Cryptocurrency markets are generally fast-paced and unpredictable. If you aren’t alert, its drastic fluctuation can mar the performance of your investment portfolio. Thus, it is clear that you need a solid strategy to balance your investment.
Luckily, rebalancing, a common practice in traditional finance, has proven to be applicable in the digital world. Whether you are holding Bitcoin, Ethereum, or other altcoins, this strategy can help you maximize your return while managing risks. In this article, we’ll dive into how to go about rebalancing your crypto portfolio. Don’t skip out on any aspect of this guide so you get the best out of the volatile crypto market.
KEY TAKEAWAYS:
- Rebalancing involves keeping your investment portfolio balanced to match your profit goals in light of market changes.
- This investment strategy is important because it helps you manage volatility, maintain risk tolerance, leverage market swings, and adapt to market changes.
- Methods of rebalancing include time-based, threshold-based, and hybrid rebalancing.
- When reallocating your assets, you need to avoid mistakes such as rebalancing too often, ignoring gas fees, and making decisions emotionally.
What is Rebalancing? And Why Is It Important?
Rebalancing or asset reallocation is the process of keeping your investment portfolio balanced such that it matches your profit goals regardless of how the market changes. For example, assuming your goal is to have a portfolio with 50% Bitcoin and 50% altcoins. It is possible that as the price of these assets shifts, you end with a 70% allocation in Bitcoin and 30% in altcoin.
Rebalancing implies that you sell some of your Bitcoin to buy more altcoins to restore your portfolio to the original target. Let’s take a close look at the other reasons to rebalance.
- To manage volatility: Cryptocurrencies are notoriously volatile, such that they can experience large price swings in a short timeframe. By reallocating your assets, you can avoid overexposing a single crypto to such price changes.
- To maintain risk tolerance: As one asset outperforms another, your risk profile will change. This strategy ensures that your portfolio suits your long-term risk plan.
- To leverage market swings: Regular rebalancing makes it easy to sell high and buy low. That way, you get to profit from cryptocurrencies that surge in value while reinvesting in underperforming ones that might eventually rise.
- To adapt to market changes: Asset reallocation allows you to adjust your investment to include new projects without abandoning your core assets.
Rebalancing Strategies for 2024
Like every other investment, rebalancing should be done to cater to your investment styles and goals. Here are some strategies to consider in 2024:
- Time-Based Rebalancing
This involves setting regular intervals to review your portfolio. It could be monthly, quarterly, or yearly. The advantage of time-based asset reallocation is that it prevents emotional trading since you’re following a fixed schedule. However, there is the possibility of missing out on certain opportunities if the market experiences major changes
- Threshold-Based Rebalancing
Here, you focus on adjusting your profile when an asset’s allocation goes beyond a pre-set threshold. For instance, you can decide to implement this strategy whenever your crypto either falls or exceeds 5% of its target. In practice, this form of rebalancing requires frequent monitoring of your portfolio, which can be time-consuming. Nonetheless, it can help you respond to and capitalize on major price changes in the market.
- Hybrid Rebalancing
This combines both methods that have been mentioned above. To implement it, you’ll have to schedule a time for your time-based rebalancing, But if an asset moves significantly in-between the fixed times, you’ll execute threshold-based adjustments.
Key Considerations for Rebalancing
Now that you know the different types of rebalancing, here are some things to keep in mind before you get started:
- Consider tax Implications: Selling assets could lead to a tax event that can eat into your profit. To mitigate this, you can sell assets that are in a loss position to offset gains somewhere else. Also, you can choose to put your rebalancing effort into tax-advantage or non-taxable cryptocurrencies.
- Market Trends: The crypto market has grown to include trends like decentralized finance (DeFi) and NFTs. It’s important to stay informed of the opportunities and adjust your portfolio to include them.
- Diversification: While cryptocurrencies offer huge potential for profit, it’s safer to include more stable classes of assets in your portfolio. For example, you can invest in tokenized stocks or ETFs to minimize your exposure to speculative investments.
Common Mistakes to Avoid When Rebalancing Your Crypto Portfolio
Asset reallocation can be effective if done correctly. Below are common mistakes that you should avoid:
- Rebalancing too often: Over-trading can lead to unnecessary fees and tax implications, which might not be worth it. Aim for a balanced attitude towards rebalancing, especially if you are using the threshold-based model.
- Ignoring fees: Be mindful of charges like gas fees, which accompany rebalancing, especially when you’re trading on a decentralized exchange.
- Making decisions emotionally: We understand that it could be tempting to hold onto an asset that is appreciating or sell one that is depreciating. However, it’s best to avoid emotional decisions and stick with your rebalancing plan to prevent potentially poor outcomes in the long run.
Conclusion
Irrespective of the assets reallocation model you settle for, consistency and discipline are the most important things. As the crypto landscape continues to evolve in 2024 and beyond, you need to stay informed of the reigning trends and rebalance accordingly. In the long run, you will see yourself get the best out of the unpredictable but profitable world of cryptocurrency.
