How much value does diversity add to a portfolio?

This is the core question we are looking to address with this article. While nobody can predict the future, we can look into the past to examine trends. This can help us make better decisions when challenging the future.

“Those who don’t learn history are doomed to repeat it”

Our previous study explored the performance difference between a year of HODLing vs a year of rebalancing. You can read more about this analysis here:

How is this study different?

While there has been a lot of discussion around the diversification of portfolios, little work has been achieved in constructing a case for diverse portfolios. We hope this will spark further technical analysis of the market.

Trades & Data

What data was collected?

Exactly one year of market data has been collected from exchanges. The data begins on May 4, 2017 and ends on May 3, 2018. This precise data is used to evaluate trades as they would have happened at the time of trading.

What fee is taken for trades?

All trades include a standard .25% fee.

What is the trade path?

All trades take place using BTC as a intermediary. This means if a trade is happening from ETH to LTC, ETH will first be traded to BTC and then to LTC. In this instance, both of these trades would incur a .25% trading fee.

Rebalance Period

What is a rebalance?

A rebalance is the process of taking some value from coins which perform well over a period and redistributing that value to coins which performed worse. The end result is the portfolio will have the desired percentage of each asset after each rebalance. So, let’s take an example where a portfolio has desired allocations of 50% ETH and 50% BTC. When the market moves, the percent of each holding may become 60% ETH and 40% BTC. Then, when a rebalance takes place it will make trades so the allocations are once again 50% ETH and 50% BTC.

What is a rebalance period?

In the most simple case, a rebalance happens on a designated interval. The specific amount of time between each rebalance is called the rebalance period. This means a rebalance period of 1 day will result in a rebalance at the same time every single day. This study will examine a range of rebalance periods, from 1 hour to 1 month. Learn more about rebalancing for cryptocurrency.

Portfolio Size

This wouldn’t be a study on diversity without varying the portfolio size. In this instance, portfolio size refers to the number of assets in the portfolio.

What is the range of portfolio size?

In this study, we have chosen a portfolio range from 2 to 10. With a step size of 2, this means there are 5 individual portfolio sizes; 2, 4, 6, 8, 10.

What is the weight of each asset in a portfolio?

Each asset is weighted evenly in the portfolio. So a 2 asset portfolio would contain 50% of each asset.

Asset Selection

What assets were included in the study?

There was no intentional selection process for what assets to either include or exclude. The simple criteria was that we needed to have a complete year of data for any asset to be included. This automatically eliminates coins which have not existed for over a year, as well as coins which have missing data during outages. The complete list of coins included in the study can be found in our backtest tool.

How were assets selected when creating portfolios?

Individual assets were selected at random from the asset pool. This process continued until the desired number of assets in the portfolio was reached.

Why are assets selected at random?

Assets are selected at random to remove bias from the portfolio design. We don’t care how individual portfolios perform in this study. We care how all portfolios of one size compare to all portfolios of another size. This gives us a more general comparison from which we can draw conclusions.

Backtest

What is a backtest?

A backtest is the process of testing a trading strategy by using historical market data. This process ensures the quality of the technique before investing funds. Backtesting is similar to a simulation that trades based on the strategy over a designated period of time. The results help illustrate the profitability and risk.

How many backtests did we run?

We ran 1000 backtests for each portfolio size and rebalance period pair. This provides us with a large sample set that can be used to observe trends. Read more about backtests or run your own.

What was the starting value for each portfolio?

At the start of every backtest, the portfolio was allocated with $5,000.