In today's investment landscape, cryptocurrency has emerged as a pivotal component of every portfolio. At SwissBorg, we aim to stand out among exchanges by offering specialised wealth management services. In this article, we aim to introduce an optimised portfolio model designed to adapt seamlessly to the fluctuations of the market cycle while firmly rooted in traditional financial theory. This model is crafted to navigate the intricacies of the crypto market, providing a robust and structured strategy for portfolio optimisation across various market conditions.
1. Market Regime Segmentation
1.1 Cycle Definition
In our pursuit to master the crypto market's phases, we've divided the market into four key stages: Bull, Bear, Accumulation, and Distribution. This segmentation is more than a mere classification; it's a foundational aspect of our strategy, offering deep insights into market dynamics and influencing our investment approaches.
Accumulation: This phase is the initial stage of the market cycle, preceding the uptrend/bull market. High volatility is still expected since the trend isn't clear yet; however, this is when smart investors purchase undervalued assets, offering them a chance for bigger gains. In this phase, we usually focus on blue-chip assets.
Bull Trend: This cycle is characterised by long-term, consistent rises in asset prices, driven by increasing investor confidence and a positive economic outlook. During this period, investors often increase the risk in their portfolios to capitalise on the upward momentum.
Distribution: At the market's peak, asset prices plateau, signalling investors to sell or adjust holdings. Despite potential euphoria and high volatility, savvy investors engage in strategic reallocation from high-performing to more stable investments. This phase is key for profit-taking and wealth-preservation.
Bear Trend: This phase features a prolonged decline in asset prices, reflecting reduced investor confidence and economic downturns. Investors prioritise capital preservation, shifting towards conservative investments and reducing exposure to high-risk assets, focusing on risk management and stability.
1.2 Market Regime Identification
SwissBorg combines advanced indicators and macroeconomic models to identify the current market regime accurately, synthesising these elements into proprietary signals. These signals classify market conditions into three broad categories: Bull, Bear, and Undecided, with the latter encompassing both Accumulation and Distribution phases. At the heart of this process is the monthly review conducted by our analysts. This practice ensures that our strategies are theoretically robust and practically in sync with real-time market trends. Their role is crucial in validating these signals against the prevailing market scenarios. This ensures that our strategies are theoretically sound and practically aligned with real-time market trends.
2. Allocation
2.1 Core Portfolio
The Core portfolio forms the "safe haven" of an investor's assets, designed to preserve capital over time while generating fair returns. It commonly includes two of the most renowned cryptocurrencies – Bitcoin and Ethereum – considered essential holdings in any modern portfolio. This approach is further enhanced by incorporating assets like Gold and Stablecoins, such as USDC, which serve to protect the capital and mitigate downside variance. The composition of the Core portfolio is dynamically adjusted and optimised for each market regime, employing a modified version of the mean-variance model. The goal here is clear and achievable: consistently outperforming standard benchmarks, including Bitcoin, over the long term. This is realised through the strategic application of the Sharpe optimal portfolio method, fine-tuned with selective cash infusions to align with specific investor risk profiles. This approach ensures a solid base for the portfolio, adeptly balancing between growth opportunities and risk control.
2.2 Satellite portfolio
The Satellite portfolio complements the Core holdings by embracing a more adventurous investment approach, targeting higher returns, especially in bull market phases. This segment of the portfolio is allocated to higher-risk assets with the potential for significant gains. When constructing the Satelliteportfolio, it's crucial to ensure diversification across various sectors, including Infrastructure, Decentralised Finance (DeFi), Gaming, Real World Assets, and Artificial Intelligence, while also spanning different market capitalisations. Including microcap assets can offer substantial returns, but managing the associated risks is essential, as the potential for return is intrinsically linked to the level of risk undertaken.
To provide a specific example of this approach, our Satellite portfolio is designed as a simply equally weighted collection, which is rebalanced every quarter to incorporate new tokens that emerge in the SwissBorg Universe. However, it's important to emphasise that this is merely one example of how a Satellite portfolio might perform. Investors should tailor their Satelliteportfolios based on their own convictions, market opportunities, personal investment objectives, and risk tolerance levels.
3. Portfolio Optimisation
Having optimised the Core portfolio and analysed the performance of the Satellite portfolio, the final step in our comprehensive approach is the holistic optimisation of the entire portfolio across various market conditions. This crucial phase involves fine-tuning the balance between the Core and Satellite components, with a keen focus on aligning this balance with the prevailing market regime. Such an approach ensures that the portfolio is robust and dynamically responsive to market fluctuations.
Our backtesting results compellingly showcase the effectiveness of our strategy. In a forthcoming article, we will detail the recommended allocation weights for the various components, tailored to different market phases and aligned with the investor's risk profile.
Conclusion
Our commitment at SwissBorg goes beyond mere crypto wealth management. We strive to offer a strategy that seamlessly merges the rigour of traditional finance principles with the dynamic nature of the crypto world. Our goal is to empower our community with the tools and knowledge necessary for making informed investment decisions. By guiding them in constructing their portfolios, we aim to pave the way towards their financial independence and success in the evolving landscape of cryptocurrency investment.
