How to Rebalance Your Crypto Portfolio: Top Strategies & Analyst Tips for 2024

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Maintaining a perfectly balanced cryptocurrency portfolio is one of the biggest challenges investors face due to the high volatility of digital assets. However, knowing how to rebalance your crypto portfolio is crucial in managing risk and optimizing potential returns.

But what is portfolio rebalancing, and what does it entail?

Portfolio rebalancing involves selling some assets held in your crypto portfolio and buying others to meet desired allocation goals and needs and is often recommended by experts during times of high market volatility.

What are some of the best strategies when it comes to rebalancing your crypto portfolio?

Key Takeaways

  • Crypto portfolio rebalancing is crucial in managing the inherent risks of cryptocurrency investments as it helps investors maintain a desired level of exposure and mitigates the chances of over-concentration in any single asset.
  • Effective rebalancing compels investors to capitalize on market volatility by buying assets when prices are low and selling them when prices are high.
  • The fast-paced and dynamic nature of the crypto market requires investors to be nimble. Techniques such as the percentage threshold rule or fixed percentage method allow investors to respond to market movements and maintain balanced exposure across their portfolios.
  • Utilizing automated tools for rebalancing, like crypto portfolio trackers, can simplify the process, particularly for investors who may not have time to manage their portfolios manually.
  • Transactional costs and potential tax impacts are crucial factors to consider during the rebalancing process. Investors must exercise caution.

Why Is Rebalancing My Crypto Portfolio Crucial?

Philip Forte, the founder and CEO of Elixir, told Techopedia that crypto portfolio rebalancing is “all about risk management and risk appetite.”

“Crypto is an inherently risky asset class, so allocation to it and the ability to stomach its volatility, both on the upside and on the downside, are crucial when thinking about crypto portfolio allocation. Narratives and new tokens also tend to change quickly, and often unexpectedly, so having a nimble mindset when allocating to crypto majors and alternative/longer-tailed assets is crucial to portfolio success.”

Moreover, without rebalancing, a portfolio can be at risk of becoming overly concentrated in a few assets, which can leave an investor vulnerable in case one of those assets clashes, the COO at Savl, James Toledano, added, meaning that crypto portfolio diversification is also an important aspect when conducting a rebalancing.

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In addition, portfolio rebalancing also forces investors to buy low and sell high, which is an important tenet of successful investing in any financial market.

Top 3 Strategies & Expert Tips on How to Rebalance Portfolio

Rebalancing your crypto portfolio can be a taxing task, especially for newer investors; however, choosing the right technique can help make this process much easier.

Here are the top three strategies and tips from industry experts.

  1. Percentage Threshold Rebalancing

    The COO at Bitget Wallet, Alvin Kan, explained that portfolio rebalancing strategies depend on the asset managers’ core investing values.

    However, since crypto can be a fast-moving and dynamic industry, it is usually advisable for investors to set a healthy allocation to some promising sectors such as Bitcoin exchange-traded funds (ETFs), certain decentralized finance (DeFi) funds, real-world assets (RWAs) and AI tokens.

    The chief analyst of Bitget, Ryan Lee, added that institutional funds often use the percentage threshold rule, a useful tactic to know when your crypto portfolio needs rebalancing.

    Lee said:

    “Setting a percentage threshold triggers rebalancing. For example, if a cryptocurrency asset rises and its weight exceeds or falls below a preset threshold (such as 5% or 10%), rebalancing is performed to restore it to the target percentage.”

    Kan also agreed, stating that a plus/minus 10% surge is considered a healthy point when rebalancing a crypto portfolio is required.

  2. Dollar Cost Averaging

    Elixir’s Forte brought forth another strategy a number of investors choose to use when rebalancing their crypto portfolio, known as dollar cost averaging (DCA), where they buy and sell the same amount of crypto every week for a set period of time. Forte said:

    “Some may choose to dollar-cost in one asset and dollar-cost out another asset. This maintains exposure to an asset investors are trying to sell while minimizing the risk.”

