Investors have used portfolio rebalancing for years, but it can be a complicated area for novices. In this guide, we’ll explore all of the key details you need to know to get started on your own cryptocurrency portfolio rebalancing.
Rebalancing your portfolio successfully hinges on understanding the amount of your portfolio you wish to allocate to specific assets — such as a token or coin for cryptocurrencies. These allocations are the percentage of every crypto asset to be represented in the combined portfolio’s total value. When the time comes to rebalance the investor’s portfolio, coins will be traded to make sure each asset’s value equals these percentages.
Confused? Don’t worry. We’ll use an example to clarify things.
Your portfolio includes four major cryptocurrencies — ETH, XMR, LTC, BTC — and you want each to hold a 25 percent share of your cryptocurrency portfolio. When your rebalance is complete, the portfolio would comprise 25 percent in every one of these assets. As coins tend not to cost the same per individual coin, value usually is calculated based on a base currency or fiat currency.
This means that the various coins won’t have an equal quantity, but their value will align. As a result, a $200 total across your four cryptocurrencies would be split at $50 each following the rebalance.
What are the Benefits of Cryptocurrency Portfolio Rebalancing?
Cryptocurrency investors tend to “hold” investments more and more today. Portfolio rebalancing for cryptocurrency offers said investors a chance to potentially increase their “held” profits by exploiting quick price fluctuations.
So, whenever a specific coin starts to experience substantial gains, a rebalance distributes said gains throughout the various different assets. As a result, rebalancing enables the portfolio to create a positive gain across the specific period, even if a coin’s value reverts back to the price it held before the increase.
Experts have conducted research into the benefits of held coins. They studied actual market data from across a 12-month period, and discovered that rebalancing outperforms HODL by more than 60 percent. Once taxes have been considered, this represents more than 90 percent of all possible cryptocurrency portfolios. Rebalancing for cryptocurrency portfolios elevates holding to a whole new level without demanding investors commit to exhaustive coin management or performing trades.
What are Common Strategies for Cryptocurrency Portfolio Rebalancing?
Investors can take advantage of a number of rebalancing strategies. In this guide, though, we’ll look at just two of the best.
The easiest for beginners is known as periodic rebalancing. This uses a fixed period of time between rebalances, and this tends to be briefer when dealing with cryptocurrencies than with other types of asset because of fast fluctuations in price.
So, for example, an investor might choose a rebalance time of 24 hours — and rebalancing would occur at the exact same time each day.
The other strategy is rebalancing according to allocation tolerance bands. This revolves around assessing allocations’ drift relative to the relevant target allocations, and by analyzing the difference, every asset’s drift will be tracked. The rebalance will be performed when a threshold is crossed, as an individual coin’s percent allocation drifts further away from the target percentage.
Need an example? For a threshold which stands at +-20 percent of an asset which has a desired allocation of 25 percent, the portfolio would be rebalanced if the relevant asset represented 5 percent more or less of the investor’s whole portfolio.
So, remember when we discussed having four cryptocurrencies at 25 percent earlier? A rebalance would take place whenever one of the assets involved consumed below 20 percent or in excess of 30 percent of the value of the portfolio.
But this means that no rebalance will occur if the value of the complete roster of coins in a portfolio increases or decreases together, without adjusting their percent representation in the overall portfolio.
We hope this guide has given you a valuable insight into portfolio rebalancing for cryptocurrency, and helps you to try it for yourself. Even though it can be a difficult topic to understand at first glance, it will become easier to absorb as you explore your own options