A strategic investment portfolio is usually created with targeted goals, such as a predetermined investment allocation or risk-reward ratio. When you trade any asset, price fluctuations inevitably lead to the difference between the current investment value and the original value. Your investment will naturally increase or decrease depending on the value of your assets. This shifts the balance of your portfolio as a percentage for each investment, and also changes the risk level of each investment.
Portfolio rebalancing is a strategic tool that protects traders from excessive exposure to unplanned risk. Rebalancing involves buying or selling assets to return to a predetermined asset allocation.
We'll show you how portfolio rebalancing works, why regular rebalancing is so important, and some of the best rebalancing strategies available. Follow our step-by-step instructions to find out how to balance your portfolio.
What is portfolio rebalancing?
Portfolio rebalancing is a redistribution of asset weights in an investment portfolio to rebalance risks. Rebalancing occurs periodically and involves the purchase or sale of cryptocurrencies or other investments contained in the portfolio in order to achieve the target level of risk or asset allocation.
Traders can perform portfolio rebalancing alongside existing trading strategies as a risk mitigation method. You can also use portfolio rebalancing as a standalone investment strategy that is often touted as a promising alternative to HODLing.
Why rebalance your portfolio?
The main benefit of regular portfolio rebalancing is the return to the strategically determined level of risk it provides. However, this is not the only advantage. Rebalancing combats the psychology of wanting to hold on to winners—and let them be a huge part of your portfolio. You will also naturally get the best price on losing positions. By not allowing the psychology of market movements to influence your strategy, you take emotions out of the equation. From this point of view, it is much easier to make a rational and logical assessment of your risk tolerance and choose the right trading strategy for your crypto portfolio.
Traders often use large market caps
Market capitalization (or market capitalization) of a cryptocurrency is a measure of its market value. In other words, it is ...
currencies such as bitcoin and ether to limit volatility and minimize investment risks. The more you start diversifying towards high volatility cryptoassets and coins and tokens with medium to low market caps, the more often you may need to rebalance your crypto portfolio. Asset values can plummet or skyrocket in minutes, rapidly changing the size of the investment. Some seasoned traders in the fast-paced world of cryptocurrency are rebalancing their portfolio hourly, every hour.
Can digital assets be rebalanced?
Digital assets are some of the most suitable investments for regularly rebalancing a portfolio. Markets never close, which means you can continue to rebalance at any time of the day. Deliberate periodic assessments are essential to stay on top of risk and aim for a predetermined balance sheet.
There are many tools available to help you track and rebalance your crypto portfolio. Here are a few of them:
CoinTracker – connect to over 300 exchanges or wallets and track over 8000 cryptocurrencies, allowing CoinTracker to keep track of all your tax sorting fees through an intuitive and easy-to-use interface.
Kubera – Track stocks or cryptocurrencies with Kubera’s highly functional (yet as easy to use as a spreadsheet) portfolio tracker, offering bank and broker connectivity for complete investment tracking and management.
shrimpy Shrimpy is a cryptocurrency portfolio rebalancing tool that offers portfolio tracking, rebalancing, and automated index and copy trading. Automate your system or follow another trader.
Best rebalancing strategies
Here are three common strategies for rebalancing a cryptocurrency portfolio. The best strategy depends on your portfolio, risk tolerance, diversification goals, and your overall trading approach.
You can test these strategies on your own portfolio.
For example, the concept of rebalancing revolves around the size of assets in a portfolio. This is usually expressed as a percentage. For example, if you have a $ 10000 portfolio and $ 2500 invested in four different coins, each coin will have a 25% distribution in the portfolio.
Distribution Percentage = Amount invested in the coin / Amount invested in the total portfolio
Typically, you start with your desired distribution percentage, and then as the value of each cryptocurrency changes, you get the actual distribution percentage. Rebalancing is the practice of bringing your actual allocation percentage back into line with your desired allocation percentage.
Periodic rebalancing
Periodic portfolio rebalancing is a simple, time-based approach to resizing an investment. The trader determines the initial distribution of investments between various coins and cryptocurrency tokens.
After a fixed period of time—which can be hours, days, or weeks—the portfolio's assets are bought or sold in the proportions necessary to return to the desired asset allocation. Even if the portfolio is imbalanced on a percentage basis, there is no rebalancing unless a period of time has passed.
Example: you can split your portfolio equally between four different digital assets (BTC, ETH, SOL, DOGE). Initially, each coin will account for 25% of your portfolio. At a time interval of your choice, say one week, you should check if your actual distribution percentage, as determined by current coin prices, has changed from 25%. If so, then you should buy and sell assets accordingly to bring each percentage of the distribution back to the desired 25% level.
