Why Portfolio Rebalancing in Crypto Deserves More Attention

These days, all the talk seems to revolve around what’s in store for the prices and market caps of Bitcoin, Ethereum, Binance Coin, Solana, and a few other supermassive cryptos. Now that MiCa regulations are released and validated and the new crypto investment vehicles are tradeable in the U.S., it’s somewhat clear why the focus has shifted a bit from the investment-savvy practices that should never leave investors’ minds.

It might be tempting to go with the flow and think that all your money should go to the heaviest crypto, all the more if you’re a newbie and are susceptible to falling victim to FOMO.

While the first and most recommended step when breaking into crypto is to understand the Bitcoin price and the process of buying and safely storing it, there’s another key aspect that may slip some people’s minds—yet it’s an ace up seasoned investors’ sleeves.

That said, let’s discuss portfolio rebalancing—the most widespread way to minimize unpreventable money losses. This strategy will help you maintain the intended asset distribution, which will benefit your investment goals and risk appetite.

Excerpt of Why Portfolio Rebalancing in Crypto Deserves More Attention

Portfolio rebalancing in crypto is a critical yet often overlooked investment strategy. With the crypto market’s high volatility, assets can quickly deviate from their intended allocation, increasing risk and skewing returns. Rebalancing helps investors realign their portfolios, ensuring a disciplined approach that maximizes long-term growth while minimizing exposure to unnecessary risks. By understanding and applying rebalancing strategies, crypto investors can navigate market swings with greater confidence and stability.

Top Reasons Crypto Portfolio Rebalancing Is Essential

• Combats Volatility: Adjusts for sudden market changes, keeping allocations on track.
• Protects Gains: Locks in profits by reallocating gains into other assets or stable options.
• Optimizes Risk Management: Balances high-risk and low-risk assets effectively.
• Promotes Long-Term Discipline: Prevents emotional decisions based on market fluctuations.
• Supports Consistent Growth: Helps maintain steady growth by focusing on allocation goals.

When rebalancing the portfolio makes sense

Patterns based on the last two great bull cycles, namely 2019-2021 and 2015-2017, help crypto industry experts learn what the cusp of a new bull period should look like. Bitcoin carried the torch during both bull cycles and fortified investors’ confidence in the market, laying the foundation for the bigger rally that followed. The penultimate bull run that saw Bitcoin shoot up from nearly $1K to an ATH of $20K in almost twelve months made history, but most importantly, the factors that led to the missile are to be considered.

The frenzy around ICO, heightened media coverage, and masses of new retail investors adopting crypto have pushed Bitcoin to unprecedented (and most notably, unexpected) levels. Crypto prices generally stick to an upward trajectory, which is desired in the upcoming period, too, given that it’s not easy to tell whether you are on the verge of a new bull cycle breakout. For more details on historical Bitcoin cycles, visit Blockchain.com.

As a general rule, rebalancing suits investors who’d rather risk less than 10% in cryptocurrency regardless of the trajectory of their holdings. Whether you prefer to do it hourly, daily, monthly, or annually, frequent balancing remains essential to performing within your risk ability to improve your ROI.

So, what exactly makes a portfolio balanced?

Old-stager or newcomer, the mere act of spreading your money across more crypto categories has undoubtedly crossed your mind. To begin with, there are over 12 types of crypto, out of which altcoins – every crypto that isn’t Bitcoin – constitute the larger group within the crypto sphere.

Rebalancing your collection boils down to tactically readjusting your asset allowances to bring them back to their initial proportions. For instance, if you’ve first dedicated half of your portfolio to BTC and DOT, MATIC, ETH, DOGE, and BNB received each their fair share of 10%, you’d seek to recalibrate proportions so that the values of which will return to the original point now that prices have fluctuated. Learn more about crypto categories and their dynamics on CoinMarketCap.

Values go up and down within seconds, meaning you’ll have a destabilized ratio if Bitcoin’s value drops and Ethereum’s surges. If Ethereum’s rise caused its percentage to spike to, say, 17, then you’ll have to sell some of it and redirect the capital into Bitcoin and the rest of the cryptos so that you’ll have a 10% distribution to each altcoin. This strategy works best when you have various cryptocurrencies, dedicating percentages after calculating their fiat currency equivalents.

Tips for unseasoned investors

Portfolio rebalancing may turn out to be a taxing undertaking if you’ve never done it before and didn’t calculate your moves well before submitting crypto orders and selling coins. While generally, crypto exchange platforms keep your money blocked for a few hours until funds arrive and your crypto enters your wallet, this isn’t an excuse to make rushed and unevaluated decisions. Before rebalancing your portfolio, let’s evaluate the main curated tips and strategies industry connoisseurs wish you knew.

Percentage threshold rebalancing

One of the most common portfolio rebalancing tactics is percentage threshold rebalancing, which involves establishing a specific percentage deviation you won’t surpass. This will help recalibrate proportions depending on changes in your percentage distribution. Feel free to explore AI tokens, DeFi funds, and other such assets if you feel confident in your patience for monitoring more markets.

Establishing a percentage edge will help you move through your rebalancing quickly. For instance, suppose your BTC jumps and surpasses the pre-established threshold; then, you’ll get proportions back to where they were. An eight-to-twelve percent surge should, more or less, be a green flag that your portfolio is ready for rebalancing.

Dollar-cost averaging

Another common strategy to diminish fluctuations’ impact is dollar-cost averaging (DCA), a great tried-and-tested tactic if you want to buy assets at relatively stable average pricing points. Basically, you’ll order and ditch the same amount of cryptocurrency weekly within a pre-established timeframe. To imagine a viable scenario, some investors might use dollar-cost in Bitcoin and dollar-cost out Ethereum. This ensures they’re exposed to crypto that holders fight to sell, buying it for a reasonable price and reducing the risk.

Fixed percentage method

Lastly, the fixed percentage method will help you rebalance your holdings to where they were when you began your journey. For instance, your portfolio may be equally split between BTC, ETH, and BNB. Sticking to this method involves reverting to this distribution occasionally by ordering more of an asset and ditching amounts of another to ensure a fair distribution among your three assets.

Ending note

There are a few things to look for when rebalancing your portfolio, such as market timing risk, the probable impact of taxes, exchange fees, and transactional costs, among other elements. Cryptocurrencies are, by default, highly volatile, meaning that extensive precaution is necessary when you’ve just dipped your toes into this realm. Rebalancing is a skill you’ll gain with time and experience, and it’s only normal for you to spend more time making decisions initially.

This doesn’t mean you won’t nail it. Staying vigilant and connected is essential against the fast-moving and volatile crypto market, meaning that your rebalancing will become easier once you’ve done your homework.