Two of my favorite techniques in investing are dollar cost averaging (when buying and selling) and rebalancing.
The early stage venture capital business has dollar cost averaging built into its buying model. You build up a position over multiple rounds and years. That is a great thing. I also try to exit investments, particularly public stocks, via this technique. But when a company is sold in an M&A transaction, you generally have to sell everything at once.
In public stocks and other marketable assets, these techniques are particularly important. I believe you can spot a long term trend and ride it. But I do not believe you can spot a market bottom or top until it is in the rear view mirror. So that is why I like to average into and out of a position over time.
Rebalancing is even more important. If you have a position that has worked incredibly well and it starts to become a very large portion of your overall portfolio, it is wise to take some of that position off the table and reinvest it in other attractive assets. This gives you more diversification, which I believe is generally a good thing, and also de-risks your portfolio from a big selloff in the largest position.
The reason I mention this is that I have been rebalancing my crypto portfolio. I got into BTC early and have held a highly concentrated position in BTC for the past five years. As other crypto assets have developed enough liquidity and maturity that they become attractive holdings, I have been taking profits on my BTC portfolio and reinvesting, mostly in ETH for now. But I am also looking around at other crypto assets to start buying.
The macro thesis around crypto has been building for the last six years that I have been investing and following it. I think it is certainly time to have a diversified portfolio and start using best practices for investing in marketable assets in this sector.
Do you rebalance even when the one with the largest share/stake in your portfolio is the one you believe in the most by far?And for a more cheeky question: Which other tokens are you looking at?
that’s a great question.having partially-rebalanced’ over the weekend out of fear rather than better options, now wish i hadn’t. btc up, all else down.
Don’t second guess yourself over shortly term moves. This is a long game you are playing
Look at the % upside. If btc goes from 1200 to 1700 vs. another currency from 20 cents to 80 cents for example.
that was exactly my thinking. still feels like a move from ‘safety’ to get to ‘safety’
Read Market Wizards by Jack Schwagger, hopefully before your conference. Written in the early 80s, it interviews the best traders of its time. There are critical lessons on investing that every crypto currency trader should consider.
Good book. “Some people were lucky enough to be born smart. Others were even smarter and got born lucky.” – Ed Seykota. Market Wizards.
tx for the suggestion…ordered it!
Will do. Thanks
I am sure you made a great profit. I sold ETH apx one week ago, then regret and bought back at higher price. 15% loss because of stupid behavior as human being with feelings. Now I think about the 15% loss instead of 2x profit so far. Maybe we should invest as robots.
Yes. We did that with Twitter several times and it was a good thing. I think it is even more important when you start drinking the Kool Aid.I am very interested in the Filecoin token that our portfolio company IPFS is working on. Hasn’t launched yet though
Interesting, might have to move some Eth into newer tokens. How big is too big in your opinion (as a % of portfolio)?A lot of interesting ones launching in the coming months. Looking forward to Filecoin as well!
More than 60% in any crypto token feels high to me now. I am over that with BTC and this rebalancing. But I like to take my time to do it
I’d suggest Factom (FCT) and Golem (GNT) if you’re looking for immediate re-balancing. Both look very promising.Realizing some of the gains to re-allocate on promising ICOs such as Basic Attention Token (BAT) and Tezos also makes sense in the long term.
How would you view re-balancing out of a well-performing asset vs. re-balancing using new funds (“fresh fiat”)? I suppose then it’s a question of overall portfolio but it’s hard to kill your darlings.
Rebalancing early can also trigger taxation in the U.S.
is Filecoin still being developed? the website looks ossified. everything is ‘2014’, including the blog. ‘the lights are on, but…..
A very interesting project is Golem, GNT which has garnered support from Polychain Capital which I believe USV has invested in. And just around the corner is Tezos which is also backed by Polychain. I think this ICO will be grand to say the least.
Yup. The market liquidity that exists today within these new cryptoassets is very attractive. Start here: http://coinmarketcap.com
This is nuts. Some of these have gone up 200% in 24 hours? This scares the heck out of my rational investing mind. (Which rarely wins anyway.)
The pump & dump schemes are pretty much happening everyday. Those who orchestrating them (whales?) are mostly parking their gains back to Bitcoin and most recently Ethereum IMO.
