What portfolio rebalancing actually means? Investors have used the strategy of portfolio rebalancing for many years. An investor determines how much of their portfolio they want to allocate to each asset. His allocations are the percent of each coin that should be represented in the total value of the portfolio. Coins are exchanged when it’s time to rebalance to bring the value of each asset to the assigned percentages.
Say you have a portfolio with four different cryptocurrencies. You’ve set an equal stake in your portfolio of 25% This means at the end of a rebalance your portfolio would consist of 25% of each coin. Since coins generally don’t cost the same per coin the value is calculated in fiat or quote currency. The coins will be equal in value but not quantity. If you had a portfolio with a hundred dollars each asset would have 25 dollars after the rebalance.
Why should we use rebalancing?
Portfolio rebalancing provides an opportunity to potentially boost held earnings by taking advantage of rapid fluctuations in price. When a coin experiences strong gains the rebalance will distribute those gains among other assets. This means that the percentage value of the coin returns to the original percentage. Rebalancing can potentially help the portfolio net a positive gain over this period. It allows you to rebalance periodically or based on a threshold percentage. Periodic rebalancing uses a fixed amount of time between each rebalance.
Again portfolio rebalancing brings your portfolio back to the target allocations you have set. Portfolio Rebalancing based on threshold deviations examines how far each individual asset has deviated from its target allocation. Once an asset deviates from the target allocation by more than the threshold percentage a rebalance will be triggered.
Related: Bull markets vs Bear markets | Bull and Bear markets Explained
Periodic and threshold rebalancing
In Portfolio Rebalancing we conducted a study on both periodic and threshold rebalancing. The Binance periodic rebalancing results demonstrate a historical preference for higher frequency rebalancing. If you compare all exchanges you will see the best portfolio results were observed when portfolios were rebalanced on an hourly or daily interval.
Related: Why Decentralized Exchanges are the future of crypto trading?
Similar to the periodic rebalancing results in some ways you will see the threshold rebalancing results still demonstrate an affinity towards thresholds that produce higher frequency threat rebalancing.