced portfolio of the same assets (2422% ROI) by 8840% in the same period.

This rebalanced portfolio outperformed BTC (431% ROI) by 10832%.

Just like the time-based thresholds, the ratio-based rebalanced portfolio has outperformed each of the assets it consists of: ETH by 10491%, SOL by 6211%, BNB by 8782%, and DOGE by 7883%.

The best result was shown by the rebalancing threshold of 84%. As in the case of time-based thresholds, any rebalancing by ratio outperforms a non-rebalanced portfolio (2422% ROI).

Conclusion

• Each rebalanced portfolio with the most efficient rebalance threshold significantly outperformed a non-rebalanced portfolio of the same assets. In many cases, almost any rebalancing threshold would produce a higher ROI than a non-rebalanced portfolio - the zone of profitable thresholds is very wide.
• A rebalanced portfolio with one asset that has dramatically lost market value still shows a 3x higher ROI than a non-rebalanced portfolio of the same assets.
• The aggressive portfolio that was rebalanced over four years using the most effective ratio-based threshold outperformed a non-rebalanced portfolio (2422% ROI) by 8840% and produced an ROI of 11262%.
• The low-risk portfolio (50% BTC and 50% USD) that was rebalanced over 6.5 years using the most effective time-based threshold outperformed a BTC-only portfolio by 104%, while having 50% lower risk.
• The aggressive portfolio of multiple different assets not only significantly diversified risk compared to investing all assets in one token, but also outperformed each asset individually over the long term.