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The rebalancing phenomenon
The reason why the Crypto Bulot strategy outperforms the market is that it uses the rebalancing technique.
Rebalancing provides 2 levers for improving performance.
The 1st lever is statistical…
The more a crypto rises in value, the closer it gets to the time when the market will experience a downward correction.
Conversely, the more a crypto falls in value, the more upside potential it has due to its undervaluation.
Of course, there are cryptos that keep rising and cryptos that keep falling until they disappear, but statistically, the short-term correction is the most regular occurrence.
As a result, when we rebalance, we resell cryptos that have risen in value by more than the proportion we intended, inviting us to resell them. As a result, on the day when its value falls, our exposure was lower and so we lost less.
Conversely, with the money recovered from the sale of overvalued cryptos, we’ll buy back cryptos that have lost value. And since, statistically, the market will eventually correct upwards, well, we’ll have more of these shares going back up.
And so, it’s this dual mechanism of reselling cryptos that are becoming too important and buying back undervalued cryptos that enables us to generate a performance improvement of 10 to 15% per year.
As a result, when we rebalance, we resell cryptos that have risen in value by more than the proportion we intended, inviting us to resell them. As a result, on the day when its value falls, our exposure was lower and so we lost less.
Conversely, with the money recovered from the sale of overvalued cryptos, we’ll buy back cryptos that have lost value. And since, statistically, the market will eventually correct upwards, well, we’ll have more of these shares going back up.
And so, it’s this dual mechanism of reselling cryptos that are becoming too important and buying back undervalued cryptos that enables us to generate a performance improvement of 10 to 15% per year.
The 2nd lever is linked to controlled risk
If you buy 2 cryptos and let them evolve over time without touching them… Even if the 2 cryptos increase in value, one will always be worth more than the other. Eventually, this will generate a significant difference.
For example, if at the beginning of 2021 you had invested 50% of your capital in Vechain and 50% of your capital in Theta, at the end of the year Vechain would have represented 66% of your portfolio and Theta only 34%.
If you buy 2 cryptos and let them evolve over time without touching them… Even if the 2 cryptos increase in value, one will always be worth more than the other. Eventually, this will generate a significant difference.
For example, if at the beginning of 2021 you had invested 50% of your capital in Vechain and 50% of your capital in Theta, at the end of the year Vechain would have represented 66% of your portfolio and Theta only 34%.
In this case, we can see that even if we’re very happy with Vechain’s outperformance, at 66% it concentrates too much risk, because if it were to fall by 20%, for example, this fall would involve 66% of the portfolio’s value instead of the 50% of the initial allocation.
So, by rebalancing each month, we maintain the level of risk we wish to assign to each crypto.
So, by rebalancing each month, we maintain the level of risk we wish to assign to each crypto.
How rebalancing works
Here’s how rebalancing works in practice…
At the start, you position your capital according to the desired distribution. Let’s stay with the example of positioning €1,000 equally between the 2 cryptos Vechain and Theta.
After the 1st month, the €500 positioned on Vechain became €678, while the €500 positioned on Theta became €513.
The value of the portfolio after one month is therefore 1191€ (513€+678€)
This is when we will rebalance…
50% of 1191€ = 595€
We will therefore sell back 83€ of Vechain (678-595) and with this sum we will buy back Theta, so that after rebalancing we now have 595€ of Theta and 595€ of Vechain.
This means repeating the same rebalancing exercise every month.
This table shows the month-by-month evolution of the static portfolio and the rebalanced portfolio. At the end of the year, we can see a 13% improvement in portfolio performance, with risk under control, as the portfolio remained on a 50/50 split.
It’s because of this dual mechanism that we use the rebalancing technique in the Crypto Bulot strategy, and that’s what makes it so successful!
