Portfolio rebalancing is an effective investing strategy that allows you to secure profits and prevent losses. One of our case studies has shown that portfolios rebalanced on an hourly basis perform up to 234% better than HODL strategies. But not all portfolio rebalances beat HODL – especially not inefficient ones.
In this article, I’m going to show you how to successfully rebalance a cryptocurrency portfolio successfully.
What Is Portfolio Rebalancing?
Portfolio rebalancing is a strategy that enables investors to balance the scale between risk and profit by readjusting asset allocations. Periodical rebalancing makes it possible to retain one’s original asset allocation weightings, which in return, helps with sticking to specific risk targets.
Let’s say that I have invested in a crypto portfolio made of Bitcoin and a couple of altcoins. I decided to invest 50% of my capital in Bitcoin, and evenly split the remaining 50% into Ethereum and Chainlink. The allocations remain stable for some time and I stick to my goal of distributing the bulk of my capital to a more stable asset like Bitcoin, while the remainder focuses on volatile assets with higher returns.
Things change as time moves on. Bitcoin increases in price, but fails to catch up with the explosive gains brought by ETH and LINK. What happens is that the dollar value of BTC decreases and becomes smaller in size compared to the other assets. This causes a disbalance where I’m overexposed to altcoins and underexposed to Bitcoin.
What I do is utilize portfolio rebalancing to return my allocations to their original targets. I sell a portion of ETH and LINK and reinvest it into Bitcoin – returning the weightings to a 50/25/25 ratio. By doing so, I have taken profit and bought an underperforming asset at a lower price.
Types of Portfolio Rebalancing Strategies
There are two main portfolio rebalancing strategies. Which one you’ll use depends on how you want to manage your risk tolerance, portfolio diversification, and asset exposure.
The section below provides you with an in-depth explanation of threshold rebalancing and periodic rebalancing.
Threshold rebalancing is a strategy where you not only set target allocations, but a tolerance band as well. This tolerance band dictates how much the allocation can deviate from its original value. You will need to rebalance the portfolio If the allocation moves past their threshold.
This strategy can entail either a low or high threshold limit.
Allocation percentage drifts away negligibly
Lower volatility, lower profits
Allocation drifts away easily
Best for volatile markets
Higher returns due to higher volatility
Better for altcoins
How does threshold rebalancing work in practice?
Let’s say I have a 4-asset portfolio made of Bitcoin, Ethereum, XRP, and Chainlink. Each asset has a 25% allocation target. Additionally, I set a 2.5% threshold. Each asset can maximally move 2.5% above or below its allocation target. If the asset breaks the threshold, I will completely rebalance the portfolio.
Periodic rebalancing entails rebalancing your portfolio on an hourly, daily, or weekly basis. There are no other factors besides time. You decide which time period to use, and buy or sell assets to bring them back to their original allocation target. You’re not supposed to rebalance the portfolio if anything changes percentage-wise – you simply stick to your time schedule.
For example, I might decide to create a brand new portfolio with 10 assets. I set a time-schedule of four hours and rebalance my portfolio each four hours. Even better, I use a platform like Shrimpy that’ll automatically rebalance my portfolio. The assets within my portfolio might move up to 5, 10, or even 15% from their allocation target. However, that will not force me to rebalance my portfolio.
How to Rebalance a Cryptocurrency Portfolio with Shrimpy
The first step is to create a portfolio and pick your assets. Start by clicking the + button next to ‘My Automations.’
Clicking the + button will launch a new window. Here you can click the ‘Pick Assets’ button. This will allow you to create a new portfolio and pick which assets you’ll invest in.
An unnamed portfolio with no assets will appear after clicking the previous button. Here, you should click the blue ‘Pick asset’ button.
A new window will appear where you can select any cryptocurrency on the market. Select as many tokens as you want and click the red ‘Add’ button once you’re done.
Step 2. Adjust Rebalancing Settings
Once you pick your assets it’s time to set allocation targets for each asset. In the picture above, you’ll see that I have set a 50%, 25%, 15%, and 10% target allocation for Bitcoin, Ethereum, Binance Coin, and Cardano respectively.
The next step is to decide your rebalancing strategy. Under ‘Rebalance Strategy,’ pick either periodic or threshold. You can set an hourly, daily, and weekly rebalancing time-basis next to the periodic rebalancing option. And next to the threshold, you can type in any number for your rebalancing threshold.
Underneath the Stop-Loss section you can also decide to add a portfolio stop loss. You can read more about portfolio stop loss orders in this article. In this section you can adjust the stop loss time period, the threshold after which the stop loss order activates, and the stablecoin currency into which your assets will convert.
Step 3. Activate Rebalancing Strategy
You’re almost done now! I recommend that you check your rebalancing settings again and think about whether you want to make any more changes to your portfolio. Once everything is ready, click the ‘Start Automation’ button to start your portfolio rebalancing strategy.
That’s it! You have now completed all the steps necessary to rebalance your portfolio.
Having trouble activating your strategy? You can watch the video guide below for a more visual showcase of how to use Shrimpy.
If you want to learn more about portfolio rebalancing, I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.