Crypto Portfolio Rebalancing Strategies You Should Know

To manage risk and maximize returns, you need to have a well-planned crypto portfolio strategy. One of the most effective ways to keep your investments on track is through crypto rebalancing. The rebalancing process ensures your portfolio stays in line with your financial goals despite any volatile crypto market movements. 

What Is Crypto Rebalancing? 

Rebalancing is adjusting your asset allocations to maintain your target balance (and risk tolerance). These strategies are also used in the TradFi world as a part of portfolio management. You set a specific percentage of each type of asset in your portfolio, for example, Bitcoin, Ethereum, and stablecoins, to ensure your risk exposure stays in line with your strategy.

Due to crypto market volatility, prices can move dramatically in a short time. So, if you initially set a portfolio that is 50% Bitcoin, 30% Ethereum, and 20% stablecoins, a surge in Ethereum’s price could boost it to 40% of your portfolio, shifting your risk. By rebalancing, you can bring your portfolio back to your desired percentages, locking in profits and mitigating the risk. 

The Components of a Crypto Rebalancing Strategy

When you build your strategy, you’ll look at four key components:

• Target Allocations

The foundation of any rebalancing strategy, your allocations typically depend on your risk tolerance. A conservative approach would be to have a higher allocation of stablecoins, whereas an aggressive investor might allocate more to riskier altcoins.

• Frequency

How often you rebalance is crucial. Too often can lead to high transaction fees, but too infrequently might mean missing important shifts. 

• Thresholds

Many strategies include setting a movement threshold to trigger rebalancing (e.g., a 5% deviation from the target allocation). This avoids excessive trading but keeps your portfolio aligned with your goals. 

• Diversification

Diversified portfolios reduce risk by spreading your investments across various assets. Rebalancing then ensures your portfolio maintains its diversification. 

Popular Rebalancing Strategies 

There are numerous strategies, each designed to align with different types of investors. 

Periodic Rebalancing

This strategy involves rebalancing your portfolio at regular intervals, such as daily, weekly, monthly, or quarterly. It’s simple, predictable, and helps maintain discipline. 

How It Works: If your interval is monthly, you would review your portfolio at the end of each month and adjust your holdings back to their target allocations. 

Best For: Investors who prefer consistency and don’t want to constantly monitor the market. 

Threshold Rebalancing

Rather than balancing based on time, threshold rebalancing triggers the process when an asset’s allocation moves beyond a set threshold, such as a 5% deviation. 

How It Works: If you set a target of 40% Bitcoin and 30% Ethereum, but Ethereum’s value grows to 35%, this would trigger a rebalance to bring it back down to 30%. 

Best For: Active investors or those who like to capture market movements without making frequent transactions. 

Hybrid Rebalancing

Exactly as it sounds, hybrid rebalancing is a combination of periodic and threshold strategies. You rebalance at regular intervals IF the portfolio’s allocations have deviated beyond the set threshold. 

How It Works: You would set rules for your assets, such as rebalancing quarterly, but only if an asset has deviated by more than 5% from its target allocation to minimize unnecessary trades. 

Best For: Investors seeking middle-ground between over-trading and missing market shifts. 

Constant Proportion Portfolio Insurance (CPPI)

CPPI is a more advanced strategy used to protect your capital while maintaining exposure to high-growth assets. It works by adjusting the proportion of risky and safe assets in response to market changes. 

How It Works: In a rising market, you would increase your exposure to riskier assets like altcoins. In a falling market, you shift your portfolio into stablecoins or cash equivalents. You can see a full example in this in-depth blog post here. 

Best For: Risk-averse investors who still want to benefit from high-growth assets. 

A Rebalancing Example

Imagine your portfolio is made up of: 

50% Bitcoin

30% Ethereum

20% Stablecoin

Over time, Bitcoin surges in value and now makes up 60% of your portfolio, while Ethereum drops to 25%, and stablecoin remains unchanged. When the time comes to rebalance, you would sell off a portion of your Bitcoin and use the funds to purchase more Ethereum, returning both to their target allocations. 

How 3Balance Can Help

Managing a rebalancing strategy manually is time-consuming and complex. 3Balance automates the entire rebalancing process, from tracking performance to calculating optimal adjustments, no matter your strategy. 

Automated tools and data-driven insights make it easier to stick to the best strategy and ensure your portfolio stays aligned with your financial goals, maximizing returns and minimizing risk. You can also execute all necessary trades in a simple three-step flow. 

Try 3Balance today!

Manage your crypto portfolio like a Pro: set up your ideal allocations, swap multiple tokens in one flow and much more. Check it out!

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