Building a Profitable Crypto Portfolio - (Stage 2) Portfolio Rebalancing

Two days ago I started rebuilding my Crypto portfolio, a process which I have broken down into three stages:

As an accidental full-time Crypto trader and still relatively new to this, I am always learning and evolving my strategy. Where initially I was investing for the long term to create a pension pot, I am now trading as a source of income and financial freedom.

The transition to trading full-time has created a rolling monthly financial target where I am required to generate enough profit to draw down an income to pay for my cost of living. This requirement has changed my risk profile, and therefore it is now imperative that I have a strategy which delivers reliable profits.

I am currently managing a portfolio of around 50 coins of varying investment levels but have never had a set structure to what I invest in and at what level, just a loose set of principles, a little research, and gut feel. Historically, I have rebalanced my portfolio by taking a bit of money from those coins which I have made a bunch of profit from and buying into a random selection of smaller coins.

With the need to ensure my portfolio delivers a profit, I want to take a more scientific approach to rebalancing my portfolio, and as such, I am now developing a framework for this.

Portfolio rebalancing is not a one off task, but something I have done, without any real strategy since I started trading and will continue to do as long as I trade. My initial investment was in Bitcoin and a bit of Ethereum. If I had held onto these original investments, then my portfolio would be up around +700%. I am currently at +1,456% in gains, and although there has been a lot of luck with this, it has been because of portfolio rebalancing. I intend that ongoing this becomes strategic and less about luck.

The first stage of the process focused on rebuilding my investment tiers around five key types of coin, which you can read about here. These five tiers operate like five independent index funds within a single portfolio, where investments are grouped around certain identifiable performance criteria. A summary of these tiers is available below, including what percentage of my portfolio they represent.

  • Tier 1 (65.6%) - Large Stable Growth Coins
  • Tier 2 (11.4%) - Developing Stable Growth Coins
  • Tier 3 (7.3%) - Developing Unstable Growth Coins
  • Tier 4 (2.4%) - Emerging Growth Coins
  • Tier 5 (1.9%) - Punts
  • Fiat (11.4%) - Profit taken off the table
 Tier summary performance, actual numbers hidden

Tier summary performance, actual numbers hidden

Note: that part of my strategy is to take 5% off the table for every time my portfolio goes up 25%. Currently, I am tracking behind as August has been a boom month, so far jumping +80%. I never sell Bitcoin for money off the table and am reluctant to take out from my other major positions in ETH, NEO, Dash and Monero while they are in a rally.

The process of rebalancing a portfolio is quite simple in itself:

  • Look for those coins which are spiking in price and shave off some profits
  • Take those profits and invest them in some coins which are trading sideways in the boring zone and are undervalued

Remember though, nobody knows what the fuck will happen, you could easily shave profits from a coin and it makes a parabolic move after, remember when I sold some of my NEO positions off early? You can also divest down into other coins which don't grow or even drop. I have done this too. Therefore, to rebalance your portfolio you need to dig around various sources to find signals of what may or may not happen:

  • Technical analysis of the charts
  • News and rumours around a coin
  • Wider market sentiment
  • Custom data

Ultimately, for any trade, you will have to make a gut decision based on all of the above. As such, I am developing tools, processes and custom data records to help with my decision making. Also, as I have mentioned before, I do not want to be a day trader. Therefore I need to be able to make investment decisions which allow me not to be glued to the market all day, even take a holiday and not care what the market does.

In terms of process, therefore, each morning, when I am trading, I will do the following:

  • Look at all my news sources
  • Scan through Reddit
  • Scan through Twitter
  • Keep notes on any particular coin or wider market activity which I think may affect a trading decision

One of most important thing to help support my trading decisions will be custom data. I currently track a number of items daily using a custom spreadsheet, which I made available here. I have adapted this over the last couple of days with the following:

  • Individual tab for each tier of investment
  • A summary tab where I group my tiered investments alongside my fiat draw down
  • A daily performance tab where I track both the individual and aggregated performance of each tier
  • A closed trades tab where I keep a record of each position I sell
  • A watch list tab where I create a record each coin I don't own which I am tracking
  • A top 150 coins tab where I keep records on the price performance for each coin

With the above, I am looking for signals which help make trading decisions, as such, I am recording the following and looking for patterns:

  • Daily % and £ growth per coin
  • Daily % and £ growth per tier
  • How the above tiers and coins react to different market conditions
 How I track £ & % performance within Tier 4.

How I track £ & % performance within Tier 4.

The above will help me make decisions about what percentage of my investment will be partitioned for each tier and coin. I can, therefore, adjust my risk profile based on my portfolio performance. I know that during difficult trading that my tier 1 coins perform well and during corrections the smaller altcoins tend to crash the most. Therefore, If my portfolio is performing well, say I have had a triple month income draw down, and my lower tier coins are outperforming my top tier of stable coins, I may then be able to divest some of my profits into the higher risk, higher reward groups.

I hope this makes sense as it reads bloody complicated. In summary: if I am making good money I can take a high risk, high reward approach and if I am not making good money, I can switch back to my reliable, stable coins. What I should be able to know is how my different investment tiers react to different market cycles.

When I then look to divest the profits, I use a tab where I keep simple records on each coin within the top 150 by market cap. This is a process which takes time, as the only way to complete this is to go through each coin within my portfolio, look at the charts, the price history and what my gut feel for where it is and then keep notes.

You can see from the table below how I do this. What I want to avoid is something which takes too long to complete and too much effort to update.

Screen Shot 2017-08-27 at 17.53.19.png

Looking at the table above you can see the following:

  • Coins I own are orange
  • Position: what is my current position on the coin, am I holding long? Do I want to sell? Do I want to add on? This is my conclusion for the coin though I won't necessarily follow this.
  • Trajectory: this is the medium term growth trajectory, is it up? Is it up but trading sideways?
  • Growth stability: this is the price growth stability of the coin
  • Price zone: is it breaking out? Is it crashing? Is it finding a price zone?
  • Notes: any general notes on the coin

What I can then do, is take profits from those coins which feel like they are at the top of a pricing cycle and invest some of those I want to add on to which are currently trading sideways in the boring zone.

I am going to need a bunch of data to improve my decisions, as such my new data records will likely need at least a month of data to provide guidance on tier performance and a few months to provide guidance on individual coins, though I would love 12 months of data.

In the short term I have decided to make the following changes to my portfolio:

Profit scrape:

  • Dash
  • Ethereum
  • Monero

Increase my position:

  • EOS
  • Zcoin
  • Zencash
  • Tokencard
  • Pivx
  • TaaS
  • Edgeless

My profit scape and new positions will though be dependent upon the current trajectory of each coin, on a case by case basis.

Before I make these changes though, I am going to complete Stage 3 of rebuilding my portfolio where I am going to dump any junk coins I have and look for new investment opportunities within my portfolio. This may take a couple of days as I am about to fly to LA. I will though then make all my new trades as one activity.

Any questions, then please give me a shout.