Percentage rebalancing
The percentage portfolio rebalancing determines the absolute percentage distribution of investments and the range of acceptable variance. If any of the owned coins rises or falls above the target amount and the acceptable corridor, the trader rebalances the entire portfolio to the desired distributions.
Example: Using the previous example, the desired distribution percentage is 25% per coin. You then select an absolute tolerance of +/- 5%. This means that the distribution percentage of the coin can drop to 20% or 30% of the portfolio without rebalancing. Anything outside these ranges will require rebalancing.
Rebalancing the threshold
The portfolio owner sets the initial target allocations and the percent variance relative to these allocations, serving as a "threshold". This method uses a percentage threshold calculation rather than an absolute percentage difference.
For example, referring to the previous example, your desired distribution percentage is 25% of coins and your threshold is 10% deviation. The absolute percentage tolerance is 10% x 25% = 2,5%. So your actual distribution percentage may only go down to 22,5% or 27,5%. Any dimensions that exceed this threshold will be balanced.
Another good strategy for rebalancing thresholds includes: if the target distribution is 10% per investment and the threshold is 10%, then rebalancing will occur if the distribution changes by more than 10% of the target. Ultimately, the idea of rebalancing thresholds usually only comes up when there is a significant shift in your asset allocation.
Generally, there are two main types of thresholds that correspond to your risk tolerance:
Low threshold:
Frequent portfolio rebalancing
Occurs in a more stable market
Lower potential return
Portfolio closer to the goal
High threshold:
Lower rebalancing rate
High volatility markets
Higher potential return
Assets with a high risk-reward ratio
When the risk to reward ratio is large, it naturally translates to a high threshold. But that also means you need a decent level of risk management.
How to rebalance a portfolio
Follow this step-by-step guide to learn how to rebalance your crypto portfolio and manage risk in the volatile crypto market.
- Step 1 – Decide what type of portfolio balancing suits your investing/trading style
The investment strategy and style of the trader largely determines the type and frequency of portfolio rebalancing required. Higher risk investments such as volatile coins, recently issued tokens, and those with limited market caps usually require more frequent rebalancing than a portfolio with one or two stable currencies and one or two high risk tokens. Decide which rebalancing strategy suits your unique approach and risk tolerance before moving on to the initial allocation of your investment. - Step 2 - Assign an initial distribution of cryptoassets
Determine the initial investment structure and balance sheet. If you have already started trading, divide your existing portfolio into the cryptoassets you prefer based on your risk management strategy and the assets you own. For example, an investor can hold 40% of the value of his portfolio in a cryptocurrency with a large market capitalization such as BTC, 20% in ETH, and invest the remaining 40% in two ICOs and two altcoins at equal 10% each. - Step 3 - Rebalance Your Cryptocurrency Portfolio
If you are doing chart-based rebalancing using a periodic strategy, then buying and selling the coins or tokens required to achieve a predetermined investment allocation is fairly straightforward. Alternatively, you can use portfolio or threshold rebalancing. Rebalancing thresholds involves setting a percentage deviation from your distribution that you do not want to violate. Rebalancing the percentage adjusts the distributions based on the absolute changes in your percentage distribution. - Step 4 - Make trades
Buy and sell cryptoassets that will bring your cryptocurrency asset allocation back to your original goals. If you are doing manual rebalancing without the help of crypto portfolio rebalancing tools, you will need to try to execute transactions as close to each other as possible. You will also need to log every transaction so that you can accurately compare investment performance and track capital gains for tax purposes at a later stage if you are in the United States.
Whether or not you need to register all rebalancing transactions depends on your local tax laws. However, for analytical purposes, it is generally recommended to keep a record of all trading activities. For tax purposes, the registration of rebalancing transactions is essential for regulatory compliance and capital loss or profit statements.
How often do you need to rebalance the portfolio?
Rebalancing a diverse portfolio will help you lock in profits and adjust your risk levels. Hacker Noon's cryptocurrency portfolio rebalancing and diversification study found that portfolios with more cryptocurrencies and tokens have the highest performance potential from hourly portfolio rebalancing. The reported gain in portfolio growth on hourly rebalancing versus HODLing is up 234%.
Substance
Whether you decide to rebalance your crypto portfolio every hour, once a day, or annually, regular rebalancing is a fundamental component of working within your risk tolerance and maximum return on your investment. Decide on a rebalancing strategy today and consider trying a few reliable crypto portfolio rebalancing tools. Each of these will suit a specific trading style and can greatly simplify portfolio rebalancing management.