To Trade Or Not To Trade: Cascading Waterfall Round Robin Rebalancing Mechanism for Cryptocurrencies

TL;DR

This paper introduces the Cascading Waterfall Round Robin Mechanism, an innovative algorithm for portfolio rebalancing in cryptocurrencies that accounts for transaction costs and market volatility to optimize trading decisions.

Contribution

It presents a novel rebalancing algorithm that dynamically determines trade sizes and timings based on asset and market conditions, applicable across various asset classes.

Findings

Effective in volatile crypto markets due to boundary-based trading triggers

Reduces unnecessary trades by filtering market noise

Applicable to multiple asset classes and trading frequencies

Abstract

We have designed an innovative portfolio rebalancing mechanism termed the Cascading Waterfall Round Robin Mechanism. This algorithmic approach recommends an ideal size and number of trades for each asset during the periodic rebalancing process, factoring in the gas fee and slippage. The essence of the model we have created gives indications regarding whether trades should be made on individual assets depending on the uncertainty in the micro - asset level characteristics - and macro - aggregate market factors - environments. In the hyper-volatile crypto market, our approach to daily rebalancing will benefit from volatility. Price movements will cause our algorithm to buy assets that drop in prices and sell as they soar. In fact, the buying and selling happen only when certain boundaries are crossed in order to weed out any market noise and ensure sound trade execution. We have provided several numerical examples to illustrate the steps - including the calculation of several intermediate variables - of our rebalancing mechanism. The Algorithm we have developed can be easily applied outside blockchain to investment funds across all asset classes at any trading frequency and rebalancing duration. Shakespeare As A Crypto Trader: To Trade Or Not To Trade, that is the Question, Whether an Optimizer can Yield the Answer, Against the Spikes and Crashes of Markets Gone Wild, To Quench One's Thirst before Liquidity Runs Dry, Or Wait till the Tide of Momentum turns Mild.