Rethinking Passive Income

This article is a followup of the last one about extracting crypto profits. After writing the last article I started to think if holding a long term position in passive income coins (MNs, PoS, DEX coins, etc.) is really worth it.

I love passive income plays, but I reached the conclusion that to HODL them forever is not really worth it.

Some points:

  1. ROI vs price swings: volatility on crypto is so big that the price swings during the altcoins market cycle can be much higher than the passive income ROI during the same time
  2. Long term risks: FA on a specific coin can change quite quickly on crypto. Holding a coin for months and years can increase exposure on these risks
  3. Taxes: staking coins is considered income (like mining) and taxed as such in many countries

Regarding the first point we have to consider that with the current 20% allocation to passive income an average of 60% ROI is needed to reach the goal of 1% monthly extraction. 60% in my opinion is a too high ROI for solid and long term passive income coins.

Merging low caps strategy (BMP) with passive income strategy

Continuing the quest for portfolio simplification, what about if we merge the passive income allocation with the low caps strategy? We could stake them during HOLD and TRIG phase and then sell them during the USD and BTC phases.

With this solution we should be able to reduce the portfolio drawdown during the bear phases and still get the added rewards of passive income during the stable or bull trend.

During the market cycles we will continue to extract 1% of the crypto portfolio every month, even if we are not staking and getting rewards. During the bear phases we will get a “synthetic passive income”.

The merged and simplified portfolio looks like this:

screenshot_02
Simplified portfolio

During the USD and BTC phases the low caps strategy (BMP) rules are the same as the BTC Strategy (HMA). Therefore during these phases the portfolio will look like this:

screenshot_03
Portfolio during low caps USD and BTC phases

Backtesting a 1% monthly extraction

What happens to the portfolio performance if we extract 1% every month? Isn’t too much? I calculated this scenario on the backtest page.

backtesting
1% monthly income backtest

The cumulated income plus the remaining portfolio is around 75% of the portfolio with full compounding. Personally I think this is totally acceptable.

You need also to consider that at a certain point you will need anyway to take profits from your crypto portfolio and reinvest those profits on traditional markets.

The most impressive thing is that the cumulated income alone is bigger than HMA BTC, Low caps strategy, HOLD ALTS and HOLD BTC results. The big caps strategy is such a beast!

The portfolio performance will be further increased by the passive income rewards during the bull phases (not calculated in the backtest). Another interesting action could be to cap at maximum fiat value the monthly extraction, usually to match your real life expenses burn rate.