Research: portfolio rebalancing returns

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 article provides a historical performance of portfolios of various digital assets over a 6.5 years period: from January 1, 2018 to July 1, 2024. The research explores different rebalancing approaches (by ratio and by time) and compares them to the performance of an non-rebalanced portfolio and BTC. Each rebalancing transaction incurs a 0.3% commission.

Optimal portfolio (80% BTC, 20% USD): rebalancing by time

The portfolio that was rebalanced by time (every 8,329 hours or 11.5 months) provided a return of 509% and outperformed the portfolio that was not rebalanced by 222%.

Surprisingly, the rebalanced portfolio of 80% BTC and 20% USD outperformed the Bitcoin-only portfolio by 150% (chart below), despite the fact that an 80/20 portfolio is significantly less risky than a BTC-only portfolio.

Research shows that the best frequency is 8,329 hours, however the profitable zone is wide: rebalancing with a frequency of 1,000 to 12,000 hours makes a return of 300% to 500%.

Optimal portfolio (80% BTC, 20% USD): rebalancing by ratio

Rebalancing by ratio returned 387% and outperformed the non-rebalanced portfolio by 99.9% and outperformed the BTC-only portfolio by 28%.

The best threshold is 30%, but almost any threshold above 10% produces high returns.

Conservative portfolio (50% BTC, 50% USD): rebalancing by time

The portfolio that was rebalanced by time (every 9,517 hours or 13 months) provided a return of 463% and outperformed the portfolio that was not rebalanced by 283.8%.

The rebalancing portfolio again showed returns 104.23% higher than the BTC-only portfolio, while the risk of holding 50% BTC and 50% USD is significantly lower than holding 100% BTC.

The best result for a conservative portfolio was shown when rebalancing every 9,517 hours or 13 months. The chart below shows that any rebalancing threshold from 1 to 12,000 hours outperforms an portfolio that was not rebalanced (279% after 6.5 years or 179% return).

Conservative portfolio (50% BTC, 50% USD): rebalancing by ratio

Rebalancing by ratio showed a return of 343% and outperformed the portfolio that did not rebalance by 163.95%. Below you can see a diagram, the red dots on which are the moments of rebalancing.

As for thresholds, the best result was shown by rebalancing with a deviation of 36%, but any threshold outperforms a portfolio that was not rebalanced (179%).

Conclusion