There have been several famous flash crashes which were followed by quick recoveries in crypto. The one discussed at the start of this article was when ETH flash crashed to 10 cents. This may not be a weekly event, but we can examine how rebalancing would have affected your performance during this flash crash and recovery.
This graph illustrates a flash crash and recovery. The white line is the price of a single asset in a portfolio. The orange line is the value of the portfolio if the HODL strategy is used from beginning the end. The blue line is the value of the portfolio if a rebalance was performed at the white dot. Result: rebalancing results in greater returns than HODL for this type of flash crash and recovery.
The results of HODL for this situation are the same as the pump and dump scenario. Since the beginning and ending price are both the same value, HODL will result in no change of value for the portfolio.
Rebalancing can capitalize on these flash crashes to result in a net positive increase in portfolio value. When rebalancing, we buy more of the volatile asset while it’s cheap. Since the price of the asset returns to the original value, the net result of a rebalance anywhere along the pump or dump curve is a positive return for the portfolio.
Catching flash crashes with rebalancing can increase the value of a portfolio. In order to highlight how significant this would have been in the case of the ETH flash crash, catching this flash crash would have resulted in up to a 1595x return for your portfolio. While this will likely never happen again, it’s not unlikely that smaller flash crashes with recoveries will take place which rebalancing can capitalize on. This illustrates how predicting the future isn’t possible in the crypto space. Creating a stop loss and selling ETH as described at the start of this article would have resulted in large losses. However, continuing to rebalance through the crash would have presented potential for incredible gains.