Introduction to Cryptocurrency Portfolio Rebalancing
Diversification is among the best ways of maximizing one’s returns, and many investors today use it for their investment. An investor may choose to invest in many different financial assets, including stocks, crypto assets, and gold, creating a portfolio.
Crypto enthusiasts also diversify into assets like stablecoins, cryptocurrencies, private coins, and other solutions like wallets and exchanges, creating a crypto portfolio. However, due to market uncertainties, the crypto portfolios might start losing value or becoming unattractive.
The portfolio suffers by having investment assets that do not 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 a process where an investor restructures or restores 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. Rebalancing gives the investor a chance to improve their returns.
Why is Portfolio Rebalancing Important?
Crypto portfolio rebalancing has many benefits for the investor, 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 assets that are easier to control. If one investment is hazardous, the investor changes strategies and invests in another asset with lower risk, consequently reducing their 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. When rebalancing, therefore, the investor considers the many different investment options and diversifies their own investments for better results.
What is The Best Portfolio Rebalancing Strategies?
Periodic Portfolio Rebalancing
Periodic portfolio rebalancing, also called time-based rebalancing, is when the investor decides to set 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.
This type of rebalancing focuses mainly on deviations of assets value from the predetermined value. The investor using this second type of rebalancing can determine the variation of assets from the target allocation.
Whenever the deviation surpasses a specific predetermined percentage value (set threshold), the investor rebalances the portfolio. For instance, if an investor determines the deviation to 5%, but the deviation surpasses the threshold, the investor may deem it wise to rebalance to avoid even larger deviations.
Combined Periodic and Threshold Rebalancing
The combined periodic threshold rebalancing merges the time and threshold factors when rebalancing the portfolio. 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, there will be no need for rebalancing 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
Shrimpy is a social portfolio management crypto bot, allowing investors to copy leading traders’ portfolios and automate their portfolios. Using Shrimpy, the investor can leverage many exchange accounts, including Binance, Bitfinex, etc., improve their performance, and reduce risk in the long term.
Shrimpy is among the safest platforms, with each of its API keys encrypted using FIPS 140-2 HSMs (hardware security modules). It also implanted 2FA to secure account access. The platform is autonomous, meaning once the investor sets their preference, the system will rebalance.
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. This platform is also autonomous, thus ensuring less work for the investors.
Crypto portfolio rebalancing is necessary for any investor since it helps reduce the extent of risk while increasing the possibility of getting better returns. 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. The third rebalancing strategy combines both periodic and threshold to create an even more robust strategy for investors.
The crypto world is full of solutions for different challenges, and there are some tools aimed at ensuring investors will be able to rebalance their crypto portfolios. The most common ones are Shrimpy and 3 Commas, all having the best features to ensure top security and automatic portfolio rebalancing.