Good point. As they say, fear and greed are the biggest drivers of stock and similar markets.
So how do people pull cash out – or do the just buy more bitcoin?
Fred wrote it in his most recent blog. But Jack Bogle (apologize if I’m a fan-boy) has been screaming well into his upper 80’s or perhaps 90’s now to IGNORE THE NOISE!!!! If you can do that you’re ahead of the vast majority of people in business or certainly investing. Not everything is a signal or a pattern or …. sometimes the hardest thing to do is to do nothing 🙂
“sometimes the hardest thing to do is to do nothing” – i like that. some people think that doing ‘nothing’ is ‘nothing’. it isn’t. it’s waiting for everyone else to lose patience.
Of course, the way to make big money is increase the beta risk in your portfolio. To put that in Layman’s terms “When you gotta hunch bet a bunch”
In a 10x-100x asset class you don’t have to behave the same way as you behave in a 2x asset class
Yup. A basket of diversification is the best approach. Not many real signals exist to warrant a rational strategy. As I said before, many of them quickly go into darkness for a long time. So it’s crap shoot really. http://startupmanagement.or…
Maybe, the problem with diversification is within a early stage sector is that you multiple return at least equal to the number of coins just to break even. Think of the early auto industry (where a group of winners was essentially a guarantee), there were more than 1500 companies in the race.
This is a massive caveat to much of what I wrote about rebalancing.From a ‘life perspective’ when you are dealing with a 30x or 50x or 100x asset class or return you are probably going to take a lot of risk beyond a certain point for relative small marginal gains in life utility / happiness. So the risk of the downside probably dictates that you’d be quicker to rebalance at 20x or 50x because you are taking risk for financial return but not a lot of ‘life return’ I suppose.
Context is the most important adult word ever.Followed by principles.And results.
In this context it is important to differentiate between just cryptocurrency and token clones and original ones with interesting research behind. One that is worth analyzing now is DFINITY which has original consensus and scaling ideas.
I’d love to hear your thoughts on how to rebalance effectively in a seed stage portfolio, where liquidity is limited. Would you push to create liquidity, or just wait to balance with follow rounds? Any other mechanism to adjust?
It seems ETH, BTC and other alts are becoming assets on their own, which grow and shrink in value based on their projected future utility (as they should). Yet, at times they all move in the same direction based on what seems to be irrational exuberance or irrational fear. Further, if there is a major tech issue with BTC or ETH, it seems the whole market could crater and stay that way for a long time.Are you tempted to rebalance out of crypto?
Great reading. I prefer to invest long term 6-24 months (entering a profitable asset is usually the easiest part, but I suck at selling smart). Fred, do you have a pre-defined sell strategy (mathematically) or do you sell/rebalance with human feelings from week to week?
“The macro thesis around crypto has been building for the last six years that I have been investing and following it.”Was wondering exactly what this thesis is from your point of viewBest
Probably a dumb question – but are there mutual funds or other baskets of crypto assets that are marketed separately for non experts?
Iconomi is good.https://www.iconomi.net
Based on our previous discussions, I imagine you have made a handsome profit on those portions you are moving to other assets. While we may disagree on the blockchains and such for the future, you obviously saw something, took the risk, and are reaping the rewards. I wish you sincere congratulations.
How does the process of dollar cost averaging work for the early stage venture capital business?Is it investing in all of the following rounds even if it’s a down round?
I’m curious about this too
It would not. Do the back of the envelope math on a portfolio of 10 companies, 2 with 10x returns, 3 break even and 5 that bust. Assuming you could rebalance once a year for 10 years add in the tax consequences and you’ll quickly see what a bust this would be.
I think you mean, “especially” if it is a down round. If it’s a down round, as an investor, you’d want to be in on it.
Makes sense, thanks!
I can’t see the fundemental rationale for rebalancing within a sector. Take the auto industry for example. If one were to have invested in all the auto stocks in 1915 and periodically rebalanced, one would have a suboptimal return when the fogged cleared and the 3 winners emerged.
But would your returns have allowed you to achieve your life goals? I don’t mean to be holistic or pretend money isn’t important, but let’s say you underperformed but made $10m instead of $50m — pretty extreme. But you still won in the game of life. And you did so with a whole lot less risk.
