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.
There are different rebalancing strategies. One approach is the constant proportion portfolio, which means that you establish allocation thresholds, such as bitcoin should be 10% of your overall portfolio. If bitcoin rises in value and hits a threshold such as 20% of your portfolio value, you will then sell part of your bitcoin, so it rebalances back to the target 10% of your overall portfolio. Another approach, is investors choose a predetermined date, such as once a year at which the portfolio is rebalanced back to the desired weights.
At Moonbit since we are not a passive portfolio investor but an active investor, we don’t have to worry about periodic rebalancing back to a set of target ratios. Instead, our investment algorithm only buy cryptos that have a positive signal while sell cryptos with a negative signal.
Why should you care?
With the volatility of the cryptocurrency market, it is critical to have a sound strategy that seeks to maximize your returns, keeping you diversified while protecting you from down trending periods.