Common cryptocurrency portfolio rebalancing strategies + Pros and Cons
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A popular and common investment strategy is rebalancing. This means that over time you buy or sell more of a stock, fund or cryptocurrency to rebalance your portfolio.
This has been very popular outside of the cryptocurrency investment world, but it is also catching on amongst cryptocurrency investors.
I wanted to share my thoughts on cryptocurrency portfolio rebalancing in a post, when it might be a good strategy, and when another strategy is preferred.
I will also briefly explain the concept in more detail, how rebalancing work and the common rebalancing strategies that exist. And how you could get started setting up a portfolio rebalancing strategy for yourself.
What is cryptocurrency portfolio rebalancing?
This popular and longstanding strategy works in a similar way for whatever investment asset you want to invest in. And it can be applied to different assets in one shared portfolio.
Meaning you could have a portfolio of stocks, bonds, funds and cryptocurrencies. And you would then rebalance the overall exposure between those assets.
Or it could be used in a portfolio of only stocks, funds or cryptocurrencies.
In this article I will focus on the investment asset cryptocurrencies.
The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation, rather than to maximize returnsVanguard article about rebalancing
The point of this strategy is usually to minimise the exposure to certain markets, or risks.
If you set a certain risk profile for your portfolio, and then over time some assets perform better or worse.
That means after a few months your initial risk exposure could have changed due to the performance of your assets.
Maybe your high-risk assets performed well, and your low risk assets perform poorly. That meant your portolio risk profile increased to a higher part containing high risk assets.
If you would want to revert back to the original portfolio’s risk profile then you would need to sell off some of those high risk assets for more of the low risk assets.
The most common portfolio rebalancing strategies
There are two common rebalancing strategies that exist today, and I wanted to talk about them briefly here. And if they sound useful, then you could further look into using them yourself.
I will share with you some additional useful links and readings to learn more about them.
The two strategies are:
- Calendar-based (or periodic) rebalancing
- Percentage-based rebalancing
This means that you after a set period of time actively rebalancing your portfolio to your initial set targets.
By doing it on a calendar basis (weekly/monthly) you can remove much of the emotional influence on your decision-making process.
And by doing it on the same time over the years you can make it part of a strategy that is easy to remember.
The other rebalancing strategy is the percentage based model, or also known as the threshold based strategy.
That would be 25% of BTC, LTC, ETH and XRP each.
And then you follow your portfolio’s changes over time, and when one or more assets have either lost or gained in value beyond a set threshold you would then rebalance to revert back to the original value (25%).
Pros of using a portfolio rebalancing strategy
The main benefits of using a rebalancing strategy are that it helps you to follow your long term investment strategy.
By rebalancing when necessary you can make sure your investments follow your desired strategy and risk profile.
If you are only inclined to have a low exposure to high risk assets then updating your portfolio to match those needs is essential.
Otherwise you could easily see this risk profile change over time.
Another benefit as I see it, is that you take an active role in your investment portfolio. By rebalancing monthly, or even yearly you force yourself to look over your investments and re-evaluate your strategy to see if it works.
I prefer this myself over to burying my head in the sand and hoping that it will all work out to the best.
Cons of using a portfolio rebalancing strategy
As there are benefits of portfolio rebalancing, there are also disadvantages to it. The main one being it is more suitable to a lower risk profile.
So if you are looking for a strategy to maximise returns this is not the best strategy to use.
There could be added costs and fees to rebalancing. Every time you sell an asset, or certificate it might incur some costs.
Often there are trading fees for selling and buying cryptocurrencies. And over time these fees can rack up and potentially be very unnecessary.
How to start with cryptocurrency portfolio rebalancing
If you are keen to explore and use a rebalancing strategy for your portfolio and you wonder how to best start then I would first suggest you to decide which of the two mentioned strategies you want to use?
Either; Periodic rebalancing, or Percentage-based rebalancing
First – decide which strategy
Second (if periodic) – set your time tables, I would suggest either 6 months or 1-year targets make it easier for you.
Second (if percentage) – set a threshold and I would suggest 10-15% threshold as cryptocurrencies are more volatile
Thirdly – Buy the cryptocurrencies you want. I would also suggest not to buy too many, start with perhaps 3-5 maximum.
- You can find popular and trustworthy exchanges here, and you can use Go CryptoMarket to compare prices between the exchanges
Fourthly – Use an exchange with low trading fees and one that has most if not all your cryptocurrencies. This will make it easier compared to having to use several exchanges every time you want to rebalance.
Other types of investment strategies
Other popular investment strategies used by cryptocurrency traders and holders are the:
- Hold (or hodl) strategy – Here you hold the same portfolio over time and make no changes to rebalance it. You can of course sell off an assets when you don’t want it no more. But the purpose of this strategy is to not touch your portfolio
- Dollar Cost Averaging – This is a strategy used for two purposes, the first is to lower a buy-in price. And the other is to buy in frequently on a periodic basis.
Conclusion – should I use a rebalancing strategy?
No one can decide for you what to do. I can list some of my thoughts when a rebalancing strategy would be a good idea though. I think it makes sense when you:
- Want to minimise your risk exposure
- You have a few different cryptocurrencies that you like and you want to invest in them all
- When you want to hedge your bets and see how they all perform over time
What risks are you willing to take? And are you more interested in maximising returns but take greater returns? Or would you prefer to lower risks when possible?
Another thing to consider is, are cryptocurrencies part of your overall portfolio? Or do you only own cryptocurrencies?
If it’s the former then you need to be aware of the fact that cryptocurrencies are often considered more of a riskier investment. As always consult an expert or advisor when seeking investment advice.
This was meant to educate and inform you on the topic cryptocurrency portfolio rebalancing, how it works, what options there are and some overview level pros and cons.
Find other guides
- Best way to invest in crypto
- 5 Cryptocurrency exchanges with staking
- Bitcoin investing guide
- Gemini vs Coinbase review
- Best altcoin exchanges
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My name is Per Englund and I’m a long-term fan and investor of Bitcoin and other cryptocurrencies. I’ve been around the space for a good few years, learning how it all works and to be a part of this engaging community.
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