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The results of our last bear market case study showed that diversification has a positive impact on portfolio performance.
We also found that adding rebalancing to the mix has significantly boosted a portfolio’s returns.
Our curiosity didn’t stop as we wanted to discover the impact of both strategies on crypto portfolios, but this time during a bull market.
We’ve analyzed 3 years' worth of market data and ran 12,000 backtests in total, only to discover that the impact of diversification and rebalancing is even better compared to our previous case study.
We found out that HODL underperforms portfolio rebalancing all of the time.
Don’t believe us? Then take a look at the data that proves our claim.
This case study was made with the help of Shrimpy's native backtesting solution. You can use Shrimpy to analyze thousands of cryptocurrencies and compare their performance against different strategies. Backtesting is the easiest way to analyze the potential performance of your portfolio without having to deploy real capital.
This case study focuses on the impact of diversification and rebalancing on portfolio performance during a 3-year time period. The time period includes the 2020-2021 bull market. It also includes the 2022 bear market.
We've analyzed 12 settings based on portfolio size and rebalancing frequency. We've run 12,000 backtests in total, amounting to 1,000 backtests per setting.
Our portfolio sizes include:
Our periodic rebalancing includes the following frequencies:
This case study compares the performance of each rebalancing strategy against HODL (buy-and-hold). We've also compared the performance of each strategy against the initial portfolio value.
Note that the asset selection process during our backtests was completely randomized.
The case study includes three portfolio groups. Each group has 10, 15, and 20 assets.
The assets in each portfolio group are evenly distributed. For example, the 10-asset portfolio has 10 assets with a 10% allocation per asset.
The rebalancing process simulated in the backtest executes trades to keep these initial allocation targets in check. The point of rebalancing is to maintain targeted allocations.
Note that each executed trade includes a 0.1% trading fee.
Each portfolio starts with an initial balance of $5,000.
The results of this case study show the value of each portfolio by the end of the backtest period (January 1st, 2020 - December 31st, 2022.)
The asset selection process in this case study is completely randomized for the purposes of objectivity and accuracy.
Our list of assets includes all cryptocurrencies that were available on the top 10 crypto exchanges during the backtest period.
Each backtest picked random assets for each portfolio group based on the list of assets available at that time. This is done so that the focus of our analysis is placed not on the assets themselves but on the strategy.
Each backtest outputs two results. One result shows a portfolio's final value if it had been rebalanced, while the other shows a portfolio's final value if it had used the HODL strategy.
To determine how these strategies compare, we calculate the performance of the rebalancing strategy against the HODL strategy by using the following formula:
Performance = ((R - H) / H) x 100
You can read the formula in the following way:
Our results contain graphs that show the relationship between the number of assets held in a portfolio with the median value of the portfolio by the end of the backtesting range. We have results for HODL, monthly rebalancing, weekly rebalancing, daily rebalancing, and hourly rebalancing.
Our final results (Portfolio Rebalancing vs. HODL) compare portfolio rebalancing against the HODL strategy. This section focuses not on the median value of each portfolio by the end of the backtest, but on the performance of a rebalanced portfolio compared to the same portfolio utilizing a HODL strategy.
Please note that any values displayed in this section are not relative to the starting value of a portfolio but to the same portfolio had it been HODL’ed. If a value of 5% is displayed, that means the final result for the rebalanced portfolio is 5% higher than the HODLed portfolio, and not 5% higher than the initial portfolio fund.
Our case study focuses on the following market period: Jan 1, 2020 - Dec 31st, 2022.
Given the nature of the market during that time period, our case study predominantly analyzes the price data of a bull market.
The market has seen extremely volatile price action during this backtest period. Bitcoin has seen a price increase of 851% from Jan 1st, 2020, to the November ATH of 2021. The market has also seen a 76% price decrease from the ATH to Dec 31st, 2022.
Considering that our case study involves mostly altcoins (due to the nature of diversification), the results are far more volatile.
Our results start by individually analyzing the effects of diversification on performance for each strategy. The strategies include:
Our combined results section compares the combined performance of all the strategies listed above. Note that the performance in both individual and combined results are denominated in dollars.
Our final results compare the performance of each rebalancing strategy against HODL. The values here are percentages, not dollars. The values are relative to a portfolio utilizing HODL – the performance difference between a rebalanced portfolio and a HODL’ed portfolio – and not to the initial value of a portfolio.
This graph shows the results of a $5,000 portfolio using the HODL strategy after three years. The X-axis shows the number of assets for each portfolio group. The Y-axis shows the portfolio's final dollar value at the end of the backtest period.
Portfolio diversification had an immense performance boost on portfolios utilizing the HODL strategy. 20-asset portfolios had performed the best, having a 10% and 28.48% increase over the second and first portfolio groups, respectively.
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This graph shows the results of a $5,000 portfolio that was rebalanced on a monthly basis after three years. The X-axis shows the number of assets for each portfolio group. The Y-axis shows the portfolio's final dollar value at the end of the backtest period.
Portfolio diversification had an even bigger effect when combined with monthly rebalancing. Switching from 10 to 15 assets resulted in a 35.63% performance increase. Switching from 15 to 20 assets resulted in a small 7% increase.
These results show that 15-asset portfolios represent the optimal portfolio group for investors utilizing a monthly periodic rebalancing strategy.
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This graph shows the results of a $5,000 portfolio that was rebalanced on a weekly basis after three years. The X-axis shows the number of assets for each portfolio group. The Y-axis shows the portfolio's final dollar value at the end of the backtest period.
