What is Portfolio Rebalancing in Crypto?

We’ve all read or heard stories of individuals who became millionaires by mining or buying coins like Bitcoin and Ethereum when they were valued next to nothing. They profited because they had the patience to hold these coins over the years of sudden new highs and lows. But today, let’s talk about the manner in which these investors hit it big — not by simply hodling, but by using a different type of strategy, portfolio rebalancing.

So, what is this portfolio rebalancing anyway?

The principal intention of using this strategy is to establish a risk management framework that makes sure that the success or failure of one or two assets does not depend on one investment or market.

How does portfolio rebalancing work in cryptocurrencies?

Credits: coinmonks

Imagine Bitcoin (BTC), Ethereum (ETH), Tezos (XTZ), and Litecoin (LTC). Allocate 25% of your crypto portfolio to each. After a period of time, the ratio of these distributed assets will change according to their price movement.

For example, your portfolio may now be 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 sure of a profitable trade in an ever-volatile and risky market.

Rebalancing smooths out the process of profitability of the investment process, effectively forcing the investor to buy low and sell high.

But it is crucial to understand that portfolio rebalancing is just a tool, not the end goal.

How to do portfolio rebalancing

Threshold only strategy

Time only strategy

Time and threshold strategy

So if the portfolio is not above the minimum decided threshold at the time of rebalancing, the portfolio won’t be rebalanced. In the same way, if the asset allocation has drifted above the minimum threshold, but the time of relocation has not come, the portfolio won’t be rebalanced.

Advantages of portfolio rebalancing

It helps a trader concentrate on their speciality

Makes sure that traders get the best entries

It helps you revisit your investment strategy

Portfolio rebalancers and holders are in a never-ending debate of which strategy is better, therefore always remember to do your own research. For trading your favorite cryptocurrencies, head over to Giottus.

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