Willy Woo is an avid cryptocurrency trader and blogger, whose work is published at Woobull.com and via Twitter at @woonomic.
The ideas in this post first appeared in a tweet published earlier this year.
I think rebalancing a crypto portfolio to reduce exposure to a single crypto asset is the most intuitive yet completely wrong move long term investors make.
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Maybe your portfolio starts off nice and balanced and may look something like this...
Maybe ICO "C" is that coin you bought only because your friend Carl would not leave you alone and you were sick of mopping up his froth from your new tiled floors every time he visited.
A year later, it turns out ICO "C" has Satoshi at the helm, he has solved the scaling problem, integrates a Vitalik Virtual Machine, promises to impeach Trump via a cryptographic proof and will herald a new era of world peace.
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Maybe your portfolio now looks like this...
You're now Carl's new best friend. But you're going to rebalance right? You'd be crazy not to right?
Here's the thing about rebalancing a portfolio. Under modern portfolio theory, you want to regularly rebalance your allocations to manage risk and maximize returns. The math seeks allocations that constantly balances your downside risk while maximizing gains, taking into account every market event that may happen, like say famine, an energy shortage or a madman leading a rouge nation into war. Here we are talking about holding baskets in various industries that have reverse correlations.
For example, you may hold both oil and airlines stocks, in an oil shock the two holdings will balance each other out. Oil goes up, airlines go down. But where does your crypto portfolio fit into this?
At this stage of the game, crypto assets are so nascent, they fall under a single sector called "emerging tech." These are not mature industries. These are unproven technologies that have not yet made it into the public equity markets to take their stake in the global economy.
Here's what emerging tech really looks like in the pre-IPO game that VCs and Angels play in.
It's a power law. Only a few win. And they win big. The rest die.
Rebalancing a high performer is like selling down your Facebook convertible notes to get more MySpace because you think that should reduce your risk. Like unloading some Amazon.com for Pets.com in the dot-com era. Don't rebalance the winners. Keep to your target allocations.