Imagine you have 5 assets in your portfolio, let's say BTC, DOGE, ETH, LTC and XMR.
You can wait them to moon individually before sell it to fiat, but there is a way to make money by HODLing without fiatting them, staying in the cryptosphere.
Principle
First, define what will be the reference currency. Here we are going to use BTC for an easy exemple.
Then get their value if sold to the reference money, and express it in % of the total reference currency (BTC here).
We just have to convert our assets to other assets so we can get a balanced portfolio, we have 5 assets so we want to have 20% for each there.
Exemple:
| Asset | Amount | Value (BTC) | % of total | Value (BTC) | Amount | % of total | |
|---|---|---|---|---|---|---|---|
| BTC | 0.5 | 0.5 | 27.78% | > | 0.36 | 0.36 | 20% |
| DOGE | 588230 | 0.3 | 16.67% | > | 0.36 | 705882 | 20% |
| ETH | 20.46 | 0.7 | 38.89% | > | 0.36 | 10.58 | 20% |
| LTC | 7.14 | 0.1 | 5.56% | > | 0.36 | 25.12 | 20% |
| XMR | 15.57 | 0.2 | 11.11% | > | 0.36 | 28.02 | 20% |
When the price of an asset change, the total value of the asset will change, and its % of total value.
We will re-compute the balance after a bit of time and will perform a rebalancing if one asset has its total value > 30% for exemple.
Price higher = % of total value higher.
But if all prices rise, the % of total value wont move (same if prices fall)
Our portfolio is managed relatively to all other assets in it, that's why we make profit when the gap between assets is high.
If A price drop, B price is stable and C price rise, the % of total value of C will be much higher than if A and B prices are stable.
How do we make profit using this ?
We sell iron near the coast and fish in the mountain.
- Near the coast the iron price is higher and the fish price is lower so we buy fish and sell iron.
- In the mountain the iron price is lower and the fish price is higher so we sell fish and buy iron.
- In plain, iron and fish have their average price between mountain and coast.
Consider these events:
This is the winter season in the mountain, all prices go up +15%. Because iron and fish prices changed, you will sell the same amount of fish and buy the same amount of iron, but the total value of your stock will rise.
A new mine opened in the mountain, iron price go down -10%, but a lot of people moved in and the fish price go up +5%, you will buy more iron and sell more fish there.
Here, this is the same. We buy and sell relatively to a reference, and we make more profit when the gap is higher.
Why it's cool
Let's say we have the situation:
| Asset | Market tendance | % start | % end | % diff | Action to rebalance |
|---|---|---|---|---|---|
| BTC | Strong Bear | 20% | 12% | -8% | Buy |
| DOGE | Soft Bull | 20% | 25% | +5% | Sell |
| ETH | Stable | 20% | 22% | +2% | Sell |
| LTC | Soft Bear | 20% | 17% | -3% | Buy |
| XMR | Soft Bull | 20% | 24% | +4% | Sell |
The lower a market dive, the more we buy, the higher a market rise, the more we sell.
Buy low + sell high = profit
The more assets are market independants (A price fall when B price rise -> dependant), the more volatility it will generate and the more we'll get occasions to make profit.
Having more assets permit as well to boost the overall volatility, but be sure to have enough investment in each asset so the transaction and convertion fees stays negligible compared to the convertion amount.
The advantages
- Easy to program
The main difficulty will be the converter API and wallet management part - When making new invest, just need to add more of one asset, it will be rebalanced
- The rebalance and triggers can be customised easily
For the traders out there, we could get a targetted % of an asset influenced by its StochRSI + Bollbands strategy score in addition to its price for exemple
The drawbacks
- A lot of transactions and conversion will be made, which means a lot of fees
- Relies on a coin converter (Shapeshift, Godex, etc...)
- Need to automate wallets use (Possible security issues)
Conclusion
This technique is very efficient for people that doesn't want to eat charts every day and simply hodl and wait; depending on the total amount invested, the number of assets, the balance % targetted and the trigger balance %, it can output different results. Strategies can be made playing with these settings, and it can show more stable results than when trading (automated or not).