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Everyone knows what it means to rebalance a portfolio. Unfortunately, rebalancing is still not popular in the crypto space. The purpose of this article is to remind crypto investors that rebalancing is essential, especially in the crypto market. If you want to learn more about simple rebalancing strategies, check out our previous article:
Portfolio Rebalancing for Cryptocurrency
Boost Performance
Buy and hold is like a roller coaster. You get on the ride at one point and your only option is to go along for the ride until you get off. With a volatile market, this means the holder isnât capitalizing on their gains. The number of coins that went in is the number of coins that come out, no matter what path they took to get to their final value. Rebalancing is different. With rebalancing, your investments are able to take advantage of the rapid changes in the market to compound gains. Instead of just going along for the ride, you are now realizing gains to reinvest into other coins.
This is an actual performance comparison between Buy & Hold and rebalancing. Itâs clear that rebalancing outperforms Buy & Hold by an astonishing percentage.
In order to demonstrate this increased performance, we created a backtest tool which uses real market data. Simply select the coins in your portfolio to see how well you would have done if you had rebalanced instead of HODLed. Click the link below to experiment with different portfolios:
https://www.shrimpy.io/backtest
Reduce Risk
When a coin sharply increases in value, a larger percentage of your portfolio is consumed by that single asset. This introduces risk into your portfolio. If that single asset were to crash, then you would lose a large percentage of your portfolio value. If instead, you were to redistribute those gains through rebalancing, you end up also redistributing the risk. So, when that same asset declines in value, it has a reduced impact on the total value of the portfolio.
âBuy low, sell highâ is one of the most famous rules for investing. It is a strategy that is so laughably simple that it almost distracts from how incredibly difficult that is to actually accomplish. After all, we would all be rich if it were easy. Right? Well, maybe not. Rebalancing is an incredibly easy way to abide by this simple rule. Letâs assume the total value of your holdings was stagnant. When one coin increased in value over the rebalance period, it would be sold off (sell high) and traded to the losers of that period (buy low). If the coins continue to cycle, rebalancing will continue to take advantage of these fluctuations to increase the value of your holdings.
Market stability.
Crypto and volatility have gone hand in hand. You almost canât mention crypto without also mentioning the volatility. Telling someone they should look into investing in cryptocurrencies is almost always followed up with âbut itâs a volatile market, so this isnât investment advice.â Well, this doesnât need to be the case forever. Rebalancing is actually a strategy which will improve the stability of the market. If enough people are rebalancing, when the value of a coin starts to go up, people will begin selling off that coin, bringing the value back down. Likewise, when a coin declines in value, those people rebalancing will correct the decline by buying the coin and bringing the price back up. This means the market will be slower to move in either direction as changes in value would require larger market forces to move the price of an asset.
Low effort strategy
The crypto market is plagued with complexities. Even simple things like purchasing a specific coin requires significant time and effort. You need to start by purchasing a coin from fiat, move that coin from exchange to exchange, determine the best strategy for your portfolio, and maintain a diverse portfolio over time. Itâs a massive task for the average person that deters them from even beginning their journey into crypto. Rebalancing is in the unique position that it targets those pains. Rebalancing is a strategy that takes no additional effort from the investor, especially when performed by a tool that automates the process.
Rebalancing with Shrimpy
Shrimpy is an application which performs all rebalances for our users. You can track your investments over time, select custom rebalance periods, quickly allocate a diverse portfolio, and much more. Itâs completely free to use and is constantly being updated with new features. Give it a try today and let us know what you want us to develop next!
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The Shrimpy Team
Rebalancing is the Crypto Promised Land was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.