The cryptocurrency market is highly volatile and can be a roller coaster ride. There has been a growing trend of investors diversifying their portfolios by holding different cryptocurrencies. However, this is a difficult task to do since most cryptocurrency exchanges do not offer a user-friendly way to rebalance your portfolio. Fortunately, there are various tools in the market to bridge this gap.
What Is Portfolio Rebalancing
In the context of investing, portfolio rebalancing is a process that brings investors’ holdings back into alignment with their original target allocation. Specifically, a portfolio is rebalanced by selling securities that have become overvalued and buying those that have become undervalued. Regularly adjusting your investments to match your target allocation helps you stay focused on your long-term goals and prevents you from chasing returns.
What Are The Benefits Of Balancing Your Crypto Portfolio?
It’s essential to think about the risks and long-term benefits of any investment you make. Investing in cryptocurrency is no different. By balancing your portfolio, you’re reducing the chance that you’ll lose all your money if one currency tanks. For instance, if you hold an equal number of Bitcoin and Ethereum, and one falls substantially in value, the other might not. On the other hand, if all your money is invested in bitcoin and something happens, your portfolio is ruined. The major benefits include:
- Keep your risk level steady
- Divide your portfolio into different categories based on the percentage of each asset
- There is a greater alignment between results and expectations
How Can You Use Tools To Rebalance?
A rebalancing tool will help you to maintain a portfolio that matches your risk tolerance. Investors use rebalancing tools to keep a portfolio that matches their risk tolerance. These tools effectively transfer assets from one account to another to ensure that the target asset allocation for the entire portfolio is met. Some are even capable of doing these tasks automatically, and you can learn more at napbots.com if you are interested in an automated tool. However, these crypto rebalancing tools are designed for investors looking to mitigate any volatility in their cryptocurrency portfolios. Still, they may not be suitable for traders who are actively trading every day.
Mistakes To Avoid When Rebalancing
When you are in the process of rebalancing your portfolio, there are some things that you should attempt to avoid.
Focusing Only On Losers
When you rebalance, it’s normal to focus on the assets that are losing you money. Nonetheless, it is also essential to keep an eye on those performing well; otherwise, you could be putting yourself at greater risk.
Being Inexperienced And Making Drastic Changes
Less experienced investors may find rebalancing an overwhelming task. It’s easy to give up or make a move without considering the consequences if you don’t know what you’re doing. Therefore, newer crypto investors should take the time to think about their actions and attempt more minor changes.
Ignoring Taxes
Rebalancing can have a dramatic effect on your tax bill, so you’ll have to keep that in mind. Capital gains taxes may apply when you sell profitable investments. It is worth remembering The IRS treats cryptocurrencies as property. This means that any product you make due to your rebalancing could be liable for capital gains tax.
Here Are A Few Interesting Tools You Can Try
Now that you understand what rebalancing is and the benefits (and risks) involved, you might wonder what tools are available for doing this.
NapBots
This is a fantastic tool that allows an automated approach to the task. Although it isn’t hands-off (nothing with investing should be hands-off), it can do many of the tasks you assign it to do. With an intuitive interface, you can easily navigate around and select the strategies you wish to implement.
3Commas
While this tool is not aimed explicitly at rebalancing, it does have these features included. The frequency at which your portfolio is rebalanced can be customized, which is a nice feature to have. It also happens to support many of the largest exchanges.
Shrimpy
This is a great free tool, but with free usually comes with some limitations. For example, you never know when the developer will decide to finish the project or dramatically increase the price. Nevertheless, it could be an interesting option for those with limited budgets and smaller portfolios.
Holderlab
Another choice is Holderlab, and like some other tools, you can choose from predefined actions or create your own. They offer free and paid versions meaning you can try before you commit.
Diversification can be one of your best tools for successful cryptocurrency portfolio rebalancing if your portfolio is large enough. This is because you are more likely to have a good mixture of gains and losses, which translates into a more stable portfolio.
