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Browsing stories of people who hit it big by scooping or purchasing coins like Bitcoin and Ethereum might leave you taken aback. Their success secrets encompass not simply holding on to these coins in trying times but hiring a strategy called portfolio rebalancing.
For amateurs, crypto rebalancing might seem a tough grind. After all, one of the most significant gifts for an investor is a procedure that can exclude emotions from investment decisions. Such a strategy is to rebalance the crypto portfolio.
Implementing a rebalance of the crypto portfolio means the investor must first determine how much of their portfolio they want to allocate to each asset. In the case of cryptocurrencies, each asset would be a coin or token.
Rebalancing your portfolio hangs on comprehending the amount of your portfolio you wish to distribute to certain assets — like a token or coin for cryptocurrencies. These allocations are the amount of every crypto asset represented in the portfolio’s total value. Perhaps you want it to be 30% Bitcoin and 30% Ethereum, with 40% everything else. Perhaps you want it to be some other combination.
When it’s time for a user to rebalance their crypto portfolio, coins will be traded to ensure each crypto’s value equals these proportions.
So, what is portfolio rebalancing?
Crypto traders are now turning to portfolio rebalancing to reduce risks near target asset allocation.
Rebalancing is the process of restoring the cryptocurrencies in your portfolio back to their initial state. One must know that rebalancing is not a goal but a standardized tool.
Cryptocurrency rebalancing gives investors the possibility to boost their existing profits by playing with fast price instabilities.
Or Let’s presume your portfolio has 30% Ethereum (ETH) and 70% Bitcoin (BTC).
From January 2020 through March 2020, Ethereum’s weightage increased to 50%.
To minimize the risk, you can sell 20% of Ethereum and buy 20% of Bitcoin (BTC) to get the portfolio back to the original target asset allocation of 30% Ethereum and 70% Bitcoin.
In portfolio rebalancing, investors repeatedly involve the previous portfolio asset ratio to sustain the aspired asset allocation framework.
Using this strategy aims to establish a risk management framework that warrants that the success or failure of one or two assets is independent of one investment or market.
Cryptocurrency investment horizon
Your cryptocurrency investment horizon can be a year, or two, or more.
An investor, at the foremost, is required to pick and heed his investment period.
In most cases, rebalancing will not give the coveted result over a short distance.
Because of its significant volatility, the cryptocurrency portfolio can exhibit excellent results at a distance of 1 month. Therefore it is quintessential to monitor your cryptocurrency portfolio.
Portfolio Rebalancing in Cryptocurrencies:
Being highly volatile assets, cryptocurrencies are indeed high-risk investments, and hence a risk management strategy becomes indispensable.
The price of one cryptocurrency is different from others; thus, a stable coin is utilized to determine the portfolio allotment ratio.
Let’s say own Bitcoin (BTC), Ethereum (ETH), Tezos (XTZ), and Litecoin (LTC), each making up 25% of your crypto portfolio. After some time, the ratio of these distributed assets will change according to their price move, and your new portfolio maybe 26% BTC, 21% LTC, 25% ETH, and 28% of Tezoz.
Now on these new metrics, you can rebalance your portfolio to 25% of each coin again.
This way, you will be able to buy the dips of Litecoin and lower your average buying price and book your profits on XTZ and BTC, making a profitable trade.
How to do Portfolio Rebalancing
There are several key strategies to rebalance your portfolio: “threshold-only”, “time-only”, and “time-and-threshold” strategies, which you can put to use while choosing portfolio rebalancing software.
Threshold only strategy
In the threshold-only strategy, traders select a predetermined rebalancing threshold. This threshold acts as a subconscious benchmark to rebalance your portfolio.
The threshold-only approach is well fitted for cryptocurrencies, given that it is volatile itself.
Time only strategy
Using the “time-only” strategy, you rebalance your portfolio at a decided time interval — daily, monthly, quarterly, etc.
As the name suggests, the time-only approach takes only time as its parameter, irrespective of how much or how little your portfolio’s resulting asset allocation has drifted from the initial funding.
Time and threshold strategy
This strategy combines the two approaches mentioned above.
Rebalancing occurs on a schedule. However, this is only in the case where the portfolio’s asset allocation sails away from the target by a predetermined minimum rebalancing threshold such as 10%, 25%, or 30%.
It doesn’t matter if this happens once a day or once a year. Once the threshold is crossed, you go and rebalance your portfolio.
When the portfolio’s target allocation is less than the predetermined threshold, the portfolio will not be rebalanced on the scheduled date.
Similarly, if the numbers drift by the minimum threshold or more at any intermediate time, the portfolio will not be rebalanced.
Advantages of Portfolio Rebalancing
It helps a trader concentrate on their specialty.
Portfolio rebalancing can be implemented to your whole crypto portfolio rather than a spot. A trader can make the most out of cryptocurrency investments, using the spot and other markets like options, futures, and margin.
With portfolio rebalancing is practiced across diverse crypto markets, traders can focus on the markets they specialize in.
Ensures that traders get the best entries
When you rebalance your portfolio, you buy the dips, meaning you add funds to a coin with PnL in minus, which means you get better entries than your previous entry points.
It helps you revisit your investment strategy.
Regularly rebalancing your portfolio allows you to revisit your trading method and strategy.
Traders get a chance to change their investment strategy and ride the waves accordingly.
Portfolio rebalancers and holders are in a constant debate of which approach is more beneficial; therefore, always remember to do your research.
Crypto portfolio rebalancing software
Crypto portfolio management software enables users to store, manage and keep track of their cryptocurrency assets, investments, and trades. There are crypto portfolio rebalancing tools out there that can support you in automating the entire process. These tools have dashboards connected to the wallets and exchanges.
Portfolio rebalancing tools render a mine of information on everything you need – from asset allocation to categorizing your investments into the major asset classes. This data is then visualized in graphs and text.
Crypto Rebalancing: What to Keep in Mind
Keep in mind that a significant advantage of cryptocurrency portfolio rebalancing is maintaining the risk profile of your investments over time rather than making the most of them.
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Frequently Asked Questions
How To Invest In Cryptocurrency Stocks?
Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
What Is Virtual Currency?
Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
Is Cryptocurrency Banned In India?
No, cryptocurrency is not banned in India. India has seen its ups and downs in the crypto sector concerning its legal status. The Reserve Bank of India (RBI) issued a circular in April 2018 advising all organizations under its jurisdiction not to trade in virtual currencies or provide services to assist anyone in dealing with or settling them. A government committee proposed outlawing all private cryptocurrencies in mid-2019, with up to ten years in prison and severe penalties for anyone dealing in digital currency. The Supreme Court overruled the RBI's circular in March 2020, allowing banks to undertake cryptocurrency transactions from dealers and exchanges.
Are Cryptocurrencies Legal In India?
In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.
What Is Cryptocurrency?
A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.
Is Crypto Legal In India?
Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India
Are Cryptocurrencies A Good Investment?
Cryptocurrency has the potential to make you extremely wealthy, and the potential to cause you to lose your money. Crypto assets, like any other investment, come with many risks and potential rewards. Fundamentally, cryptocurrency is an excellent investment, particularly if you want to gain direct exposure to the demand for digital currency.
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
