Sharp Jump (Pump)
Sharp jump is the situation where a single asset in your portfolio quickly increases in value until it reaches a new baseline value.
This graph illustrates a pump and then stabalization. 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 and HODL produce similar results for this type of sharp jump.
HODL of an asset which has a sharp rise simply results in the increase of portfolio value directly proportional to its own value increase over time.
The results for this situation are the same as those of HODL. While the single asset pump resulted in a net increase for the portfolio, a rebalance at the dot does not introduce any additional gain in funds. Rebalancing anywhere along the increasing line before the dot would result in under performing when compared to HODL (See “Slow Take Off”).
Both rebalancing and HODL perform the same in this instance when looking at the complete portfolio value. Rebalancing at the dot will redistribute some of the gains observed during the sharp incline, however, the stabilizing price afterwards means no additional gain in portfolio value is observed.
Slow Take Off
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.
Pump and Dump
Let’s end 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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