Similar to the previous rebalancing frequency, diversification has also had a significant impact on weekly rebalancing. Switching from 10 to 15 assets resulted in a 17.54% performance increase. Adding 5 more assets resulted in a 14% boost.
Compared to monthly rebalancing, the impact of diversification on portfolio performance is much more consistent with weekly rebalancing.
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This graph shows the results of a $5,000 portfolio that was rebalanced on a daily basis after three years. The X-axis shows the number of assets for each portfolio group. The Y-axis shows the portfolio's final dollar value at the end of the backtest period.
Daily rebalancing brings the highest returns so far. A 20-asset portfolio ended the backtest period with $18,364. This represents a 13.7% performance boost over 15-asset portfolios and a 34.51% boost over 10-asset portfolios.
Similarly to the previous rebalancing period, daily rebalancing also brings consistent jumps in performance – which are almost identical to the previous group. The difference is that the returns are slightly higher.
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This graph shows the results of a $5,000 portfolio that was rebalanced on a daily basis after three years. The X-axis shows the number of assets for each portfolio group. The Y-axis shows the portfolio's final dollar value at the end of the backtest period.
The results of hourly rebalancing show that investors who switched from 10 to 15 assets experienced a 17.27% performance boost. Adding 5 more assets on top of that led to a 30.3% performance boost. And compared to the first group, 20-asset portfolios have a performance increase of a whopping 52.81%.
When compared to the previous strategies, we see that diversification had the biggest impact on portfolios that were rebalanced on an hourly time basis.
This graph shows the combined results of all the previous strategies for a $5,000 portfolio after three years. The X-axis shows the number of assets for each portfolio group. The Y-axis shows the portfolio's final dollar value at the end of the backtest period.
Our combined results indicate that 20-asset portfolios dominate across the board. They have the highest performance across all strategies compared to smaller portfolios.
In a bull market, HODL underperformed against all rebalancing strategies.
Daily rebalancing outperforms all other strategies in 10-asset portfolios.
Monthly rebalancing outperforms all other strategies in 15-asset portfolios.
Hourly rebalancing outperforms all other strategies in 20-asset portfolios.
The image above compares the performance of each rebalancing strategy against the initial portfolio value. The data shows that 20-asset portfolios offer the highest returns during a bull market.
The image above shows the average performance of each rebalancing strategy across all three portfolio sizes. The data implies that daily rebalancing has the best performance on average when combined with diversification.
The image above compares the performance of HODL against the initial portfolio value.
The graph above compares how well each rebalancing strategy has performed against HODL at varying portfolio sizes. The X-axis shows the rebalancing strategy utilized. The Y-axis shows the performance, defined in percentages, of a rebalancing strategy compared to a HODL strategy at the end of the backtest period.
Our final results show that all portfolio rebalancing strategies outperform HODL at all portfolio sizes.
Rebalancing a 10-asset portfolio on a daily basis outperforms HODL the most with a performance boost of 36.76%.
Our most inefficient strategy was hourly rebalancing on a 10-asset portfolio, which only outperformed HODL by 5.44%.
On average, daily rebalancing is the best strategy for diversified portfolios when compared to HODL.
The image above shows the results of each rebalancing strategy and portfolio size.
Hourly rebalancing has the best performance against HODL at 20-asset portfolios.
Daily rebalancing has the best performance against HODL at 10-asset portfolios.
Weekly rebalancing has the best performance against HODL 15-asset portfolios.
Monthly rebalancing has the best performance against HODL at 10-asset portfolios.
We conclude that monthly rebalancing is the worst-performing rebalancing strategy across all three portfolio sizes when compared to other rebalancing frequencies.
We conclude that daily rebalancing is the best-performing rebalancing strategy across all three portfolios sizes when compared to other rebalancing strategies.
In total, any portfolio utilizing a rebalancing strategy has outperformed HODL by 37% more than 50% of the time
The results of our bull market case study show that diversification has an incredibly positive impact on portfolio performance.
The best-performing portfolios were the ones that were the most diversified: 20-asset portfolios.
The performance boost of increasing your portfolio from 5 to 10 and then to 20 assets is gradual and predictable.
Like in our previous case study, diversification has the biggest impact on smaller portfolios. In terms of percentages, they’re the ones to benefit the most from diversification.
Our results show that adding a periodic rebalancing strategy to a well-diversified portfolio has a positive influence on performance. Daily rebalancing is the best-performing rebalancing strategy on average.
We have also seen that HODL completely underperforms rebalancing.
Portfolio rebalancing outperformed HODL by 37% more than 50% of the time.
Moreover, we found that investors who utilized any rebalancing strategy had returns of 211% (on average) in the selected backtest period compared to their initial portfolio value.
The backtests and rebalancing strategies were carried out using our very own portfolio rebalancing tool, Shrimpy.
Shrimpy is an automated portfolio management platform that helps you not only rebalance but also diversify your crypto portfolio.
You can connect over 25 exchange accounts and wallets with Shrimpy and start rebalancing your portfolio right away. Shrimpy is one of the easiest to use rebalancing tools in the industry.
Sign up now by clicking here.
Each day Shrimpy executes over 200,000 automated trades on behalf of our investor community. And joining them is easy.
After you sign up and connect your first exchange account, you’ll deploy an investment-maximizing strategy in as few as 5-minutes.
Whether you create your own rebalancing strategy or completely custom automation, the ability to walk your own path belongs in the hands of every crypto investor.
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