How to rebalance your crypto portfolio: Steps to success

Managing a precisely balanced crypto portfolio proves challenging for investors due to digital asset volatility. Nevertheless, understanding portfolio rebalancing is vital for risk management and maximizing potential profits.

But what exactly is portfolio rebalancing, and how does it work?

Portfolio rebalancing includes selling certain assets from your crypto portfolio and acquiring others to align with your desired allocation objectives and requirements. This practice is frequently advised by professionals during periods of significant market volatility.

Determining the frequency of rebalancing your crypto portfolio

Investors often wonder about the optimal timing for rebalancing their crypto portfolio. The frequency largely depends on the chosen rebalancing technique and the investor's risk tolerance.

Savl’s Toledano outlined three common approaches:

• Quarterly rebalancing: This cadence involves adjusting the portfolio every quarter, suiting those with higher risk tolerance.
• Annual rebalancing: A simpler method where the portfolio is rebalanced annually, commonly preferred by investors with lower risk tolerance.
• Threshold-Based rebalancing: Rebalancing occurs when an asset's weight deviates from the target by a specified threshold percentage (e.g., a 10% drop).

Ultimately, the ideal rebalancing frequency varies based on individual strategies, risk profiles, and market conditions.

Key strategies and expert advice for portfolio rebalancing

Balancing your cryptocurrency portfolio can be challenging, especially for beginners. However, adopting the correct approach can simplify this task significantly.

Here are the top three strategies and expert tips for portfolio rebalancing.

Optimal percentage threshold approach for portfolio rebalancing

According to Alvin Kan, Bitget's COO, portfolio rebalancing strategies are influenced by asset managers' core investment principles. Given the rapid changes in the crypto industry, investors are advised to allocate portions to promising sectors like Bitcoin ETFs, certain DeFi funds, RWAs, and AI tokens.

Ryan Lee, Bitget's chief analyst, highlights the use of the percentage threshold rule by institutional funds. This rule triggers rebalancing when a cryptocurrency's weight surpasses or falls below a preset threshold (e.g., 5% or 10%), ensuring it aligns with the target percentage. Kan also recommends a plus/minus 10% change as a healthy indicator for portfolio rebalancing in crypto.

Utilizing Dollar Cost Averaging (DCA) for portfolio rebalancing

Another strategy discussed by Elixir’s Forte is dollar cost averaging (DCA), a method favored by many investors when rebalancing their crypto portfolios. In DCA, investors buy and sell a fixed amount of cryptocurrency on a weekly basis over a predetermined period.

Forte noted, “Some investors may opt to dollar-cost into one asset while dollar-costing out of another. This approach helps maintain exposure to an asset being sold while reducing associated risks.”

The fixed percentage method for portfolio rebalancing

Another widely used approach for rebalancing portfolios is the fixed percentage method, enabling investors to realign their assets to their original target allocation percentages.

For instance, if an investor initially allocated equal portions (33%) to Bitcoin (BTC), Ethereum (ETH), and Solana (SOL) in their crypto portfolio, they would aim to restore this allocation periodically by either selling or purchasing assets as needed.

Alternatively, investors can allocate a constant dollar amount to each asset rather than a percentage and rebalance based on the designated investment amount.

Savl’s Toledano highlighted the availability of automated crypto rebalancing tools and services, such as crypto portfolio trackers, which aid in asset rebalancing. However, the decision to use such tools depends on an investor’s risk tolerance.

Considerations when rebalancing your portfolio

While portfolio rebalancing in crypto offers benefits, investors should be mindful of several factors.

Lee highlighted:

• Transactional costs: Be aware of fees incurred during rebalancing.
• Tax impact: Understand potential tax implications of rebalancing.
• Market timing risk: Rebalancing at the wrong time could impact returns.

Forte cautioned against over-trading in crypto due to its volatility and nascent nature, which can lead to underperformance compared to a Bitcoin and Ethereum-focused strategy.

Kan emphasized the challenge of personal sentiment and conflicting growth signals, advising investors to rely on objective data and statistics for well-calculated decisions during rebalancing.