Passive Crypto Investing Case Study

A Short Intro

Hi there! Phil from Crypto Authority here and welcome to this Passive Crypto Investing case study!

In this case study I’m going to cover the way that I currently invest in cryptocurrencies. I’m going to cover my reasons as to why I use this investment technique. I’m going to show you historical data that shows how this investment style has performed compared to other investment styles. Finally, I’m going to show you how to use this investment technique in your own cryptocurrency portfolio.

By the way, if you’re interested in checking out the software I wrote to automate this investment strategy, you can find that here: https://cryptobooster.io/

So without further ado, let’s get right into it!

In April 2018 I was looking for a better cryptocurrency investment strategy…

I had a problem. I felt like I was consistently missing out on the biggest winners in the crypto markets. I was watching other cryptocurrencies skyrocket while my own portfolio continued to dwindle in the aftermath of the bubble.

On top of that, with my busy schedule, I didn’t have time to research new and emerging cryptocurrencies or even manage my own portfolio. And even when I did, the process of logging into exchanges to perform the various trades was a hassle that consumed even more of my already limited time.

And that’s when I came across the idea of applying an index fund strategy to the cryptocurrency market. You see, in the stocks world, index funds are a very well known and commonly used investment vehicles that track what’s known as a market index.

You’ve probably heard of the S&P 500 before. It’s a stock market index that tracks the 500 largest companies by market capitalization in the U.S. An index fund that tracks the S&P 500 is essentially an investment that tracks the entirety of the S&P 500. No better. No worse.

So essentially you’re getting an investment that follows the performance of the market as a whole. Even if one stock tanks for some reason, it’s OK because you’re essentially diversified across the best performing stocks in the market.

This style of investing is also known as passive management.

Numerous studies have shown that passive management outperforms actively managed portfolios. These studies have shown that on nearly every time frame ( especially longer ones ) the vast majority of investors and traders fail to outperform the market.

So I thought to myself, “Hmm, I wonder if this passive management strategy would work in the crypto markets?”

Truth be told, I wasn’t particularly thrilled with the return on investment using my previous “buy and hold” strategy. I had hand picked a wide variety of cryptocurrencies to invest in, but it seemed I would have been much better off following a passive management strategy, rather than trying to pick the few lucky winners that had a chance of “mooning”.

So I started testing this new passive management strategy with a wide variety of crypto portfolios, running historical back tests nearly every day. I was honestly amazed by the results.

Applying this passive management strategy to my crypto portfolio was, without fail, outperforming my old strategy of buying and holding (HODLing) the various cryptocurrencies I had “researched.”

This new investment strategy was consistently leading to higher crypto returns, all while requiring way less time and effort!

But how does one actually apply this “index fund style” or passive management strategy to cryptocurrencies? Just like in the stock world, where there are numerous types of index funds that track different market indexes and follow different rules, there are numerous ways to apply this passive management style to cryptocurrencies.

For example, you could apply the following rules to your passive management strategy. Let’s say you wanted a passively managed portfolio that tracked the 5 best performing cryptocurrencies by market capitalization. In other words, the 5 cryptocurrencies with the largest market caps.

In addition to that, you wanted your portfolio to be equally split between the 5 cryptocurrencies. So you would invest 20% into each of the top 5 cryptocurrencies.

Lastly ( and most crucially ), you need to determine when you want to rebalance your portfolio. Because the price of each cryptocurrency is constantly changing, the percent value of your portfolio that each coin takes up is constantly changing as well.

By rebalancing, you make each cryptocurrency in your portfolio once again take up the percentage that you want it to take up.

Consistently rebalancing over time offers a few nice advantages. Firstly, if one coin gains value relative to others, during the next rebalance period, those excess profits will be redistributed into the other cryptocurrencies.

Secondly, using our example of a portfolio that tracks the top 5 cryptocurrencies by market cap, if the 5th largest cryptocurrency lost market cap and switched places with the 6th largest cryptocurrency, your portfolio would automatically sell out of the cryptocurrency that lost value, and buy into the cryptocurrency that gained value.

So that’s a basic overview of how you would implement such a strategy in your own cryptocurrency portfolio. I’ll circle back to this again a bit later so you can get a more in depth look at how you would actually do this with your own cryptocurrency portfolio.

But for now, let me show you some actual data from the various historical back tests I have run!