  3. Fixed Percentage Method

    Another popular methodology for portfolio rebalancing is the fixed percentage method, which allows investors to rebalance their assets back to the original target allocation percentages.

    This means that if an investor chose a crypto portfolio allocation that was holding equally 33% of Bitcoin (BTC), Ethereum (ETH), and Solana (SOL), they decide to revert to that percentage after a certain amount of time, either selling or buying enough assets still to hold 33% of those in their portfolio.

    Similarly, investors can allocate a constant dollar amount to each asset versus a percentage and rebalance it according to the amount they have decided to invest in assets.

    Savl’s Toledano noted that investors can use automated crypto rebalancing tools and services that help them rebalance their assets, such as a crypto portfolio tracker. However, whether an investor decides to use one or not depends on their risk profile.

How Often Should I Rebalance My Crypto Portfolio?

Another popular question asked by investors is whether there is an ideal time when they should rebalance their crypto portfolio.

In reality, this depends on the technique investors are choosing to use when rebalancing their crypto portfolio and their risk tolerance and profile.

Savl’s Toledano explained:

  • Quarterly rebalancing is a popular cadence that helps regularly adjust the portfolio and is more well-suited to high-risk tolerance.
  • There’s also annual rebalancing, which is a simpler approach that still maintains the desired allocation. This is more common with lower risk tolerances.
  • Finally, there is threshold-based rebalancing, wherein rebalancing is triggered when an asset’s weighting deviates from the target by a certain threshold percentage i.e., if the asset drops by 10%.

Bitget’s Lee added that investors can choose to adjust their portfolios intraday, midweek or even monthly based on macro data and market conditions if they see it fit their investment strategy.

Things to Look Out for When Rebalancing Portfolio

While crypto portfolio rebalancing comes with an array of advantages, Lee noted that investors should also be cautious of transactional costs, potential tax impact, and market timing risk. 

Elixir’s Forte added that crypto also has the real risk of over-trading, which investors should be cautious about. He said:

“Since the asset class is so volatile, but also so nascent, investors who are not in the daily flow may hear about tokens talked about by others in their daily lives and start allocating to those assets in their portfolio.

 

“There is a real risk that by increasing allocation from Bitcoin and Ethereum, with potentially steady appreciation in value, to riskier assets that may fail to gain traction and go to 0, investors underperform on a longer time horizon than if they’d just kept their assets in Bitcoin and Ethereum.”

Additionally, individual sentiment that might be associated with one token or a group of tokens can also pose a challenge to regular crypto portfolio rebalancing, according to Bitget Wallet’s Kan. He said:

“Portfolio rebalancing is a predefined strategy that can get complicated with conflicting growth signals. For instance, what an individual personally feels about the price fluctuation of a particular asset may come into conflict with his planned rebalancing strategy.

This can be a fairly common occurrence especially against the volatile and fast-moving crypto market. In such occasions, users should try to exercise well-calculated judgments that is backed by numbers and objective statistics, even when varying their rebalancing and trading strategy on the go.”

The Bottom Line

Crypto portfolio rebalancing is a crucial practice for mitigating risk and adhering to certain investment strategies and needs, especially given the volatile nature of cryptocurrency markets. However, when doing so, investors should also exercise caution and incorporate risk management tactics when adjusting their holdings to ensure they do not make any wrong moves.

These include being mindful of transaction costs, tax implications, and the potential risks of market timing and over-trading. Maintaining vigilance and adapting to market changes prudently can safeguard investors and potentially enhance their financial outcomes in the turbulent world of cryptocurrencies.

FAQs

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Iliana Mavrou
Crypto journalist
Iliana Mavrou
Crypto journalist

Iliana is an experienced crypto/tech journalist reporting on blockchain, regulation, DeFi, and Web3 industries. Before joining Techopedia, she contributed to a number of online publications, including Capital.com, Cryptonews, and Business2Community, among others. In addition to working in journalism, she also has experience in tech and crypto PR.  Iliana graduated from the City University of London with a degree in Journalism in 2021. She is currently pursuing a Master's degree in Communication.