There are many tools available to traders for managing their crypto portfolios and assets. All of these tools help traders in one way or another to maintain their portfolios, execute trades, move assets and so much more. One of these tools is known as the portfolio rebalancing algorithm. This tool helps keep your assets stable and steady.
What Is Portfolio Rebalancing?
In simple terms, this is the process of reassessing and rearranging assets in a portfolio so that the original desired asset allocations is attained or maintained.
For instance, let’s say your original crypto investment portfolio included 30 percent BTC, 50 percent ETH and 20 percent USDT. If BTC outperforms all the other two assets for a certain timeframe, this will alter the balance, resulting in BTC having a larger value than the others.
So, in order to maintain the same percentages, you would have to sell off some of the BTC, and use the proceeds to buy some more ETH or USDT to balance the portfolio again.
Now, this can be done manually, or through the use of algorithm that automatically tracks and measures the cryptoassets in your portfolio, resulting in a semi-automatic portfolio adjustment. With rebalancing processes in place, investors can expect a relatively stable portfolio growth and value.
Benefits Of Rebalancing Your Crypto Assets
The smart investor knows that diversification and risk tolerance are two important factors critical to the sustenance and profitability of their portfolio. This is where this plays a huge role.
With this in place, all increase in crypto value can be really profitable, while stopping any significant portfolio losses in the event that one of the assets loses its value. The benefits of portfolio rebalancing are many.
Every investment portfolio will always contain assets that perform well, and those that don’t with portfolio rebalancing, you can make sure the ratios stay the same by simply selling off some assets and buying new ones or the more of the same ones in the portfolio.
Eliminates the Task of Price Speculations
Hodling in crypto trading or investing is a very popular term. People just buy their cryptos and hope that it will go up in value. This is essentially price speculation and isn’t based on any mathematical formula.
Rebalancing your portfolio however, puts power back in your hands by eliminating the need to predict future crypto prices. With this, profits are almost guaranteed, seeing as you would just keep selling high and buying low.
It Plain Works
In fact, studies have found that rebalancing your portfolio produces better results than hodling by a 64 percent margin.
And the best performing portfolios were those that combined a higher number of assets that were frequently rebalanced. It’s an excellent way to redistribute the wealth in your portfolios and can be responsible for portfolio growths of up to 230 percent.
When Is The Right Time To Rebalance Your Cryptocurrency Portfolio?
If you’re looking to minimize risk and maximize profits, then rebalancing is often the way to go. But for many newbie investors, knowing when to go the rebalancing route is tough. In fact, most newbies aren’t aware of crypto rebalancing, yet it’s capable of doing wonders for their portfolios.
The best time to rebalance though, would be when your key assets aren’t performing as great. If your key assets are performing well, by all means keep them. These are the best assets to have, particularly if they have long term growth potential. It doesn’t make sense to sell your high performers just so you can buy some smaller, less performing cryptos.
Only do so if your key allocations are underperforming for an extended period. Of course, this is dependent on factors like the knowledge of your market, market speculations aka the possibility of a rebound, project viability and so on.
Crypto Rebalancing Strategies
What’s the Best Way to Rebalance Your Cryptocurrency Portfolio? There are currently two cryptocurrency portfolio rebalancing strategies. These are:
Both function based on different rules. The periodic strategy is time-based and isn’t dependent on volumes or gains. This is set up in such a way that there’s a fixed time between rebalancing activities. So, if you set up your portfolio to be rebalanced every 2 weeks, it will automatically do that every 14 days.
The threshold strategy is dependent on percentages or profit/loss margins. For instance, you could set it up to rebalance at every +/-10% band. So, if any of your assets grows or dips by 10 percent, the entire portfolio is automatically rebalanced and adjusted to accommodate that growth or loss.
So if you have a portfolio of 5 different cryptos with each crypto taking up 20 percent each, a rebalance will happen if the value of one shrinks to 10 percent or grows to 30 percent.
With this in place, the portfolio either grows or decreases depending on pricing.
List of Crypto Rebalancing Tools
Rebalancing can be a little difficult to manage manually, particularly if you’re doing a 24 hour or 1-3 percent type limits. So, the best bet might be to look for some of the available cryptocurrency portfolio rebalancing tools to automate the process. Most of the available crypto rebalancing tools are often able to integrate with popular exchanges.
Some of them include:
- 3Commas –supports Bitfinex, Bittrex, Binance, Huobi, Poloniex, Kucoin, CEX, YoBit, and HitBTC
- Shrimpy –free to use and supports Binance, Poloniex, and Bittrex
- Google Sheets rebalancing tool
Just because we broke this down in simple terms doesn’t mean it is. Cryptocurrency rebalancing can be quite complex and even difficult, depending on which strategies you use. Most traders are content with the fundamentals listed in the strategy part of this article.
Those should suffice for your trading and investing needs. Combine those with the tools provided in this article, and you should have no problems getting great results from your rebalancing efforts.
Complex strategies and tools are great if you’re into them, but you really don’t need them for great results.