At a high level, building an investment portfolio consists of answering two questions:
Which assets should it hold?
What share of the portfolio to put into each asset?
The optimal answers to these questions should achieve the maximum potential return with the lowest risk of drawdowns.
One time-tested approach that works in the stock market is to build a diversified portfolio that aims to replicate the market as a whole. Think the S&P 500.
This is known as a capital-weighted portfolio. The share of each asset in the portfolio equals the share of the asset’s capitalization to the total market capitalization.
The alternative is to try to follow the trends. This is known as momentum trading. The basic idea is to identify assets that are going up in price and are likely to continue to go up. Then sell these assets once the probability of further price increase is lower than the probability of a correction.
To find and exploit these trends, discretionary (i.e. manual) traders rely on their own skills and experience and algorithmic traders (including Stoic) rely on a system that uses mathematics and statistical techniques.
Stoic’s algorithm combines capital-weighted and momentum approaches — this is sometimes known as smart beta.
Here is how the process looks from a high level.
Review everything: The algorithm considers all assets on Binance with at least $10 million in trading volume. For each asset, it assigns a weight based on its capitalization.
Buy more of what will go up: The algorithm also analyzes previous returns, price volatility, correlation with other assets, and other factors to identify the assets that are rising and are likely to continue to go up. Stoic increases the weighting for this asset.
Sell assets that might go down: Likewise, the algorithm estimates the likelihood of the asset going down. If it statistically looks like the price has peaked, Stoic sells the asset or at least decreases its share in the portfolio.
You can see that on any day, Stoic’s portfolio will include lots of different assets. Typically, a share of each asset is under 1%. The largest weighting would be 2-3%.
This means that a Stoic portfolio gives exposure to the broad altcoins market. It’s diversified: the risk of any crypto crashing balances out. Yet the portfolio is also likely to catch any moonshots.
Although Stoic has a purely mathematical approach to building a portfolio, many users still ask about specific assets.
Why did Stoic buy XYZ? Why did Stoic sell ABC?
Sometimes you might see some crypto shot up by 50% or more on some major news. Or maybe some hot token was listed on Binance or Coinbase. Or some crypto partnered with TikTok or whatever.
Stoic ignore all that noise.
Instead, Stoic looks at (1) capitalization to select weighting and then 2) evaluates the asset’s momentum to buy what’s going up and to sell what’s about to go down.
Furthermore, if you see crypto assets in the news, on Twitter, or among the top gainers on Coinmarketcap.com, this likely means that its price has already pumped — and in most cases, it’s too late to buy them.
In any case, Stoic will algorithmically assess whether the price will continue to go up or down.
Why does Stoic hold (no) BTC or ETH?
Occasionally, Stoic might hold BTC and/or ETH.
Yet these two assets dominate market capitalization. And large-cap assets tend to underperform assets with smaller market caps. Assets that are already flushed with capital usually appreciate at slower rates than assets that are less capitalized. That’s a well-documented phenomenon in the stock market.
So Stoic gives preference to smaller assets that are more likely to deliver higher returns.
Yet Stoic’s job doesn’t stop at just building the portfolio — it also rebalances it daily.