Rebalancing Definition
Rebalancing in the world of cryptocurrency refers to the act of periodically buying and/or selling assets in a portfolio to maintain an originally-desired level of asset allocation or risk. Basically, rebalancing helps keep your portfolio in line with your investment goals and risk tolerance by ensuring it doesn’t overemphasize one or more assets.
Rebalancing Key Points
- Rebalancing is an essential component of portfolio management and risk-adjusted returns.
- It is a systematic approach to maintain predetermined asset allocation in a portfolio.
- This process can help to mitigate risks and generate higher potential returns over time.
- Rebalancing in cryptocurrency can be done either manually, or through automatic tools and platforms.
Who Does Rebalancing?
Rebalancing is typically performed by individual investors, financial advisors, and fund managers. They are done as part of an initial investment plan to keep asset classes from drifting too far from their original allocations.
What Is the Purpose of Rebalancing?
The main purpose of rebalancing is to maintain the risk level of the portfolio. If not rebalanced, a portfolio can become overweight in certain assets which may increase the risk levels beyond those with which the investor is comfortable.
Where Is Rebalancing Done?
Rebalancing is carried out within the investment portfolio and can be performed on virtually any investment platform. These can include traditional trading accounts, retirement accounts, and cryptocurrency exchanges.
When Is Rebalancing Done?
Rebalancing can be done at regular intervals (monthly, quarterly, annually) or whenever the portfolio drifts a certain percentage from the target allocation. For example, a common approach is to rebalance once the asset allocation moves more than 5% from the target.
Why Is Rebalancing Important?
Rebalancing helps to control risk and potentially enhance returns. Without rebalancing, a portfolio may end up bearing a risk level that is not consistent with the investor’s preferences and goals. This process ensures the asset mix stays aligned with the investor’s target asset allocation.
How Is Rebalancing Done?
The most common way to rebalance is to sell assets that have increased in value and use the proceeds to buy more of the assets that have decreased. It can be done manually, where the investor checks the portfolio and makes necessary adjustments, or using automated tools which rebalance based on pre-set rules.
