The other problem of “it’s only a small percentage of my AA” is that, if you are actually following your AA and are rebalancing, if you have say $500k NW and 5% in crypto ($25k), and it falls to half, you need to buy another $12k to rebalance to 5%. And then it drops by half again in the next 6 months so you need to buy another $11k and now your low percentage has cost you around 10% to own. I’m not saying crypto isn’t here to stay, but there’s no guarantee it is, and if you have even a small percentage and the hype dies off and you keep buying lower and lower do you just keep going or abandon your AA?
That's a huge issue for rebalancing, and the more often you rebalance, the bigger an issue it becomes. Also, it seems like rebalancing is only guaranteed to be useful if the assets balanced have similar long term performances, or one goes up when the other goes down. There's no guarantee crypto will ever bounce back at all.
Still, if crypto survives at all, logically it will have ups as well as downs. If you buy more when it's down and less when it's up, you might come out ahead. Its high volatility suggests that a strategy that distinguishes well between the low periods and high ones could be effective. Rebalancing is a strategy that seeks to automate the buy low sell high process, so maybe it is relevant.
I think that a logical approach might be rebalance, but rebalance rarely. That would minimize the total loss in the event that crypto dies, but still produce gains if it bounces back. Maybe:
1. do once a year, not once a quarter?
2. assume 3 or 4 down years max, never investing more than a quarter of expected max allocation?
3. So if your target was 8%, invest 2% / year under "low" conditions, nothing in non-low ones
4. Don't sell unless allocation is over 8%
This still has all sorts of uncertainties, like "what is low" and whether to sell all of the amount over 8% or only some. Or since it's certainly not guaranteed, whether to try it at all. :)
For myself, the tiny bit I bought is an opening attempt to buy low. Not suggesting anyone repeat my example, just offering info as a contribution to group entertainment/education, in appreciation of others' contributions across the forum. For now I can buy more at each ratchet downwards if prices keep falling, for several ratchets down (another 20%, another 40%, perhaps) and still be within 2%.* But if it bounces back 3x to prior levels, or perhaps 5x, might be good.
Is this how a formerly sensible person squanders their minimal FIRE nest egg? Stay tuned/keep following, I guess.
*To be clear, I'm not planning to limit myself to 2%/year. Just discussing the idea in this thread, because it fits this thread's title.