Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $1,09 trillion. Bitcoin is up by over 2% to reach around $27,200. Ethereum increased by nearly 6% to close to $1,700. XRP gained almost 2% in value during a highly volatile week. Almost all altcoins are trading in the green, with virtually no exceptions. The DeFi sector maintains the total value of protocols (TVL)…
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Introduction to Cryptocurrency Portfolio Rebalancing
Diversification is among the best ways to maximize one’s returns, and many investors use it for their investments today. An investor may choose to invest in many different financial assets, including stocks, crypto assets, and gold, creating a portfolio.
Crypto enthusiasts diversify into assets like stablecoins, cryptocurrencies, private coins, and other solutions like wallets and exchanges, creating a crypto portfolio. However, the crypto portfolios might lose value or become unattractive due to market uncertainties.
The portfolio needs investment assets that contribute to the investor’s overall goal. At this point, crypto portfolio rebalancing becomes the only solution for the investor. What is portfolio rebalancing?
What is Portfolio Rebalancing?
In the investment world, rebalancing involves an investor restructuring or restoring their investment portfolio to their target allocation. The investor selects assets in their investment, checks their performance, and restructures the asset mix to improve the quality of their portfolio and investments.
The investor may eliminate all underperforming assets and increase the assets’ value, which has a higher potential.
Similarly, in the crypto world, the investor will rebalance the portfolio to eliminate crypto assets that are not performing well and are highly risky. Again, rebalancing gives investors a chance to improve their returns.
Why is Portfolio Rebalancing Important?
Crypto portfolio rebalancing has many benefits for the investor, the foremost being risk control. As investors check their investment values, they may notice risks arising from a particular class of investments, i.e., stablecoins or cryptocurrencies.
Therefore, when rebalancing, the investor will choose easier-to-control assets. If one investment is hazardous, the investor changes strategies and invests in another support with lower risk, reducing overall risks.
Another vital role of portfolio rebalancing to the investor is ensuring the portfolio does not depend on one investment asset, in most cases, bitcoin. Therefore, when rebalancing, the investor considers the many different investment options and diversifies their investments for better results.
What are The Best Portfolio Rebalancing Strategies?
Periodic Portfolio Rebalancing
Periodic portfolio rebalancing, also called time-based rebalancing, is when the investor sets a time interval to rebalance their portfolio. The length of the interval selected depends on the market volatility and the investor’s needs.
In the crypto world, for instance, volatility is the order of the day, and as such, investors should set shorter rebalancing intervals, probably daily or, in some cases, hourly. Periodic rebalancing only considers the time factor of any portfolio, ensuring maximum returns for a particular time.
Threshold Rebalancing
This type of rebalancing focuses mainly on deviations in assets value from the predetermined value. The investor using this second rebalancing type can determine the asset variation from the target allocation.
The investor rebalances the portfolio whenever the deviation surpasses a predetermined percentage value (set threshold). For instance, if an investor determines the variation to 5%, but the deviation surpasses the threshold, the investor may deem it wise to rebalance to avoid even more significant deviations.
Combined Periodic and Threshold Rebalancing
The combined periodic threshold rebalancing merges the time and threshold factors when rebalancing the portfolio. For example, an investor sets a specific time interval for rebalancing, but the rebalancing will only happen when the set deviation reaches.
For instance, an investor can set the rebalancing interval at five days and the threshold at 7%. If the deviation has not hit the 7% in the five-day lapse, rebalancing will be unnecessary since the asset has not varied.
However, after the end of the five days, if the asset has varied to the 7% or beyond, the investor rebalances their portfolio.
In other instances, the variation may hit on the third day of the set interval; but, on the fifth day, returns to below the threshold; what happens in such cases? Since there were no deviations on the 5th day, there is no need for rebalancing the portfolio.
Best Crypto Portfolio Rebalancing Tools
3 Commas
3 Commas is a feature-rich platform providing a world of services, including portfolio management services. It has some of the best subscription plans for investors and, as such, access to all.
It supports around 13 exchange platforms, extending its accessibility, which is a plus for its stakeholders. Furthermore, this platform is also autonomous, thus ensuring less work for the investors.
Final Word
Crypto portfolio rebalancing is necessary for any investor since it helps reduce the extent of risk while increasing the possibility of better returns. However, there are different strategies for rebalancing a portfolio.
Topmost is periodic rebalancing, which mainly focuses on time intervals. Another good plan is threshold rebalancing, primarily focusing on a set threshold. Finally, the third rebalancing strategy combines periodic and threshold to create an even more robust system for investors.
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The crypto world is full of solutions for different challenges, and some tools aim to ensure investors can rebalance their crypto portfolios. The most common ones are 3Commas and CryptoHopper, all having the best features to ensure top security and automatic portfolio rebalancing.
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