In our previous studies, all of the backtests were run with an even distribution of assets. This means if a portfolio of 5 cryptocurrencies was allocated, the selected allocation for each asset was 20%. During rebalances, each asset would be realigned to this allocation.

This study is putting distribution models to the test. We will examine 3 different distributions to determine the optimal allocation strategy. These allocation strategies will be the following:

Even

Linear

Exponential

Backtest Design & Setup

In order to evaluate each allocation strategy, we performed backtests over historic data. This allows us to create a simulation of how well a strategy would have performed in the past. The following constraints were used when performing each backtest.

Trades & Data

Market data was collected from May 4, 2017 to May 3, 2018. This data was used to calculate the price of trades as they would have happened at that time. The trading path between each asset was performed by first trading to BTC. This simplifies the path across exchanges which may have different base pairs. Each trade was simulated using a .25% trading fee.

Assets & Initial Conditions

Every portfolio in this study consists of exactly 10 randomly selected assets. After each backtest, a new random group of 10 assets is selected for the next backtest. This process is completed 1,000 times for each strategy type and rebalance period. The complete list of assets which were included in the study can be found in our backtest tool.

At the start of each backtest, the portfolio is seeded with a $5,000 initial investment which is allocated across the assets. The rebalancing method used is outlined in our previous article.

A more in depth discussion of the backtest procedure and study setup can be found in our previous article:

Even Allocation Distribution

This distribution follows an allocation of 10 percent for each asset.

Even distribution means that each asset holds the same weight in the portfolio. A portfolio of 10 assets would result in each asset holding exactly 10% weight in the portfolio. Whenever the portfolio is rebalanced, trades are made to realign the portfolio to match these desired allocations.