How To Automate Your Crypto Portfolio
When most people think of trading bots, they imagine complex services that have a never-ending set of bells and whistles. Sliders, levers, and input boxes peppered throughout the UI to create a sea of confusion.
After using one of these trading bots, it would be no surprise if you thought “trading bots are too complicated.” Frankly, you would be correct. The majority of trading bots are too difficult to use.
They are not only a problem for your sanity, but they can be devastating for your portfolio as well. Without a deep understanding of these trading services, one small misstep can result in losses that you can never recover.
Let’s take an example from Caspian. As one of the most advanced trading resources in the crypto market, it has become known for its complex design and endless features.
Like most people, you may watch this quick video tutorial and immediately think “there is no way I’m using a trading bot if it’s this convoluted.” That’s okay, you wouldn’t be the only one. Even professional traders will be watching this video and scratching their heads.
The UI looks like a mad scientist tried to design a user interface for controlling the quantum state of the universe.
Crypto traders have better options, thankfully. Instead of trying to haggle with complex solutions like the one discussed above, or trying to trade manually on exchanges, there are ways to manage your assets in a more holistic way.
This is called portfolio management.
Instead of executing trades for each individual asset, portfolio management allows you to simply select the assets you want to own and then abstract the rest. The order execution is then managed by a software solution that interfaces with the exchange to execute your strategy or construct your portfolio.
Some of the most common strategies people have been using for portfolio management include rebalancing, dollar-cost averaging, and smart order routing. Each of these strategies is important to understand. They will help you simplify the way you manage your portfolio with trading bots, without adding extra complexity.
Portfolio Rebalancing
Portfolio rebalancing for cryptocurrency is similar in many ways to how it is executed in the traditional financial system. This strategy has been used for decades by institutions to reduce portfolio risk.
As the price of cryptocurrencies fluctuate, portfolio rebalancing allows us to maintain a consistent allocation of each specific asset. For example, if you have 25% BTC, 25% LTC, 25% ETH, and 25% XRP in your portfolio (based on value). As time goes on, the markets will change and you may end up with more or less of each asset (based on value) in your portfolio than you desired from your initial allocations. A rebalance would trade the assets such that at the end of the rebalance, you once again hold 25% of each of these 4 assets.
To better illustrate how this works, here is a detailed example.
1. Start of Rebalance Period
2. Allocations Change Over 24 Hours
3. Rebalanced After 24 Hours
When you rebalance, you are simply trading in order to have your portfolio match this original allocation of 25% in each asset. This rebalancing can happen on a periodic basis (example: every 1 day) or on a threshold basis (example: when one allocation is 15% more than it should be).
Dollar-Cost Averaging (DCA)
Similar to rebalancing, dollar-cost averaging has been used by investors in the traditional financial market to reduce the downside risk of entering into the market all at once.
Although there are multiple ways to think about dollar-cost averaging, we will be thinking about it in terms of the entire portfolio.
A dollar-cost averaging strategy is essentially injecting funds into your portfolio on a regular or semi-regular basis. Each time new funds are added to your portfolio, they are automatically distributed to the allocations you have selected in order to maintain the desired allocations.
Dollar-cost averaging is similar to rebalancing in some ways but uses a different mechanism to determine when and how to allocate the funds. That mechanism is a deposit to your portfolio. When new funds are deposited, this event will be recorded and trigger the DCA.
Let’s take a look at an example DCA event.
Pre-DCA Portfolio: Asset Value
Imagine you are the owner of a portfolio that has $20 in 5 different assets. These assets are BTC, LTC, ETH, XRP, and BCH. Each of these assets would then comprise of 20% of your portfolio. If you wanted to dollar cost average your portfolio each time you deposited new funds, you would first need to determine what allocations you would like to have at the end of the DCA.
In this example, we will use target allocations of 30% BTC, 25% LTC, 20% ETH, 15% XRP, and 10% BCH. As we can see from the current state of the example portfolio, we have not reached our desired allocations.
Let’s see how that will affect our DCA.
Post-DCA Portfolio: Asset Values
Once funds are deposited into the portfolio (regardless of what asset was deposited), the new funds will be traded in order to reach the target allocations. In this example, $100 was deposited into the portfolio and then distributed to the desired allocations.
Note: None of the existing funds in the portfolio will be traded, only the deposited funds. That means if you deposit $100, only the $100 that were deposited will be used for trading to reach the target allocations. Therefore, it’s possible we won’t be able to reach the target allocations during a DCA event if one of the assets is over-allocated by a significant amount. For example, if BCH had a current allocation of $25 (or 25% of the portfolio).
Smart Order Routing (SOR)
Smart order routing is a strategy for moving funds from one asset to another asset as optimally as possible. When we say “optimally”, that means using whatever means possible to get the lowest prices for trades, so when you reach the final asset, you have the most funds.
Let’s look at an example.
Say we have 10 LTC that we want to trade for DASH on the Binance exchange. We can see by going to the exchange that Binance has trading pairs for LTC/BTC, LTC/BNB, LTC/ETH, LTC/USDT, DASH/BTC, DASH/BNB, DASH/ETH, and DASH/USDT. This presents a number of different ways we can sell our LTC and buy DASH. We could sell LTC for BTC, BNB, ETH, or USDT and then buy DASH from that intermediary.
SOR helps us make these difficult decisions by calculating the most optimal path. Once the path is calculated, it will continue to re-evaluate the market in real-time to continue to make decisions. That way every trade is precisely placed to reach the best outcome possible.
The result may be that 5 LTC is traded to BTC, 2 LTC is traded to BNB, and 3 LTC is traded to USDT in order to buy DASH.
Conclusions
Cryptocurrency is a complex market. Not only is it confusing for new traders to learn everything there is to know about exchanges, wallets, blockchains, scams, dApps, and more - once traders enter the market with their initial capital, it’s confusing to learn how to manage a portfolio of assets.
Shrimpy has a vision for the future of crypto where it’s simple to buy assets, create a diverse portfolio, and automate a long-term strategy.
It only takes a few minutes to set up a Shrimpy portfolio and begin automating each of these strategies. Once set up, that’s it. There is no maintenance. Getting exposure to the cryptocurrency class should be nothing but seamless. That’s what we will need for global adoption, so that’s what we’re prepared to do.
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