Shannon’s Demon and Volatility Harvesting in Crypto

Summary

The article describes a constant-mix strategy inspired by Claude Shannon: hold equal portions of an asset and cash, then rebalance after large price moves. Rebalancing sells some of the asset after gains and buys after losses, harvesting price fluctuations while keeping exposure below that of a fully invested buy-and-hold portfolio. In the idealized example, this can profit even when an asset has no positive expected return, but real-world performance depends on costs and market behavior. The author backtests threshold rebalancing on Bitcoin and Augur using historical exchange data. Bitcoin’s strong upward trend led the strategy to trail buy-and-hold substantially. On Augur, it also produced lower cumulative returns, but the reported drawdown was smaller and the risk-adjusted return slightly higher. These tests cover limited historical periods and assets, use a particular rebalancing rule, and do not establish that the strategy will work in other markets. Transaction costs, insufficient volatility, and persistent trends can all affect results.

Key ideas

• A constant-mix portfolio can harvest volatility by rebalancing between an asset and cash.
• Volatility harvesting does not guarantee outperformance when an asset has a strong upward trend.
• The reported crypto tests show lower returns but reduced drawdown for the rebalanced approach on one token.
• The results are limited to specific assets, dates, and a chosen rebalancing rule.
• Transaction costs and the amount of available volatility constrain the strategy.

Tags

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