Capturing the Cryptocurrency Rebalancing Premium

Summary

The document explains the rebalancing premium as the return potentially gained by periodically restoring portfolio weights. Rebalancing sells assets that have risen relative to the portfolio and buys those that have fallen. A buy-and-hold portfolio instead lets weights drift toward assets that have performed best. The cited research argues that lower portfolio variance alone does not guarantee a diversification return.

The described cryptocurrency implementation compares an equally weighted portfolio of 27 coins rebalanced daily with an initially equal-weighted buy-and-hold portfolio. It goes long the rebalanced portfolio and shorts the drifting portfolio at a 70% weight, adjusting the relative allocation daily. The cited study reports a significant premium in crypto data and discusses daily versus monthly rebalancing, long-only and long-short portfolios, and combinations with bonds. The strategy depends on no single asset consistently dominating; concentrated crypto risks and the study's historical sample limit how confidently its results transfer to future markets.

Key ideas

• Periodic rebalancing can add return by selling assets whose portfolio weights have grown and buying those whose weights have fallen.
• The crypto example compares daily equal-weight rebalancing with an equal-weight buy-and-hold portfolio.
• The proposed long-short portfolio holds the rebalanced portfolio long and the drifting portfolio short at 70% weight.
• The cited study reports a significant crypto rebalancing premium and also considers bonds and alternative rebalancing frequencies.
• The approach may weaken if one asset persistently outperforms the others, and historical results do not assure future performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.