To Trade Or Not To Trade: Cascading Waterfall Round Robin Rebalancing Mechanism for Cryptocurrencies
Ravi Kashyap
TL;DR
The paper tackles efficient, blockchain-aware portfolio rebalancing in hyper-volatile crypto markets by accounting for gas fees and slippage. It introduces the Cascading Waterfall Round Robin Rebalancing algorithm, which allocates asset capacity from risk/return characteristics, enforces min/ideal/max weights, and schedules trades in a cascading, round-robin fashion across networks, while considering bridge constraints. A Weight Calculation Engine provides multiple risk- and volatility-based weighting schemes, including $R_t=\ln\left(\frac{P_t}{P_{t-1}}\right)$ and rolling $\sigma_t$ computations to derive ideal weights under bounds $minweight_{it}$ and $maxweight_{it}$. The approach is demonstrated with numerical examples, discusses practical off-chain/on-chain implementation, and argues that the method can improve transaction costs and risk management relative to simple rebalancing, with broad applicability across 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.