If you are interested in trading cryptocurrencies, you are probably asking yourself some of the following questions:
- Which coin is currently best to invest in?
- Should I buy only one coin or should I invest in basket of coins?
- How broad should I diversify – 3, 5, 10 or even more coins?
- Which weight method should I use? Market cap or equally?
- Should I actively trade or rather buy & hold my positions?
- How often should I re-balance?
I have created a financial model to back test, simulate and analyze different trading strategies based on weekly data for year 2017 available on coinmarketcap.com. The following variables were tested in all possible combinations of portfolio size, weight type and re-balancing frequency:
- Portfolio size: top 3, 5, 10, 20 coins by market capitalization
- Portfolio weight: market capitalization vs. equally weighted portfolio
- Re-balance frequency: weekly, monthly, quarterly, half-yearly, yearly, y% off-balance
- Trading fee: 0.25% on every buy and sell transaction
- Trading period: 1st of January 2017 until 31st of December 2017
- Initial investment: 1,000.00 USD (1 thousand US dollars)
Would you like to know which combination was most profitable? I can reveal that investing in Bitcoin (BTC) would make you a 14-times profit. Investing in an equally weighted basket of top 10 coins by market cap at the beginning of the year and holding positions till the end of the year, would make you a 62-times profit. Starting with the same portfolio and by including some re-balancing strategy could bring you a profit of over 100-times the initial investment, in best scenario your profit would be as high as 140-times the initial investment. You can read all about the strategy in a 15 page PDF document sold as GIG on Fiver at $30 only.