A bulletproof crypto-investment strategy

By ScreenTag | The Other Side | 28 Jul 2020

This is quite an old market investment strategy, that is known for years. It only needed to adapt for the crypto markets, to make it more relative to Publish0x readers. Although, as any investment strategy, does not guarantee positive returns - at least not in the short term - it offers manageable losses. The strategy pre-supposes that the market will be bullish in the long term - so it should be used for porfolios you will be keeping for at least 5 years.

Bear in mind

If you are considerate about security of your investment wallet(s) held with exchanges, this strategy is not for you. While you won't be making transactions frequently, you will need to be making some from time to time, and you don't want transaction fees adding up to your costs.

First things first: cash or stablecoins

You should hold at least 20% of your portfolio in cash or stablecoins, on set up. This will allow you to be making adjustments to your holdings when the market is down, without having to close a position and writing-off your losses. It also offers some stability to the overall valuation - with the downside to be that your portfolio value increasing in value in lower pace.

Select your holdings wisely

You don't want to be locked in a low liquidity holding that you won't be able to buy or sell easily. The good thing is that shitcoins are not listed in mainstream exchanges, so you won't need to worry about that. However, some altcoins might have purposes that are highly optimistic, and may never take-off. Do your research, and choose wisely. The obvious choice would be some or all of the major coins/tokens, but you can go less mainstream.

How many assets?

Counting in stablecoins, the minimum is obviously 2. Now regarding maximum, although there is no definitive number, since you will be holding around 20% of your portfolio in stablecoins, the strategy would work best if you hold 4, 5 or 8 different coins/tokens. This would make it easier for you to take action whenever needed, without having to do any pricing calculations.

What should be the portfolio value at set up?

While there is no definitive rule, the portfolio value should be a multiple of 50. For easier calculations, you would better select values of $50, or $100, or $500, or $1,000 etc.

Investment allocation on set-up

If you have decided to run your portfolio with 4 coins/tokens, you will have to bear in mind that you won't be able to add more later on, unless you decide to add more funds in it. Also bear in mind, that if markets go bearish for long, you will still have to set funds aside to support your holdings. If you have decided to run your portfolio with 8 coins/tokens, but you cannot decide at set up which, the allocation of funds should be made as if you had decided for all 8; you simply keep the future allocated funds in your stablecoins holding.

On setup, you divide the remaining 80% of your funds in equal parts, depending on the number of the number of holdings you have decided. For instance, if you have decided to run with 4 coins/tokens, each part should be allocated 20% of your total portfolio. For easier calculations, we avoid holding 6 or 7 coins/tokens - you can do so, if you wish, but you will have to keep consulting your spreadsheets.

When and how to make adjustments

You first have to decide how frequently you wish to trade. If you don't mind trading frequently, you may set your tolerance rate at 10%. If yo do, you may set your tolerance rate at 20%. Tolerance rate is the percentage of gain or loss in any of your holdings, that you won't be taking corrective actions (trades). So, for a 20% tolerance rate, in a $100 base holding, if the valuation drops even at $80.01, we do not take any corrective action.

Corrective actions are based on averaging per unit price. Typical averaging is doubling the asset units held in a portfolio, to bring the per unit price on the average between the originally held purchase price and the current price. For this strategy, we select the weighted average tactic. This means we buy as many units, as needed to bring our holding to the base value. E.g. in a 20% tolerance rate portfolio, with $100 base value, the valuation is at any given time at say $79.85, which exceeds your tolerance rate. In this case, you purchase as many units you need, to cover the difference of $20.15, up to the base value. Similarly, on the same portfolio, if the valuation is at any given time at say $120.15, you sell as many units you need, to cover the difference of $20.15, down to the base value.

In case of a limited profit taking, you may either have the conversion in the stablecoin you hold, or - if you hold a coin/token that is down over your tolerance rate - directly to cover the value difference using the limited profits from the profitable asset.

What to do when profits start to accumulate on the stablecoin holding?

You have two options there. Either you collect your profits and use them as you like, or you re-allocate your portfolio in the way described for initial set-up. This is also a good opportunity to add more assets to your portfolio, while leaving all other coins/tokens intact.

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