Portfolio rebalancing is a crucial strategy for investors to manage risk and optimize potential returns in a volatile cryptocurrency portfolio, despite the challenges posed by the high volatility of digital assets.
Portfolio rebalancing involves selling assets in a crypto portfolio and buying others to meet desired allocation goals, often recommended by experts during high market volatility. Some effective strategies include the following:
Why Is It So Important to Rebalance My Crypto Portfolio?
Philip Forte, founder and CEO of Elixir, emphasizes that crypto portfolio rebalancing is a crucial aspect of risk management and risk appetite. He emphasizes the need to manage the volatility of crypto, both upside and downside, and to have a nimble mindset when allocating to crypto majors and alternative assets to ensure portfolio success.
The COO at Savl, James Toledano, emphasizes the importance of portfolio rebalancing to prevent overconcentration in a few assets and protect investors from potential asset clashes. He also stresses the significance of diversifying one’s cryptocurrency holdings when rebalancing. Additionally, rebalancing encourages investors to buy low and sell high, a crucial aspect of successful financial market investing.
The Best 3 Methods and Professional Advice for Rebalancing Your Portfolio
Rebalancing your crypto portfolio can be challenging, especially for beginners. However, selecting the right technique can simplify the process, with industry experts offering the top three strategies and tips.
1. Rebalancing by Percentage Threshold
Bitget Wallet’s COO, Alvin Kan, suggests that portfolio rebalancing strategies should align with asset managers’ core investing values, with investors advised to allocate to promising sectors like Bitcoin ETFs, DeFi funds, RWAs, and AI tokens.
Institutional funds often use the percentage threshold rule to determine when a crypto portfolio needs rebalancing. This rule triggers rebalancing when an asset’s weight exceeds or falls below a preset threshold, such as 5% or 10%. A plus/minus 10% surge is considered a healthy point for rebalancing a crypto portfolio.
2. Averaging Dollar Cost
Elixir’s Forte introduced dollar cost averaging (DCA), a strategy where investors buy and sell the same amount of crypto weekly for a set period. This helps maintain exposure to an asset investors are trying to sell while minimizing risk, as it allows for a more consistent approach to rebalancing their crypto portfolio.
3. Method of Fixed Percentage
The fixed percentage method is a popular strategy for portfolio rebalancing, allowing investors to rebalance their assets back to their original target allocation percentages. This involves holding 33% of Bitcoin, Ethereum, and Solana in a crypto portfolio and reverting to that percentage after a certain time, either by selling or buying assets.
Investors can allocate a constant dollar amount to each asset, or a percentage, and rebalance it according to their investment decisions. Automated crypto rebalancing tools and services, like a crypto portfolio tracker, can help rebalance assets, but their use depends on their risk profile.
How Frequently Should My Crypto Portfolio Be Rebalanced?
Investors often inquire about the optimal time to rebalance their crypto portfolio, which depends on the chosen technique and their risk tolerance and profile.
Toledano of Savl clarified:
- Quarterly rebalancing is a popular strategy for regularly adjusting a portfolio, making it ideal for investors with high risk tolerance.
- Annual rebalancing is a simpler method that maintains the desired allocation and is often used with lower risk tolerances.
- Threshold-based rebalancing is triggered when an asset’s weighting deviates from the target by a certain percentage, such as a 10% drop.
Lee from Bitget emphasized that investors can adjust their portfolios based on macro data and market conditions as per their investment strategy.