Backtest 1

Let’s start with a relatively simple portfolio. The following example graph shows the value over time of 3 portfolios different portfolios that use a different investment strategy.

The first portfolio is 100% Bitcoin. The second portfolio is 33% Bitcoin, 33% Ethereum, and 33% Ripple. This portfolio consisted of the top 3 cryptocurrencies by market capitalization from May 2017 to May 2018. This is our “diversified-only” portfolio.

The third and final portfolio is also 33% Bitcoin, 33% Ethereum, and 33% Ripple. However, this portfolio is also rebalanced every 2 weeks. This last portfolio makes use of our passive management strategy.

Take a look at the graph below to see how each one did.

Diversified & Rebalanced Portfolio
(33% Bitcoin + 33% Ethereum + 33% Ripple)

Diversified-Only Portfolio
(33% Bitcoin + 33% Ethereum + 33% Ripple)

Bitcoin-Only Portfolio
(100% Bitcoin)

As you can see from the chart above, the passive management strategy, over the course of a year, led to:

800% higher returns compared to a holding a diversified-only portfolio containing the top cryptocurrencies by market capitalization.

And 1,100% higher returns compared to holding a Bitcoin-only portfolio! 

But let’s see what happens if we use some different rebalancing time frames!

Backtest 2

In this test, the only thing that’s changed from backtest 1 is the rebalancing period on portfolio #3. Instead of rebalancing every 2 weeks, the portfolio is rebalanced every day.

Diversified & Rebalanced Portfolio
(33% Bitcoin + 33% Ethereum + 33% Ripple)

Diversified-Only Portfolio
(33% Bitcoin + 33% Ethereum + 33% Ripple)

Bitcoin-Only Portfolio
(100% Bitcoin)

Backtest 3

In this third back test, we’ve only changed the rebalance period again. Now the rebalance period is set to once a week.

Diversified & Rebalanced Portfolio
(33% Bitcoin + 33% Ethereum + 33% Ripple)

Diversified-Only Portfolio
(33% Bitcoin + 33% Ethereum + 33% Ripple)

Bitcoin-Only Portfolio
(100% Bitcoin)

Backtest 4

In this back test, we’re going to change up the cryptocurrencies in our portfolio a little bit. I like to call this one portfolio the Coinbase classic, as it features the original 3 cryptocurrencies that were listed on Coinbase.com.

The first portfolio again is 100% Bitcoin for reference. The second portfolio is split equally between Bitcoin, Ethereum, and Litecoin. The third portfolio contains the same coins but is also rebalanced every 2 weeks. Let’s see how this portfolio did after a year.

Diversified & Rebalanced Portfolio
(33% Bitcoin + 33% Ethereum + 33% Litecoin)

Diversified-Only Portfolio
(33% Bitcoin + 33% Ethereum + 33% Litecoin)

Bitcoin-Only Portfolio
(100% Bitcoin)

Once again, we see that the diversified and rebalanced portfolio ( our passively managed portfolio ) outperformed the Bitcoin-only portfolio and the diversified-only portfolio.

Backtest 5

This test uses the same settings as the previous one, however the rebalance period is set to once a day.

Diversified & Rebalanced Portfolio
(33% Bitcoin + 33% Ethereum + 33% Litecoin)

Diversified-Only Portfolio
(33% Bitcoin + 33% Ethereum + 33% Litecoin)

Bitcoin-Only Portfolio
(100% Bitcoin)

Once again, we see that the diversified and rebalanced portfolio ( our passively managed portfolio ) outperformed the Bitcoin-only portfolio and the diversified-only portfolio.

Backtest 6

The final backtest for the Coinbase classic portfolios uses a rebalance period of 1 week.

Diversified & Rebalanced Portfolio
(33% Bitcoin + 33% Ethereum + 33% Litecoin)

Diversified-Only Portfolio
(33% Bitcoin + 33% Ethereum + 33% Litecoin)

Bitcoin-Only Portfolio
(100% Bitcoin)

Once again, we see that the diversified and rebalanced portfolio ( our passively managed portfolio ) outperformed the Bitcoin-only portfolio and the diversified-only portfolio.

Backtest 7

In this back test, we add a few additional cryptocurrencies into the mix to see how the passive management strategy works with a larger portfolio.

