Investors have varied definitions of success, but no one can argue the significance of beating benchmarks such as the S&P 500. Since the index leveled off at 500 companies in 1957, the average annual return hovers around 8%. All investors consider beating the S&P 500 a massive win, especially if you can do so consistently.
The blockchain industry has yet to adopt an index that tracks the growth of the overall crypto landscape, but many investors see bitcoin as the leading indicator. As such, Bitcoin Market Journal has constructed a portfolio optimization tool to help you beat Bitcoin!
The model provides two separate portfolios, one with ten digital assets and the other with three. The model takes historical pricing into account to determine the optimal weights for each digital asset. If done correctly, investors can use historical data to predict the probability of beating Bitcoin returns on a daily, weekly, and yearly basis.
To help with setting up your optimal portfolio, BMJ has included detailed instructions throughout the rest of the article.
It’s no secret that some of the top performing digital assets have little to do with bitcoin. Scores of altcoins have realized incredible gains in the past few years, surpassing even the most notable assets on the market.
The five coin portfolio uses historical price data from Ether (ETH), Ripple (XRP), Monero (XMR), Litecoin (LTC), and NEM (XEM) to demonstrate those impressive gains in comparison to bitcoin over the last few years.
An evenly weighted five coin portfolio, for example, would produce 3.5x the return of an all bitcoin portfolio, according to our historical data range of approximately three years.
Analyzing and experimenting with the evenly weighted portfolio is the first step in the process. Investors should prioritize their asset allocations based on personal investment goals. The portfolio optimizer can help by using historical pricing to establish trends and forecast future results.
Although an evenly weighted portfolio could outperfom bitcoin – should the altcoin market continue its impressive increase in value – there is still plenty of room for portfolio optimization.
Optimizing Your Altcoin Portfolio
The BMJ portfolio optimization model gives historical pricing for bitcoin and other digital assets from August 2, 2016 to October 14, 2019. Although the range is not ideal, the majority of altcoins have appeared over the last few years, so there isn’t much price data available.
In the model, investors can construct portfolios using the five or three asset models that maximize their chances of beating bitcoin. The five asset model includes Ether (ETH), XRP (XRP), Monero (XMR), Litecoin (LTC), and NEM (XEM). The three asset model has only ETH, XRP, and XMR.
Investors have two options when it comes to optimizing their portfolios. The first will use 0s and 1s to indicate the weeks in which the constructed portfolio has a lesser return (marked by 0) and those weeks it has a higher return (marked by 1) than BTC. The average of all 0s and 1s yields the probability of beating bitcoin.
The other method uses the daily change in price to optimize the digital asset weights. The goal is to maximize the difference between the daily growth rate of the portfolio and that of bitcoin.
NOTE: You must download “Evolver” as an Excel add-on in order to use the portfolio optimizer. The following instructions are meant specifically for the five coin portfolio. The three coin model runs the same way but with data in different cells.
Step 1: Maximize Probability using Evolver
- Open Evolver. Click on the Model Definition button in Evolver’s ribbon. Choose Maximum as the Optimization Goal and P3 as the Cell to maximize. We want to maximize our chances of beating bitcoin on a day-to-day basis.
- For the Adjustable Cell Ranges, click Add and enter B3:F3. Click OK.
- Enter 0 for the Minimum and 1 for the Maximum as shorting is not allowed and the portfolio must consist of multiple altcoins.
- Ensure that Evolver is using the “Budget” mode so that the weights add up to 1. Click on the Group button, choose Edit, and in the dialog box shown below, choose Budget. Click OK. Click OK again to close the model definition window.
- Finally, go to Settings under the Evolver ribbon and set a time trial for ten minutes. Then, close the window and click start. The model will run for ten minutes and yield the optimal weighted portfolio to beat bitcoin.
It is important to keep in mind that solutions may vary due to processing speed and quality of personal computer. The goal is to beat an equally weighted portfolio by optimizing the Validation and Estimation data probabilities of beating bitcoin.
Having said that, the 0’s and 1’s do not tell the whole story. Using “1” to indicate that we beat the Bitcoin does not tell us by how much. For example, the model might beat bitcoin over 50 percent of the time on a day-to-day basis but still have a lower return over those two years. To solve this issue, we can maximize the difference between the compound daily growth rates (CDGR) of Bitcoin and the portfolio.
Step 2: Maximize Difference in CDGRs
- Click on Model Definition button in Evolver. The only change required is that we now maximize cell V3. Click OK to close the window.
- Run Evolver by clicking Start.
The portfolio will display the optimal weights of each asset to maximize the difference between the CDGR of both bitcoin and our portfolio. Investors should expect to see some assets with weights of 0 percent as the model has only one goal in mind: optimize our chances of beating bitcoin.
Savy Excel users can alter the model and add constraints such as “minimum 5 percent for each asset”. The more time spent tinkering with the model, the easier it becomes to manipulate it for optimal returns.
The blockchain investment world has always suffered from a major issue: it’s nearly impossible to evaluate altcoins. Investors choose their digital assets based on anything they see as significant to price movements. The randomness in crypto investing must end at some point, so why not today?
Using the crypto portfolio optimizer tool, investors can use real historical data to assist in their portfolio construction. Allocating the right amount of funds to each asset is one of the most important decisions when investing, so it is important to utilize Excel models to optimize your portfolio based on historic trends.
Having said that, past trends do not yield future results. That means that optimal portfolios that you construct using our model may not outperform bitcoin in the future, should your altcoin portfolio components not generate similar returns as in the past three years.
Download the BMJ Crypto Portfolio Optimization Tool here.
- A Beginner’s Guide to Crypto Fundamental Analysis
- Digital Asset Valuation: Top 7 Metrics for Valuing Bitcoin, Altcoins, and Cryptocurrencies
- What is the Bitcoin Misery Index And How Can Traders Use it?
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