Rebalancing cryptocurrency portfolio is an important part of the investment strategy of investors. It allows them to reallocate their funds for investment in different cryptocurrencies for getting maximum return. Crypto portfolio rebalancing helps to maintain a healthy mix of different cryptos so that a desired level of risk can be maintained by the crypto traders. Periodic rebalancing of your crypto portfolio is needed so that the desired allocation or risk is maintained.
Now let me walk you through the different aspects of rebalancing crypto that you must know as an investor.
When you rebalance your crypto portfolio, you essentially redistribute asset allocation. This is done primarily to maintain allocation as well as risk at a desired or original level. You can rebalance your cryptocurrency portfolio by buying or selling crypto assets on a periodic basis for maximizing portfolio performance.
Different cryptos have different value systems. That’s why, you’ll not get a uniform weighting for every cryptocurrency, giving rise to variation in quantity of each crypto. For traders, a value based system is easier and more straightforward to manage. They can not only keep a tab on the performance of his/her bought cryptocurrencies but also allocate them in terms of original weightage.
Investing in cryptocurrencies can be highly risky. Due to price fluctuation and uncertain market condition, asset allocation has become a very important way to ensure stable returns.
When rebalancing cryptocurrency portfolio, you as a trader/investor makes profits from the overperforming asset by reinvesting the proceeds into other cryptocurrencies. Therefore, risk profile can be maintained by you no matter in which direction the market is moving. By rebalancing crypto portfolio, you can reap benefits in all market conditions and increase overall profitability of your cryptocurrency investment.
As you rebalance your crypto portfolio, you essentially sell the crypto that overperformed and buy an underperformed asset. In this way, you are fully utilizing the strategy of buying at every low and selling at every high. This rebalancing reverts back the market to the mean value, thereby increasing the overall returns.
Another major advantage of portfolio rebalancing of cryptocurrencies is that it is helping investors to avoid emotion-driven trading/investing decisions. In the crypto market, it is seen that the inexperienced retail investors are driven by:
When you are using rebalancing crypto, you are essentially guided by predetermined rules. This helps you in maintaining focus on your investment plan.
There are two major strategies of cryptocurrency portfolio rebalancing:
According to this strategy, you rebalance your crypto coin’s portfolio after a predetermined time interval. This strategy is most suitable for the beginners. As per this strategy, you have to rebalance the portfolio after a particular time gap, say:
The time interval you choose will again be dependent upon your appetite for risk tolerance.
A shorter time interval may be suitable for rebalancing if you want to maximize returns by minimizing risks. This is mainly because of the fact that cryptocurrency market has very high volatility.
This strategy requires you to rebalance your portfolio when weightage of a particular crypto in your portfolio surpasses a particular value.
Let me explain it with an hypothetical scenario. Suppose, you are holding 4 cryptocurrencies with equal weightage (25%) allocation:
You may want to hold these cryptos with an individual weightage of 25% each.
Now, suppose Bitcoin starts performing well and its weightage (value in terms of fiat currency like USD, EUR, etc.) increases to 30% from 25%. However, Ethereum starts underperforming and its weightage in the crypto portfolio decreases from 25% to 20%. In that particular scenario, you would like to correct the weightage (+/- 5%) balance of the portfolio to its initial allocation level. That’s why, you have to sell BTC and buy ETH for rebalancing the portfolio.
You can use both periodic rebalancing and threshold rebalancing to get maximum profit. If you don’t have too much time in hand, you can use trading bots for rebalancing your portfolio. There are many renowned bots available in the market that can make best investment decisions.
Use automatic rebalancing of crypto portfolio on day trading as well as HODLing for increasing your portfolio value. The perfect time to rebalance is dependent upon your decision. While choosing crypto trading bots, you have to select appropriate target allocations in the asset portfolios during crypto trading and crypto rebalancing to get maximum portfolio performance. Having a clear investment horizon is a must for every investor for choosing the right strategy.
You can buy and sell cryptocurrencies against various fiat currencies (US Dollar USD, British Pound, Canadian Dollar CAD, South Korean WON, Singapore Dollar, Chinese Yuan, Hong Kong Dollar, etc.) through a wide array of crypto exchanges (centralized or decentralized exchanges).
If you want to increase your investment explosively in the coming 5-to-10 years, buy crypto coins now. Keep an eye on the market news, price statistics, block times, and others to time your trading of Defi systems and tokens for maximum profit.
You can also diversify your crypto coin portfolio by including other cryptocurrencies such as Bitcoin Ether ETH, Bitcoin Gold, Bitcoin Cash BCH, Basic Attention Token, Ethereum Classic, Binance Coin, Wrapped Bitcoin (some also call it wrap bitcoin or wBTC), USD Coin, Gemini Dollar, ERC20 tokens (created on Ethereum blockchain), NFTs, and others. Always keep rebalancing portfolio periodically to get maximum profitability.
Also, invest in various types of stocks, mutual funds, index funds, real estate, and others to improve your personal finance. If possible, get help from a portfolio manager or wealth management firm for maximum return.
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