Let’s now look at what happens if we have a single asset in the portfolio which is continuously increasing in value. Over the long term, it continues on a general increasing trend.
This graph illustrates a slow climb. 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: HODL beats rebalancing. However, rebalancing offers an opportunity to reduce risk by shaving off some of your returns into other assets.
HODLing an asset which is slowly increasing in value results in a net increase for the portfolio. This slow incline has no affect on the rest of the portfolio, so the value increase from this asset is directly proportional to its own value increase over time.
Rebalancing an asset which is constantly increase results in shaving off profits and dumping them into the rest of the portfolio. Since this instance is discussing the behavior of a single asset, this would result in a dampening affect on the value increase for this single asset.
Steadily increasing asset value has advantages for both rebalancing and HODL. HODL generates larger returns if the rest of the portfolio value remains stagnant. The reason for this is that profits won’t be taken from the succeeding asset. In the other case, rebalancing has an advantage because a steady increasing asset that always wins is far more rare than many investors believe in the crypto market. This means a more typical case is one asset grows in value, but the next time it is a different asset that has great growth. In this case, it’s better to shave off some of the profits from one asset since the next time period may see a rise in a different asset.