How to rebalance your crypto portfolio: strategies, tools and benefits
Crypto portfolio rebalancing is a strategy that allows you to regularly rebalance your allocations to manage risk and maximize returns.
Rebalancing consists of intermittently re-aligning assets with your strategy. That means periodically making tweaks to your asset allocation to ensure that you maintain your desired risk profile and take advantage of any new opportunities in the market.
What is portfolio rebalancing?
Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state.
Rebalancing is only possible for investors with a diversified cryptocurrency portfolio. This means that you cannot tweak your asset allocation if you only own a single cryptocurrency (e.g., Bitcoin). Consequently, rebalancing and diversification go hand-in-hand. In our previous article, we already discussed how to diversify your crypto portfolio based on your desired level of risk and your preferred asset allocation.
For example, say your original target asset allocation was 50% Bitcoin and 50% Altcoins. If Bitcoin performed well during the period, it could have increased the Bitcoin weighting of the portfolio to 70% or even 85%. You may then decide to sell some Bitcoin and buy Altcoins to get the portfolio back to the original target allocation of 50/50.
Why is rebalancing important?
Rebalancing offers a lot of benefits, without losing many of the benefits of HODLING. HODLING, a common slang term in cryptocurrency, refers to holding an investment over time, regardless of short-term changes in the market. Essentially, this means buying cryptocurrency and waiting for years as the market continues to grow.
Rebalancing still allows you to buy now and hold onto an investment as long as you’d like. It also reserves you the opportunity to adjust planned long-term investments that fall off their trajectory.
- Manage your risks: Asset allocation is about balancing risk and reward. Invariably some asset classes will perform better than others. As a result, the percentage that you’ve allocated to different asset classes will change. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.
- Maxime chances of profitability: by selling the assets that are outperforming, and buying the underperforming ones, you will benefit from the buy-low and sell-high strategies
- Keep control of your portfolio and emotions: Warren Buffet’s most famous quote states “if you cannot control your emotions, you can’t control your money”. By having and keeping a consistent strategy, you can avoid FOMO (Fear of Missing Out) or FUD (fear, uncertainty, and doubt.)
However, one of the disadvantages of rebalancing is that sometimes you cut the legs out from under the asset class before it has finished its bull run.
Best Crypto portfolio rebalancing strategies
Periodic Rebalancing: At Coinmatic we support this strategy. You can set the frequency to periodically rebalance your portfolio to ensure that it fits your original asset allocation preferences and risk profile. Additionally, we will ensure that your portfolio always represents the best opportunities available on the market. And if your desired strategy changes — we can change your portfolio to fit your needs. As mentioned, rebalancing and diversification go hand-in-hand, so you can decide the frequency of rebalancing based on your risk level, for instance:
- Low diversification — low risk and volatility — lower frequency (e.g., every 30 days)
- Medium diversification — medium risk and volatility — medium frequency (e.g., every 14 days)
- High diversification — high risk and volatility — higher frequency (e.g., every 7 days)
Threshold Rebalancing: As the name implies, with this strategy you set asset allocation boundaries and then rebalance whenever they are breached, as opposed to automatically rebalancing your portfolio on a predetermined. Back to the example of a 50/50 bitcoin/altcoins diversified portfolio, if you have set up a threshold of 10% deviation, then you will rebalance when a portfolio reaches a 10% deviation from the target allocations.
How to rebalance your crypto portfolio?
Manual record: once you have defined your own strategy, you can record the total amount allocated into a diversified portfolio and its value. Assuming you use a hybrid approach (a combination of the periodic and the threshold rebalancing methods), on the rebalancing date, review your portfolio and determine the weightings of each asset. If the portfolio is unbalanced and some of your coins reach the defined deviation (e.g., ±10%), you can sell and buy the appropriate assets.
Automatic tools: There are crypto portfolio rebalancing tools out there that can help you automate the whole process. Automatic rebalancing is part of our product offering too. Our web app offers a variety of trading features and periodic rebalancing is part of our automated platform. You enter your desired frequency and we’ll perform the rebalancing according to your strategy.
Each investor has his/her own risk profile. Crypto portfolio rebalancing is a strategy that allows you to regularly rebalance your allocations to manage risk and maximize returns. You can choose between different levels of diversification for your portfolio and consequently adopt different rebalancing strategies. Periodic, threshold, or hybrid rebalancing strategies are available and data have shown that in the long run, a rebalanced portfolio will outperform the portfolios following a HODL strategy.