As usual, our first portfolio again is 100% Bitcoin. The second, diversified, portfolio will now contain 5 cryptocurrencies. Bitcoin, Ethereum, Ripple, Litecoin, and Stellar Lumens. And lastly, the third portfolio is the same as the second but it is also rebalanced every 2 weeks, implementing our passive management strategy.

Diversified & Rebalanced Portfolio
(20% Bitcoin + 20% Ethereum + 20% Ripple + 20% Litecoin + 20% Stellar Lumens)

Diversified-Only Portfolio
(20% Bitcoin + 20% Ethereum + 20% Ripple + 20% Litecoin + 20% Stellar Lumens)

Bitcoin-Only Portfolio
(100% Bitcoin)

You’ll notice that even when using 5 of the largest cap cryptocurrencies, the diversified and rebalanced portfolio outperformed the Bitcoin-only portfolio and the diversified-only portfolio again.

Backtest 8

In this next test, everything remains the same except for the rebalance period on our third portfolio. The rebalance period is now set to once a day.

Diversified & Rebalanced Portfolio
(20% Bitcoin + 20% Ethereum + 20% Ripple + 20% Litecoin + 20% Stellar Lumens)

Diversified-Only Portfolio
(20% Bitcoin + 20% Ethereum + 20% Ripple + 20% Litecoin + 20% Stellar Lumens)

Bitcoin-Only Portfolio
(100% Bitcoin)

We see on that with the daily rebalancing period, our diversified and rebalanced portfolio once again outperforms the other two portfolios.

Backtest 9

In this final test, once again we use these same 5 cryptocurrencies, but our rebalance period is changed to once a week for portfolio #3. Let’s see how it does!

Diversified & Rebalanced Portfolio
(20% Bitcoin + 20% Ethereum + 20% Ripple + 20% Litecoin + 20% Stellar Lumens)

Diversified-Only Portfolio
(20% Bitcoin + 20% Ethereum + 20% Ripple + 20% Litecoin + 20% Stellar Lumens)

Bitcoin-Only Portfolio
(100% Bitcoin)

Key Takeaways

As you can see, in each of these historical back tests, diversifying and rebalancing lead to significantly higher returns over time.

There were more than a few instances where the diversified-only portfolio or Bitcoin-only portfolio pulled ahead of the diversified and rebalanced portfolio for a short period of time. But in the long run, in each one of these backtests, the diversified and rebalanced portfolio ended up returning significantly higher returns.

I encourage you to run your own back tests to see how this passive management strategy could have worked on various other cryptocurrency portfolios.

The best part about this strategy is that there’s no trying to guess the lucky winners in the crypto space. I didn’t have to look into and research new and emerging cryptocurrencies constantly. You’re simply tracking the cryptocurrencies with the largest market cap. If one cryptocurrency loses a lot of market capitalization, it simply gets swapped out with another. Following these simple rules ensures that you’re portfolio is always spread across the best performing cryptocurrencies.

That’s why this passive management method has gone on to be my primary cryptocurrency investment strategy.

Implementing Passive Management In Your Own Portfolio

One obvious way to implement this strategy is to manually execute buy and sell orders on a cryptocurrency exchange, diversifying and rebalancing your portfolio into the cryptocurrencies you want.

One downside of this however is that it does require some work on your part. You manually have to log into your exchange accounts, do the math on how much of each cryptocurrency that needs to be bought or sold, and then execute those trades consistently over time, depending on your rebalance period.

This was a challenge I encountered while trying to follow this strategy. However, being a former full time software engineer in my old job, I decided to create an app that would handle of this tedious work for me, completely on autopilot.

It’s taken all of the hard work out of this process completely and I’m quite happy with the results! If you’d like to use this software to help implement this passive management strategy in your own portfolio, you can check it out here: https://cryptobooster.io/

Conclusion

I hope you found it interesting to see how this passive management strategy historically benefited these cryptocurrency portfolios.

While past performance does not guarantee future results, I do like how this strategy ensures that your portfolio stays invested in the best performing cryptocurrencies over time. This is why I’ve started using this method as my primary cryptocurrency investment strategy.

Again, if you’re interested in trying this strategy with your own cryptocurrency portfolio, I encourage you to check out the software to automate this process, Crypto Booster. You can check out all the details at https://cryptobooster.io/

Thanks for taking the time to read this case study and I wish you luck with all your future investments!