Subtleties of crypto investing: how to properly rebalance a portfolio

The richest businessmen and companies do not invest in just one cryptocurrency. As a rule, they have a certain set of coins — a portfolio. And it is always useful for any normal portfolio to rebalance.

What is a cryptocurrency portfolio

A cryptocurrency portfolio is a set of specific digital coins that a trader or investor holds in his hands. This is done in order to minimize the risk of losing money. Few people know for certain where (up or down) a particular coin will go. Therefore, in order not to keep all your assets in one instrument, a portfolio is useful.

You cannot collect a certain set of cryptocurrencies once and for all. Assets are volatile, prices are dynamic, that is, they change over time. This means we have to use rebalancing. How it works?

What is cryptocurrency portfolio rebalancing?

Rebalancing is the process of changing a cryptocurrency portfolio. The methods are different. For example, you can directly change the composition of the portfolio. Let's say you had Bitcoin, Ethereum, Solana and Cardano in your hands. But the rate of the latter began to fall, and you decided to replace it with Avalanche.

You can change the weight of individual coins in the portfolio without changing the composition of the components. For example, you have 50% of your assets invested in Bitcoin, 20% in Ether, 10% each in Avalanche, Cardano and Solana. At some point, you see BTC volatility drop while all other coins continue their strong bullish trend. You consider Bitcoin the most reliable cryptocurrency, but at the moment you decide to redistribute 15% in favor of Cardano, Solana and Avalanche (+5% each). As a result, you get a new portfolio composition: 35% Bitcoin, 20% Ether and 15% each Solana, Avalanche and Cardano.

What factors should you pay attention to when rebalancing?

What affects rebalancing?

The first thing everyone should keep in mind is market conditions. This includes macroeconomic processes such as inflation, the situation in certain sectors of the economy that have an impact on the crypto industry. For example, the collapse of several banks hit the digital asset market hard in the spring of 2023.

It is necessary to take into account events directly within the ecosystem of a particular cryptocurrency. This may include both halving and changes to the consensus protocol, as well as the release of important updates.

Rebalancing will also depend on what a particular investor needs. Some are ready to take more risks, others, on the contrary, are conservative. Some people want to make small money every month, while others are happy with a huge jackpot after a long period of time..

How often should you rebalance? And what varieties does it have?

Types of cryptocurrency portfolio rebalancing

Rebalancing a cryptocurrency portfolio may vary. However, the most popular types are distinguished:

Threshold. You must set certain boundaries beyond which the volume of certain cryptocurrencies should not exceed. For example, you can set that each of your coins should account for no more than 35% of the portfolio and no less than 20% of the total funds. If any cryptocurrency is currently out of the specified framework, it’s time to rebalance. For example, Bitcoin, due to growth, began to occupy 36% of your portfolio. This does not satisfy the conditions described above, rebalancing must be carried out.

Temporary . A time period is set. For example, once a month, quarter or six months. And clearly within this period, review the cryptocurrency portfolio.

Situational. Reshuffling of assets in a cryptocurrency portfolio occurs when some important events occur in the market: an increase in the central bank’s interest rate, the collapse of another crypto exchange, the approval of the same spot Bitcoin ETFs, etc..

Rebalancing has its pros and cons.

Benefits of Rebalancing

The first advantage is constant diversification of capital. Money itself (in the classical sense) tends to depreciate. You constantly transfer them from one cryptocurrency to another, having a chance not to lose purchasing power.

The second advantage follows directly from the first — it reduces the risk of incurring losses.. Fundamentally, an investment portfolio and its rebalancing reflects the adage: Don't put your eggs in one basket..

The third advantage is the creation of a clear trading strategy. By compiling a portfolio of cryptocurrencies and knowing in advance what rules you will use to rebalance it, you warn yourself against chaotic trading.

Disadvantages of Rebalancing

The first disadvantage is missed earnings opportunities. Portfolio investing and rebalancing are about minimizing risk, not maximizing profit. Just an example — Solana in 2023. The most profitable investment was to invest everything in this cryptocurrency, as it grew by about 900% in 365 days. A portfolio investor would not have earned that much, since he would have had several coins in his hands, but none of them could compare with Solana in 2023 in terms of growth percentage.

The second disadvantage is constant commissions. After all, what is rebalancing? In regular purchases and sales of cryptocurrency. And for this, as you know, any exchange will take its percentage.

The third disadvantage is subjectivity. One way or another, any cryptocurrency portfolio is not perfect, and neither is its rebalancing. Any investor must take risks and responsibility. In threshold rebalancing, for example, you can choose any size of deviation, but there is no guarantee that it will be correct. The same as the period for temporary revaluation.

Conclusion

In short, rebalancing your cryptocurrency portfolio is beneficial because it reduces the risk of large losses. However, it is not an ideal tool for savings and accumulation, since often investments in one asset can bring greater profits.