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Crypto Portfolio REHASH
Disclaimer: this is not financial advice. This is a look at an open-source portfolio optimization technique utilizing Modern Portfolio Theory, through basic spreadsheet formulas & Rstudio analysis.
A couple blogs back, I mentioned the Importance of Portfolio Optimization as applied to various cryptocurrencies. For a look at this analysis into the application of Modern Portfolio Theory, visit the original analysis.
This analysis delivered a good cursory view of how to appropriately balance a portfolio. However, I stumbled upon additional information in the subsequent months that I thought would improve it.
A Reddit user posted a metric showcasing the annual rate of inflation for a number of cryptocurrencies.
As per the headline, the intent was to check any given crypto project's claimed inflation rate against the actual calculated annual inflation using the formula:
Inflation Rate % = (2022 Supply / 2021 Supply ) - 1
Why is this important?
Inflation decreases the time value of an asset over time.
I was curious as to how my original selection racked and stacked against the calculated actual inflation rate for each coin & token. It turned out that more than the majority of my selected cryptocurrencies had fairly high calculated inflation rates, with half well over 10%.
A few days ago, I decided to take another sample of cryptocurrencies, that were top-of-mind for me to reassess, for an optimized portfolio in the coming year or so. The distinguishing factor this time lied within their individually captured annual inflation rates, between 28 December 2021 to 28 December 2022.
True to form of the original reddit user, I used CoinMarketCap circulating supply data, notably from the 28 December 2021 Historical Snapshot, and individual daily price statistics of each cryptocurrency.
As a result, I captured the following table:
Hence, I decided to pick my potential rebalanced & optimized crypto portfolio, with the following personal criteria to select cryptocurrencies that:
• beat the U.S. annual inflation rate (hovering around 7%)...
• ...Moreover, have an optimal inflation rate of 2% or less
• Are Proof-of-Work (preferred), or Proof-of-Stake
• Offer purposeful utility with potential
• Are not Memes Tokens
• Are not Stablecoins
From this selection criteria, I decided on the following four coins & tokens:
• Bitcoin (BTC)
• Monero (XMR)
• Cardano (ADA)
• Decentraland (MANA)
I then re-evaluated two distinct portfolios (Minimum Variance versus Tangency), with Yahoo Finance historical price performance data, captured between 03 January 2009 to 28 December 2022.
For the reproducible R code see: Crypto Portfolio Rehash
I opted for the Minium Variance Portfolio over the Tangency Portfolio:
Given a hypothetical amount, say $1000, this portfolio weighting would determine the following allocation:
Takeaway: hopefully anybody can aspire to vet the merits of various cryptocurrencies, projects, and protocols given the aforementioned analysis and factors considered.
Consumer preference among cryptocurrencies may vary, given other considerations.
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