© by MUOAs a crypto investor, you can hold a variety of digital assets in your portfolio, including high- and low-risk cryptos. A general rule of thumb is to allocate most of your portfolio to high-risk assets and low-risk assets. However, due to the volatile nature of the crypto market, your investment allocation will change frequently.
Therefore, you should balance your crypto wallet frequently. But what does it mean to balance your portfolio and how do you do it?
What is Crypto Portfolio Rebalancing?
Rebalancing your crypto portfolio involves rebalancing, buying and selling your assets to their original weights.
Let's say you create a wallet with 50% BTC and 10% ETH, ADA, DOGE, MATIC and DOT. Due to price fluctuations, DOGE can be more valuable than ADA and the spread will be 15% and 5%. When you recalculate, you sell DOGE and buy ADA to maintain your original allocation of 10% each.
You can balance your crypto wallet only if you have a lot of digital assets. Although each crypto has a different value, they allocate interest to each asset based on the fiat currency. For example, if you have $100 and want to create a wallet using the previously mentioned allocations, you will have $50 BTC and $10 each in ETH, ADA, DOGE, MATIC, and DOT.
As the crypto market fluctuates, these assets are worth more or less in dollars. In rebalancing, you sell them for more value than you need and buy them for more value until you return to your original allocation.
Keep in mind that your investment value will change from the original $100. This means you have to convert all your assets to the base currency to get the new value, which could be 90, 150 or whatever. You will then be refunded based on this new value. if it is $150 you will have $75 each of BTC and $15 of other tokens.
By portfolio rebalancing, you can maintain your investment allocation and risk-reward ratio despite the volatility of the crypto market. This helps you reduce unexpected risks, such as investing more in high-risk cryptoassets. However, balancing your crypto portfolio is a long-term crypto trading strategy, so you won't reap the rewards right away.
2 things to consider before rebalancing your crypto portfolio
While balancing your crypto wallet is a good idea, a few details determine how and when you should do it.
1. Market trends and conditions
Your decision to upgrade your balance should be based on the future prospects of the crypto market. Sometimes one asset outperforms the others and you have to sell the undervalued to buy a bargain. In other cases, low-risk assets may be worthless, and selling to buy "risky" high-return assets will result in significant losses.
Traditionally, traders combine cryptos with larger market caps like BTC and ETH to reduce volatility and reduce risk. However, if there are a lot of mid-cap and low-cap funds, you'll need to rebalance your portfolio more often. Indeed, their values are more sensitive to change.
2. Investment Objectives and Risk Tolerance
If you have a long-term view, you may not need to rebalance your crypto portfolio as often. This is because the crypto market remains volatile, and buying and selling digital assets incurs fees and taxes that can wipe out your profits.
Your investment objective and risk tolerance will also determine your rebalancing strategy. For example, if you have a low level of risk, you can rebalance when spreads exceed a certain threshold, rather than a predetermined time period.
How to balance your crypto wallet
If you want to restore your crypto wallet, follow these simple steps:
1. Determine your current portfolio asset allocation
In addition to your ideal asset allocation (eg 25%, 25%, 25%, and 25%), you should know the exact numerical asset allocation before rebalancing your portfolio. It includes math. You need to convert your holdings to a base currency (such as USD), summarize the value of your portfolio, and determine the spread and total value of your investments.
However, you can skip this step if you are using the automatic rebalancing tool.
2. Separate crypto-assets to balance
Let's say you want to have a crypto wallet with 70% BTC, 20% ETH, 7% ADA and 3% DOGE. All four assets should be balanced based on the current distribution above (92.2% BTC, 5.8% ETH, 1% ADA and 0.9 DOGE). You should sell BTC until it is 70% of the total new investment and buy more ETH, ADA and DOGE until you get back the intended allocation.
As shown in step 1, you can opt out of this section with the crypto wallet auto-balancing tool.
3. Choose a balancing strategy
In general, there are three balancing strategies you can take.
First, you can use a threshold balancing strategy where your assets are adjusted after passing a certain point. For example, you can limit distribution changes to 15%. When the asset allocation crosses that point, negative or positive, you adjust the balance. This method is great if you have a long-term view and don't want to spend too much on transaction fees.
Another thing you can implement is periodic or calendar rebalancing of your crypto. With this method, they create a formal recovery plan. When you rebalance weekly, you rebalance your assets to your initial allocation at a predetermined time each week. This strategy will help you keep your crypto portfolio strong, ensure minimal portfolio movement and well-balanced, risk-adjusted investments.
Alternatively, you can use a hybrid rebalancing strategy, a combination of schedule and limit. With this method, you can adjust your portfolio every time the asset crosses a certain point on the chart.
4. Implement your strategy
Once you select a portfolio rebalancing strategy, you can execute it manually or automatically.
The manual method is to calculate the distributions and make the necessary transactions yourself. Since the crypto market is very liquid, you need to do all the steps quickly. Additionally, you should carefully record each transaction to track your portfolio's performance and determine capital gains for tax purposes.
5. Additional. Use the Crypto Wallet rebalancing tool
Alternatively, you can use a crypto portfolio balancing tool like Shrimpy to do the math, identify assets to balance, implement your strategy, and record all transactions. You can join secure crypto exchanges like Coinbase, Binance and Kraken and some of the best cryptocurrency wallets like MetaMask and LedgerLive. Before using this rebalancing tool, try a demo account to see if it's right for you.
is near.
Never leave your crypto wallet out of balance.
Adjusting your cryptocurrency portfolio can help you reduce your risks in this volatile market. Assess your investment goals and risk appetite and determine the best crypto portfolio rebalancing strategy to implement. So stick with it.
And you'll be well on your way to better digital asset management.
The information on this site does not constitute financial, investment or business advice and should not be construed as such. MakeUseOf does not make trading or investment recommendations and does not recommend buying or selling any particular cryptocurrency. Always do your due diligence and consult a licensed financial advisor for investment advice.