Willy Woo is a keen cryptocurrency trader and blogger. You can read his blogs at woobull.com and follow him on Twitter at @woonomic. He has some advice for those of you with crypto assets, especially if you’re wondering what to do at the moment as the main crypto coins are fluctuating in value within each 24-hour period.
He starts off by saying: “I think rebalancing a crypto portfolio to reduce exposure to a single crypto asset is the most intuitive yet completely wrong move long term investors make.”
He takes the example of a balanced portfolio that is split roughly like this: BTC 30%; ETH 0%; Litecoin 15%; Monero 15% and then tokens from three ICOs at 5% each.
Woo then hypothesises about what will happen to the portfolio if one of the ICOs does extremely well. He describes a scenario where, “A year later, it turns out ICO “C” has Satoshi at the helm, he has solved the scaling problem, integrates a Vitalik Virtual Machine, promises to impeach Trump via a cryptographic proof and will herald a new era of world peace.” Now the ICO token is valued at 72.5% of your portfolio and BTC only has a 10% share.
He believes this is the time to rebalance, and that you’d be mad not to do it. He says: “Under modern portfolio theory, you want to regularly rebalance your allocations to manage risk and maximize returns.”
How do you rebalance?
Woo thinks about rebalancing a token that is performing well in this way: “Rebalancing a high performer is like selling down your Facebook convertible notes to get more MySpace because you think that should reduce your risk. Like unloading some Amazon.com for Pets.com in the dot-com era. Don’t rebalance the winners. Keep to your target allocations.”
How do you set a target allocation?
He suggests you use a metric based on a percentage of token supply. For example, if you really like an ICO project you might aim for 1/100 of the tokens and if you were buying more from a speculative perspective, then you might only go for 1/1000. As Woo says, you can scale these percentages to your own means. He also points out that this is how venture capitalists operate: they take a percentage of a company and they never sell out until their liquidity event, the IPO or acquisition.