KEY TAKEAWAYS
- Rebalancing a portfolio is the process of changing the weightings of Digital Assets in an investment portfolio.
- To rebalance a portfolio, an individual buys or sells assets to reach their desired portfolio composition.
- As the values of Digital Assets fluctuate, inevitably the original asset mix will change due to the differing returns of the Digital Assets. This will change the risk profile of your portfolio.
- Things obviously get more complicated when you hold more than just two coins or care about parameters other than equal weights. Even strategies that sound relatively simple — like investing in the top ten tokens by market cap — require constantly tracking information on the state of the market and your holdings, and then executing as many trades as it takes to rebalance in response.
Intro
As complicated as crypto can be, the very first digital asset investing strategy was simple: You bought Bitcoin or you didn’t. Thirteen years later, it’s not that easy.
Why? Well, now there are more than 19,000 tokens and new cryptos being launched every single day, investors often find themselves lost.
In many ways, it’s a lot like the stock market. All of these new options allow you to invest in things with different levels of risk, different market caps, and different price histories. And just like in the stock market, you’d be smart to diversify: With a balance of assets, if one of your investments tanks, your portfolio doesn’t necessarily follow it. There is, of course, one big difference. The volatility of crypto means prices can and do change. Rapidly. To be smart, then, a crypto investor needs to make use of another strategy born of legacy finance: rebalancing.
What Is Rebalancing?
Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each Digital Asset back to its original allocation. In addition, if an investor’s investment strategy or tolerance for risk has changed, he or she can use rebalancing to adjust the weightings of each Digital asset in the portfolio to fulfill a newly desired asset allocation.
Here’s a very simple example: Let’s say you invest $1000 in crypto. You decide you want half in Bitcoin and half in Ether. That’s $500 in each. The next day, Bitcoin’s price triples. After annoyingly texting every friend who will listen, you realize you now have $1500 in Bitcoin and still only $500 in Ether. Instead of the 50–50 split you wanted, you’re at 75–25. To rebalance, you would sell $50 worth of Bitcoin and invest it in Ether, putting you at $100 in each coin — and the 50–50 split you originally wanted.
Things obviously get more complicated when you hold more than just two coins or care about parameters other than equal weights. Even strategies that sound relatively simple — like investing in the top ten tokens by market cap — require constantly tracking information on the state of the market and your holdings, and then executing as many trades as it takes to rebalance in response.
When you start talking about balancing for risk, some very confounding math gets involved. For example, instead of choosing to invest your assets equally across those ten coins, you may want the balance of your portfolio to maximize return at a preselected level of risk. Figuring out how to do this can involve making assumptions based on price history and momentum, and then applying mathematical formulas to ensure the level of risk is matched across the portfolio.
If that’s work you are willing to do yourself, congratulations. You are a wise and worthy investor. The rest of us, however, need some help. That’s why PECULIUM rebalances most of our baskets automatically, using a combination of algorithms and oversight from a human investment committee. Our baskets offer either equally weighted groups of coins or a risk-weighted level. Every well-selected period, baskets shift automatically to ensure you’re never too far from your preferred strategy — no matter what the market does.
Why is rebalancing your portfolio important?
Rebalancing your portfolio helps to stay in line with your asset allocation strategy and implement any changes you make in your strategy. Some of the benefits of rebalancing your portfolio are listed below:
1. Helps maintain the original asset mix
Over time, you might notice that your portfolio’s asset mix changes. 2 reasons this might happen are disproportionate returns and unplanned investing and disinvesting.
The returns from each asset may be different. They may be in the form of income or capital gains. You might make some investment decisions without paying attention to your asset mix.
Thus, the asset mix of your portfolio may change over time. So, after some time, your investments’ risks and expected returns might not suit you. You could fix this by rebalancing your portfolio.
2. Better risk management
The risks associated with an asset can change over time. Some growth Digital Assets might stabilise, and their risk levels might drop. Some assets might become riskier. You might need to reevaluate your portfolio’s risks and shift the asset mix if needed. Systematic portfolio rebalancing allows you to control how much risk you are taking.
3. Useful in implementing changes in investment strategy
As you grow older and more experienced, you might discover new strategies. Most investors also become risk-averse as they grow old. If you regularly rebalance your portfolio, your portfolio will align with your evolving investing style and strategy.
How to do Portfolio Rebalancing?
Do It Yourself (DIY)…
There are two steps to rebalancing. First, you need to Identify the sections for which the allocation has changed. Then, you need to make trades to get back to the old asset mix. If you decide on a different asset allocation, you could make the trades to reach the new asset allocation.
DIY rebalancing is suitable for investors who can make time for it and know the asset markets well enough to execute trades.
…Or with SAIEVE
You can choose to invest in baskets dedicated to an investment philosophy that suits you. The SAIEVE App would be responsible for rebalancing. At PECULIUM, you can find curated portfolios called Baskets. Every Basket is based on a theme and follows a certain investment strategy. These are portfolios of Digital Assets managed by experts.
Subscribers of these portfolios benefit from automatic rebalancing. Portfolios are automatically rebalanced due to deposits, withdrawals, or changes in your overall goals to ensure that your asset allocation stays consistent with what you initially had set up. Price changes in your holdings require more consideration when rebalancing. Full Automation with us simplify your crypto journey.
Conclusion
Rebalancing your portfolio will help you maintain your original asset allocation strategy and allow you to implement any changes you make to your investing style. Essentially, rebalancing will help you stick to your investing plan regardless of what the market does.
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About PECULIUM
PECULIUM has always been a company driven to democratize access to investment opportunities previously only available to the very wealthy. The development of blockchain technology has been a key factor in enabling this ongoing financial revolution. But blockchain goes beyond offering a more efficient replica of the traditional financial ecosystem-it enables new business models that are better aligned with the incentives of all market participants.
PECULIUM has developed saieve.io, a crypto investment and asset management platform that connects to exchange accounts and allows users to instantly access vetted trading strategies and investment portfolios. Founded to simplify trading strategy for users without any technical experience, PECULIUM has a growing offering of automated investment products.
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