Let’s begin our discussion with the hallmark of the crypto market; the pump and dump. This is when a sharp value increase of an asset is followed by a sharp decline in asset. The result is a return to the original price.
This graph illustrates a pump and dump. 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 pump and dump.
The results of HODL for this situation are simple. Since the beginning and ending price are both the same value, HODL will result in no change of value for the portfolio.
Pump and dumps provide an opportunity for rebalancing to capture returns for the portfolio. When rebalancing, we shave off some of the value generated by the volatile asset and spread the returns into other holdings. Since the price of the volatile 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.
Pump and dumps present an opportunity for rebalancing to increase your total holdings. These same opportunities are not available for portfolios which simply HODL through a pump and dump.
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