You’ve probably noticed that investing in cryptocurrencies isn’t completely different from the traditional stock market.
Stock market investors and fund managers rely on tried-and-true strategies to reduce risk and increase long-term growth, and it’s these same methods that you often rely on to make your long-term cryptocurrency portfolio reach its potential.
We’ll discuss the importance and benefits of rebalancing your long-term crypto portfolio below and a few valuable techniques to fine-tune crypto allocations in your portfolio.
What Is Rebalancing?
Rebalancing is a technique to adjust the weight or percentage of a given asset in your investment portfolio.
The act of rebalancing assets within your portfolio is achieved by buying or selling assets to return to the point of a predefined balance. The value of each asset will change over time (go up or down), making it necessary to rebalance each asset according to your risk tolerance or investment strategy.
For example, a balanced long-term investment portfolio may look like this:
As values rise and fall, the same long-term investment portfolio may look like this after a year:
As you can see, A gained 20% in value while B and C decreased by 10%. Thus, investors sell 20% of A to rebalance B and C to their original state.
Why Should You Rebalance Your Long-Term Crypto Portfolio?
Whether you invest in ETFs, individual stocks, or Bitcoin — you should strive for balance.
Problems arise once a group or single asset gains significant value compared to other assets within your long-term portfolio. Whether the asset’s value changes suddenly or over a year, you can take profits and reinvest them into other assets, such as bonds, stocks, or other underperforming cryptocurrencies.
For example, at the beginning of the year, your overall long-term investment portfolio was a balance of $30,000 (30%) in bonds, $60,000 (60%) in stocks, and $10,000 (10%) in Bitcoin, totaling $100,000. At the end of the year, however, your Bitcoin investment rocketed 300% and is now worth $30,000 (alternatively, your Bitcoin could also lose 50% or more).
Assuming your bond and stock investments dropped a few percentage points, your Bitcoin investment now accounts for 25% of your portfolio instead of 10%. As you can see, your Bitcoin investment is now roughly the same as your bond allocation, and your portfolio could benefit from rebalancing.
At this point, some financial advisors would recommend skimming 5-10% profit from your Bitcoin investment and rebalancing your bonds and stocks to their original allocation. Alternatively, you could use the profit to gain exposure to another cryptocurrency, such as Ethereum. However, you need to understand the risk of having a large part of your portfolio in cryptocurrency.
The Top Benefits of Rebalancing Your Long-Term Crypto Portfolio
Rebalancing your long-term crypto portfolio is a way to fine-tune and renew your investment strategy.
Below, we’ll highlight the primary benefits of rebalancing your crypto portfolio which may reduce risk while increasing long-term growth.
Decrease the Risk Profile of Your Crypto Portfolio
The entire point of rebalancing your crypto portfolio is to return to your original and predefined proportion of asset weight based on your risk appetite.
In a crypto-centric investment portfolio, many investors tend to hold a large proportion of Bitcoin compared to other lesser-known cryptocurrencies because of its blue-chip status. Smaller and more volatile cryptocurrencies may rocket in price, thus ballooning their weight and increasing the overall risk to your long-term investment.
The risk may be mitigated by following the rebalancing strategy and moving profits from volatile cryptocurrencies back into Bitcoin and other reliable assets.
Without rebalancing long-term crypto investments, you may run the risk of having a lopsided long-term portfolio.
Predefined asset allocation forces you to boost underperforming cryptocurrencies while taking profits from strong cryptocurrencies. If you were always to let “winners run,” you’d likely end up with a long-term crypto portfolio lacking diversity.
Increase Potential Returns
One of the critical aspects of rebalancing is to take profits from strong assets and add toward underperforming or undervalued assets.
Typically, strong assets experience downturns after hype subsides, while undervalued cryptocurrencies may surge in demand. By following the rebalancing method, you heighten your chances of selling high and buying low.
The Different Types of Rebalancing Strategies for Your Long-Term Crypto Portfolio
There isn’t a one-size-fits-all strategy for rebalancing your long-term crypto portfolio.
Instead, rebalancing comes in three basic forms that we’ll detail below.
Threshold Rebalancing (Tolerance Band)
Threshold rebalancing, also known as tolerance band rebalancing, is a method that requires you to set limits in which assets within your portfolio may deviate.
Once an asset or assets deviate pass the threshold from the predefined allocation — it’s time to rebalance. For example, your deviation limit is 10%, and Ethereum increases 15% overnight, making it necessary to rebalance your Ethereum holdings until it’s back to its original allocation weight.
You can always set your threshold to any percentage, where large percent deviations carry more risk, and lower percent deviations have less risk.
Periodic rebalancing is precisely what it sounds like — rebalancing your long-term crypto portfolio at a specific time.
Many financial experts say that rebalancing once per year optimizes your long-term crypto portfolio, making this an easy strategy to implement. However, crypto may experience sudden volatility, making more frequent periodic rebalancing a prominent option.
Constant Proportion Portfolio Insurance (CPPI)
Risk is a serious consideration that comes with any market — not just cryptocurrency.
As such, constant proportion portfolio insurance (CPPI) is a method that focuses on selling strong assets into cash or stablecoins. By having stablecoins or fiat on the “sidelines,” you can buy additional crypto at a lower price or weather increased periods of volatility.
CPPI considers marketwide downturns, which is why this method focuses on turning crypto profits into cash to await better buying opportunities.
Using an Automated Crypto Investment Adviser
Rebalancing is a battle-tested strategy that helps manage your long-term crypto portfolio.
However, manual rebalancing requires ample time and effort that may force you to dash to your nearest computer in an instant. Instead, you may want to consider an automated crypto investment adviser to rebalance your crypto portfolio.
Automated crypto investment advisers can help you customize your investment strategy according to your risk tolerance and investment timeline. This allows you more time to focus on the important things in life without worrying about manually implementing threshold limits or periodic rebalancing chores.
Shrimpy is providing an endorsement of Shrimpy Advisory. Shrimpy and Shrimpy Advisory are affiliated companies. A conflict of interest exists because Shrimpy Advisory will be compensated if a client utilizes Shrimpy Advisory’s services.