Rebalancing is the theory that now underpins one of my newly developed bots.
The idea itself is old and rather dull, which in this business is a compliment. Every portfolio drifts, and a crypto portfolio tends to drift faster than most. Vanguard’s plain description is that as the value of what you hold fluctuates, the mix you chose may “begin to drift away from your target mix,” and rebalancing is the adjustment that keeps you from straying too far from it. Whatever has run up becomes a bigger share of the whole than you meant it to be, and whatever has fallen becomes a smaller one. Rebalancing is the chore of putting the proportions back where you decided they should be.
Here’s how I’ve applied it. I keep everything as a portfolio — every coin has a place in the whole, and a proportion of it that it’s meant to occupy. Then I deploy trading bots to keep everything in alignment. Each bot works a traded pair, and it stops when that pair is in alignment with where both coins should be in the portfolio. When the two drift apart again, the bot has work again.
The bot never decides what belongs in the portfolio, or how much of it. Its whole job is to enforce the proportions it’s given. Crypto doesn’t keep office hours, and drift doesn’t wait for anyone to notice it, which is what makes the job a natural one for a bot rather than a person with a spreadsheet.
So there are two things going at once, and they need each other. The portfolio is the plan — what the whole is supposed to look like. The near-constant bot trading is the enforcement. Between the two, the portfolio stays in balance.
I’m writing this in the month Coinbase went to Nasdaq — it set its listing for April 14, under the ticker COIN — so there’s no shortage of noise about where everything is heading.
