Crypto EDU

Rebalancing

  • August 2, 2021
  • Expert
  • investing
Rebalancing Animation Delivery (0-00-04-06)

Rebalancing means adjusting the assets in your portfolio in order to maintain a desired ratio among them. This is done by selling assets that take you further from your goal ratio and buying assets that bring you closer to it. Rebalancing can also be done to diversify your holdings and mitigate the risk that comes with having too much exposure to one type of investment. 

The timing for a rebalance is different for different investors. One approach is to establish performance thresholds, automatically selling an asset if the value goes up or down by a certain percentage. Other investors choose to set a horizon: a predetermined date at which the portfolio is reexamined to see which assets have been performing as expected and which haven’t, and to modify accordingly. In traditional finance, investment horizons can be a year or more, but the volatility of crypto justifies more regular check-ins. 

Volatility is what makes periodic rebalancing particularly important for cryptocurrency investors. Although it can be tempting to react with every market shift, it’s often better to follow more objective parameters. That’s why many of Makara’s baskets are rebalanced every quarter, ensuring that your investment ratio is exactly what you want it to be, regardless of how the market has changed. In the case of our Momentum basket, which exposes investors to Bitcoin and Ether, Makara’s algorithms constantly monitor both currencies, periodically adjusting the allocation based on the projected return of each. So if the algorithm thinks Bitcoin will outperform Ethereum, it shifts the basket balance toward Bitcoin and vice versa. 

Why should you care about rebalancing? 

For long-term investors, rebalancing is an important way to periodically compare your investment holdings against your investment goals and adjust accordingly. With the volatility of the cryptocurrency market, it is critical to establish a sound and sustainable rebalancing strategy that adjusts for its inevitable ups and downs—and removes emotions from the equation.

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