Managing your assets can feel like a rollercoaster—one moment, your portfolio is soaring, and the next, it’s taking a dive. Such is investing. The somewhat unpredictable nature of investing makes it crucial to have a strategy that helps you maintain control over your investments. Enter crypto portfolio rebalancing. It’s a method that ensures your assets stay aligned with your risk tolerance and financial goals.
Ready to learn more? Let’s dive in.
What Is Crypto Portfolio Rebalancing?
Crypto portfolio rebalancing is the process of adjusting the weightings of assets in your portfolio to maintain a desired allocation. In other words, you conduct trades to ensure you have the right amount of each asset value. Over time, the value of your individual assets in your portfolio fluctuates, creating an overall shift in the balance. Without regular rebalancing, your portfolio could become riskier or more conservative than you intended. Rebalancing brings your portfolio back to your original investment strategy.
Does this sound familiar?
Rebalancing is a common strategy in traditional investing as well. In both cases, the goal is to maintain a portfolio that aligns with you. The biggest difference is that due to the sometimes higher volatility of the crypto market, rebalancing might need to be more frequent and vigilant than with RWAs.
Example
Imagine a user has a portfolio of two assets, ETH and BTC, with a target allocation of 50% each. If the price of ETH falls by 75% and the price of BTC is flat, the user would have a portfolio allocation of 20% ETH and 80% BTC. The portfolio has drifted from its original strategy of 50% ETH and 50% BTC, under-exposing the investor to ETH and over-exposing them to BTC.
The solution to this problem, and skewed portfolios in general, is for the investor to rebalance their portfolio. In this case, the user would convert 30% of their portfolio from BTC to ETH, achieving their initial target allocation of 50-50.
Why Is Rebalancing Crucial?
It’s no secret that cryptocurrencies are considered volatile compared to RWAs and traditional investments (with some exceptions). Rebalancing your crypto portfolio is crucial because it helps you manage this volatility. It helps you protect yourself from overexposure to high-risk baskets while also ensuring you’re not missing out on potential gains from other assets in your crypto portfolio.
Methods Of Rebalancing
Just like there are numerous DApps to help you manage your portfolio, there are many different rebalancing methods you can incorporate into your asset management strategy.
Here are a few basic rebalancing methods to start:
Calendar Rebalancing
This is a very straightforward method for rebalancing your crypto portfolio. You simply rebalance at regular intervals, such as monthly, quarterly, or annually, regardless of market conditions. Calendar rebalancing is easy to implement and ensures you manage your assets consistently. It can be a great approach for new investors.
Constant Mix Rebalancing
In this method, you only rebalance your portfolio when the allocation of an asset deviates from your target by a certain percentage. It is a more flexible approach that can be more cost-effective by reducing the number of transactions you make. Here’s an example: Say you want Ethereum (ETH) to make up 40% of your portfolio. You might rebalance only when you have +/- 5% of the target allocation.
Hybrid Rebalancing
Some investors like a hybrid rebalancing method to create a “best of both worlds” strategy. As you may have guessed, this is a combination of calendar and constant mix rebalancing: you make regular adjustments to your portfolio while also responding to significant market movements. It provides consistent oversight with the flexibility to react.
Rebalancing With 3Balance
3Balance helps crypto investors simplify their rebalancing process, allowing them to manage their crypto portfolios effectively. Here’s how it works:
3Balance displays your holdings and their percentage of your portfolio, allowing you to easily identify which assets need to be rebalanced. Then, you simply choose your network, set up your desired allocations, and execute transactions immediately. 3Balance removes the extra labor of rebalancing required on other DApps—investors no longer need to worry about liquidity or switching between tokens to execute the necessary trades. This creates even further efficiencies not just in time but in gas fees as well.
Start Rebalancing Today
Crypto portfolio rebalancing is an essential strategy for managing your investments. By regularly adjusting your holdings, you can protect your investments, capitalize on market opportunities, and stay aligned with your financial goals. With 3Balance, rebalancing becomes a seamless, automated process, allowing you to focus on what matters most—growing your wealth in the dynamic world of cryptocurrency.
Try 3Balance today for free!
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