Crypto Portfolio Rebalancing: What it is and How to do it

By May 13, 2021May 17th, 20215 minute read
Crypto Portfolio Rebalancing_ What it is and How to do it

Browsing stories of people who hit it big by scooping or purchasing coins like Bitcoin and Ethereum might leave you taken aback. Their success secrets encompass not simply holding on to these coins in trying times but hiring a strategy called portfolio rebalancing. 

For amateurs, crypto rebalancing might seem a tough grind. After all, one of the most significant gifts for an investor is a procedure that can exclude emotions from investment decisions. Such a strategy is to rebalance the crypto portfolio.

Implementing a rebalance of the crypto portfolio means the investor must first determine how much of their portfolio they want to allocate to each asset. In the case of cryptocurrencies, each asset would be a coin or token.

Rebalancing your portfolio hangs on comprehending the amount of your portfolio you wish to distribute to certain assets — like a token or coin for cryptocurrencies. These allocations are the amount of every crypto asset represented in the portfolio’s total value. Perhaps you want it to be 30% Bitcoin and 30% Ethereum, with 40% everything else. Perhaps you want it to be some other combination. 

When it’s time for a user to rebalance their crypto portfolio, coins will be traded to ensure each crypto’s value equals these proportions.

So, what is portfolio rebalancing?

Crypto traders are now turning to portfolio rebalancing to reduce risks near target asset allocation. 

Rebalancing is the process of restoring the cryptocurrencies in your portfolio back to their initial state. One must know that rebalancing is not a goal but a standardized tool.

Cryptocurrency rebalancing gives investors the possibility to boost their existing profits by playing with fast price instabilities.

Or Let’s presume your portfolio has 30% Ethereum (ETH) and 70% Bitcoin (BTC). 

From January 2020 through March 2020, Ethereum’s weightage increased to 50%. 

To minimize the risk, you can sell 20% of Ethereum and buy 20% of Bitcoin (BTC) to get the portfolio back to the original target asset allocation of 30% Ethereum and 70% Bitcoin.

In portfolio rebalancing, investors repeatedly involve the previous portfolio asset ratio to sustain the aspired asset allocation framework.

Using this strategy aims to establish a risk management framework that warrants that the success or failure of one or two assets is independent of one investment or market.

Cryptocurrency investment horizon

Your cryptocurrency investment horizon can be a year, or two, or more. 

An investor, at the foremost, is required to pick and heed his investment period. 

In most cases, rebalancing will not give the coveted result over a short distance. 

Because of its significant volatility, the cryptocurrency portfolio can exhibit excellent results at a distance of 1 month. Therefore it is quintessential to monitor your cryptocurrency portfolio.

Portfolio Rebalancing in Cryptocurrencies: 

Being highly volatile assets, cryptocurrencies are indeed high-risk investments, and hence a risk management strategy becomes indispensable. 

The price of one cryptocurrency is different from others; thus, a stable coin is utilized to determine the portfolio allotment ratio.

Let’s say own Bitcoin (BTC), Ethereum (ETH), Tezos (XTZ), and Litecoin (LTC), each making up 25% of your crypto portfolio. After some time, the ratio of these distributed assets will change according to their price move, and your new portfolio maybe 26% BTC, 21% LTC, 25% ETH, and 28% of Tezoz.

Now on these new metrics, you can rebalance your portfolio to 25% of each coin again. 

This way, you will be able to buy the dips of Litecoin and lower your average buying price and book your profits on XTZ and BTC, making a profitable trade.

How to do Portfolio Rebalancing

There are several key strategies to rebalance your portfolio: “threshold-only”, “time-only”, and “time-and-threshold” strategies, which you can put to use while choosing portfolio rebalancing software.

Threshold only strategy

In the threshold-only strategy, traders select a predetermined rebalancing threshold. This threshold acts as a subconscious benchmark to rebalance your portfolio. 

The threshold-only approach is well fitted for cryptocurrencies, given that it is volatile itself.

Time only strategy

Using the “time-only” strategy, you rebalance your portfolio at a decided time interval — daily, monthly, quarterly, etc. 

As the name suggests, the time-only approach takes only time as its parameter, irrespective of how much or how little your portfolio’s resulting asset allocation has drifted from the initial funding.

Time and threshold strategy

This strategy combines the two approaches mentioned above. 

Rebalancing occurs on a schedule. However, this is only in the case where the portfolio’s asset allocation sails away from the target by a predetermined minimum rebalancing threshold such as 10%, 25%, or 30%.

It doesn’t matter if this happens once a day or once a year. Once the threshold is crossed, you go and rebalance your portfolio.

When the portfolio’s target allocation is less than the predetermined threshold, the portfolio will not be rebalanced on the scheduled date. 

Similarly, if the numbers drift by the minimum threshold or more at any intermediate time, the portfolio will not be rebalanced.

Advantages of Portfolio Rebalancing

It helps a trader concentrate on their specialty.

Portfolio rebalancing can be implemented to your whole crypto portfolio rather than a spot. A trader can make the most out of cryptocurrency investments, using the spot and other markets like options, futures, and margin. 

With portfolio rebalancing is practiced across diverse crypto markets, traders can focus on the markets they specialize in.

Ensures that traders get the best entries

When you rebalance your portfolio, you buy the dips, meaning you add funds to a coin with PnL in minus, which means you get better entries than your previous entry points.

It helps you revisit your investment strategy.

Regularly rebalancing your portfolio allows you to revisit your trading method and strategy. 

Traders get a chance to change their investment strategy and ride the waves accordingly.

Portfolio rebalancers and holders are in a constant debate of which approach is more beneficial; therefore, always remember to do your research.

Crypto portfolio rebalancing software

Crypto portfolio management software enables users to store, manage and keep track of their cryptocurrency assets, investments, and trades. There are crypto portfolio rebalancing tools out there that can support you in automating the entire process. These tools have dashboards connected to the wallets and exchanges. 

Portfolio rebalancing tools render a mine of information on everything you need – from asset allocation to categorizing your investments into the major asset classes.  This data is then visualized in graphs and text.

Crypto Rebalancing: What to Keep in Mind

Keep in mind that a significant advantage of cryptocurrency portfolio rebalancing is maintaining the risk profile of your investments over time rather than making the most of them. 
And, don’t forget to give us a follow us on Twitter and join our Telegram community to stay updated on the crypto market in India!

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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