What is Cryptocurrency Portfolio Rebalancing and what are the Different types of Portfolio Rebalancing?

What is Crypto Portfolio Rebalancing?

Crypto portfolio rebalancing is the process of realigning the asset weightings in an investment portfolio in order to rebalance risks. Rebalancing is done on a regular basis and involves buying or selling cryptocurrencies or other investments in a portfolio to achieve the desired level of risk or asset allocation.

Rebalancing a portfolio optimizes it by selling assets that have risen in value and redistributing funds to assets that have not yet risen in value. By adjusting your holdings and bringing them back to their original levels, rebalancing a portfolio calibrates your risk level. Profits are taken where necessary, and losses are stopped. It also makes room for additional profits and possibly newer assets. Remember that it’s all about profiteering, buying low, and selling high.

How does crypto portfolio rebalancing work?

Rebalancing is a relatively simple process. Consider it a more sophisticated version of the buying low and selling high strategy. The emotions and psychology of an investor can have a significant impact on buying low and selling high. Both are removed from the equation during rebalancing. So, how does rebalancing actually work? Imagine a diversified asset portfolio to better understand rebalancing. In this case, the assets will be cryptocurrencies. You will try to make such a mix of investments that will mitigate risks and will reward you with profits.

Advantages and Disadvantages of Crypto Portfolio Rebalancing

Advantages:

1. Crypto portfolio rebalancing reduces your risk exposure. 
2. You can reduce the minimum and maximum amount of money you can win or lose by rebalancing. 
3. When you have enough assets, the effects of losing one are negligible in comparison to your total capital.
4. If you win an excessive amount of money, you can optimize your portfolio by reallocating capital to more assets. And the more assets you have, the less risky you are. 
5. Actively changing allocations. Thus, to find the best coins you should always conduct a fundamental analysis and it will pan out to be a perfect strategy. 

Disadvantages:

1. it forces you to sell assets that are underperforming, which you then reinvest in better assets.
2. Cryptocurrency portfolio rebalancing is that it only has one advantage: momentum.
3. Reinvested funds are directed toward an asset that has not yet moved and is now moving – but in the wrong direction.
4. Crypto portfolio rebalancing only adds value if assets that have gained value have lost value and vice versa.
5. a substantial amount of money on trade fees and transaction costs is also a big issue. Some investors may be put off by frequent trades.

The most common crypto rebalancing types

Cryptocurrency portfolio rebalancing has many benefits, but it also has drawbacks. If the benefits outweigh the drawbacks, you should consider rebalancing. But how should you go about rebalancing? The section that follows contains a list of popular rebalancing strategies for your cryptocurrency needs.

Periodic

Periodic rebalancing is the most fundamental type of crypto rebalancing. Your asset allocation is adjusted on a predetermined time interval, such as every hour, day, week, or month, with periodic rebalancing. Because of cryptocurrencies’ rapid price fluctuations, this interval is typically shorter than for other asset classes. Because periodic rebalancing is so simple to grasp, it is ideal for new cryptocurrency investors. It is important to note, however, that when it is used, asset allocations are not changed, even if the portfolio is out of balance until the crypto rebalancing time comes.

Threshold

Threshold rebalancing is a rebalancing crypto strategy in which tolerance bands are applied to your holdings. An asset is assigned an allocation percentage from which it cannot deviate excessively. Allow the asset to move 10% up or down, but buy or sell it as soon as the price difference exceeds 10%. The effectiveness of threshold rebalancing is determined not only by the market but also by the threshold’s width. The outcome of your strategy is determined by whether you use a low or high-threshold strategy.

Hybrid

Hybrid rebalancing is the finest of both types, combining periodic and threshold rebalancing. An investor would adjust the portfolio allocation on a schedule as well as when the value of an asset crosses a certain threshold with this type of crypto rebalancing.

How Crypto portfolio rebalancing is done

You can simply follow the below-mentioned steps to rebalance your crypto portfolio and start your journey towards, safer, decent, and more promising profits:

Determine which type of crypto portfolio rebalancing is best.

The type and frequency of crypto portfolio rebalancing required are largely determined by the trader’s investment strategy and style. Higher-risk investments, such as volatile coins, newly launched tokens, and those with limited market capitalization, typically necessitate more frequent crypto rebalancing than a portfolio consisting of one or two stable currencies and one or two high-risk tokens. Before moving on to the initial allocation of your investment, decide which crypto portfolio rebalancing strategy best suits your unique approach and risk appetite.

Determine Your Initial Crypto Asset Allocation

Figure out the initial investment mix and balance. If you’ve already started trading, divide your current portfolio according to your risk management strategy and the assets you own. For example, an investor could put 50% of their portfolio value into a large market capitalization cryptocurrency like BTC, 20% into ETH, and the remaining 20% into two ICOs and two altcoins at 10% each.

Adjust Your Cryptocurrency Portfolio

Crypto rebalancing on a schedule using a periodic strategy, followed by buying and selling the coins or tokens required to reach your predetermined investment allocation, is relatively simple. You can also use portfolio or threshold rebalancing to rebalance crypto portfolios. Setting a percentage deviation from your allocation that you don’t want to be exceeded is what threshold rebalancing is all about. Allocations are rebalanced based on absolute changes in your percentage allocation.

Trade it Out

Purchase and sell cryptocurrency assets to return your cryptocurrency asset allocation to your original objectives. If you’re rebalancing manually without the help of crypto portfolio rebalancing tools, try to keep transactions as close together as possible. Your local tax laws govern whether or not you must record all crypto rebalancing transactions. Keeping track of all trading activity, on the other hand, is generally recommended for analysis purposes. To maintain compliance and claim capital losses or gains, rebalancing transactions must be recorded for tax purposes.

FAQs

1. Should I rebalance my crypto portfolio?

Rebalance the crypto portfolio, whether traditional or crypto, entails buying and selling assets within your portfolio in order to maintain the original asset allocation and level of risk. Because the return and benefits of crypto rebalancing are most visible in the long run, it is not a one-time-use tool and if you are someone who wants less risk, a longer investment run, and profitability then yes you should definitely go for cryptocurrency portfolio rebalancing

2. When to rebalance Bitcoin?

When an asset’s value increases faster than it should, you sell it to make room for other assets. On the negative side, it forces you to sell underperforming assets, which you then reinvest in better assets. Diversification is also introduced during crypto rebalancing.

3. Do you lose money when you rebalance?

Crypto rebalancing does not usually increase long-term investment returns. It may lower the volatility of your investment portfolio while keeping asset allocation in line with your risk tolerance.