Yes to a degree when the rebalancing is across asset classes portfolio (stocks and bonds for example). The underperformance within a sector (within crypto for example) would be (assuming you have a winner) would be huge.
CONTRIBUTORS:Be aware of irrational exuberance.Trends shouldn’t be followed. Be ahead of the curve.
CONTRIBUTORS:OFF TOPIC ALERT!Titbits from the Commencement speech by Documentary Director Ken Burns…1. The nurturing of an incipent profascism, jingoistic saber-rattling and dictatorial tendencies.2. There comes a time when I–and you–can no longer remain neutral, silent.——–A snapshot of this blog of Progressives standing idle and mute while Alternative essays and intentional lies are posted unabated.Wealth has much to do with just having the excuse of no time to address it. (sic)
Mr. Market will be collecting the fare for the recent run in all markets. It will be more than expected.
The VIX hit a 24-year low yesterday and Bitcoin hit a new High.Make of that what you will :-).
My inner alert system is going off but could be political too
There is nothing to fear but the absence of fear itself.
I thought you didn’t own a lot of BTC currency; just stock in companies working in the space?
At first I thought that BTC and crypto coins would flop because they are too close to what criminals, terrorists, drug dealers, illegal importers (rum runners), and tax evaders want to use, and since the world financial system has been successful in making banking life hard for terrorists that system should also be able to make crypto coins just something for back alleys.Also there is not much for a barrier to entry; so, there can be a lot of different crypto coin systems. Further, for coin mining, there’s a chance someone will find a computationally fast way to do that, if not always in principle then often enough in practice. Besides, Intel can build a 1000 core processor as soon as very many people want them.I still believe that is the case.What I didn’t see is how long it is taking to throttle crypto and the opportunities to make money with it in the interim.
Is there a particular system you are using for rebalancing? Currently I am balanced between the top 3 by market cap, weighted by market cap.
CONTRIBUTORS:OFF TOPIC ALERT!The firing of Republican FBI Director Comey is similar if not exactly like Disgraced President Nixon Saturday Night Massacre to purge the Justice Department of investigating his illegal wiretapping.The big difference now is the country is so partisan that Conservatives will justify and support corruption, spying, etc. at the cost of the country. (Nothing is proven because he just fired the FBI Director and the Republican house has no interest in fact finding if anything did occur which the preliminary testimony shows something occurred. (Flynn)Let the excuses and Democratic names loose to obscure with Alternative facts. Deny, lie, lie some more and deflect.#UNEQUIVOCALLYUNAPOLOGETICALLYINDEPENDENT
you have lost all credibility, Podesta bot.
CONTRIBUTORS:Rebalancing our portfolio has involved the reallocation of assets to a defined makeup. This applies whether the target allocation is 50/50, 70/30 or 40/60.
you said previously that you would not sell your bitcoin – have you glimpsed something in the fog?are you still with the ‘fat protocol, thin client’ analysis?
Did you (or anybody here) do a 1031 exchange between crypto assets? I think it could be possible based on current IRS guidance but I am wondering if anybody here has already done it successfully?
Thanks for sharing your tips Fred. One article that I liked about asset diversification in the crypto sphere is this one: https://thecontrol.co/the-b…
hi allany crypto currency newsletters you recommend–that advises on allocation ?Hard to keep track of them all and don’t want to put all my eggs in 1 basket….
Not a newslettrt but many sources. https://thecontrol.co/some-…
What are the tax implications of rebalancing? Do you expect to simply pay capital gains (long or short term)? The tax question with crypto is non-obvious.
Bitcoin has the advantage of its returns being uncorrelated with other major asset classes, which potentially makes it worthwhile to allocate 1-3% of a portfolio to bitcoin.This paper is a bit dated, but you get the idea:”Spanning tests confirm that Bitcoin investment offers significant diversification benefits. We show that the inclusion of even a small proportion of Bitcoins, say 3%, may dramatically improve the risk-return trade-off of well-diversified portfolios.”https://papers.ssrn.com/sol…also: https://revoltura.com/portf…
How about using decentralized indices for crypto, that rebalance periodically? create sector ones like computing index, data storage index and market cap indices – large, medium, small etc.