Rebalancing your portfolio is a powerful yet often overlooked strategy in crypto investing. It’s about keeping your portfolio aligned with your risk tolerance and strategy as the market evolves.
Done right, rebalancing can help you lock in gains, minimize risks, and position yourself for future opportunities.
It’s less risky and requires less effort and skill than swing trading altcoins, as you don’t need to know much technical analysis or stress over how to take profits from altcoin trading.
Here’s everything you need to know about rebalancing your portfolio effectively.
Why Rebalancing Matters
Crypto is volatile, this causes your portfolio to drift from your intended allocations.
For example, if altcoins surge while Bitcoin lags behind, you might end up with a portfolio that’s too risky.
Rebalancing solves this by:
- Locking in Gains: Selling overperforming assets ensures you realize profits instead of letting them ride unchecked.
- Mitigating Risks: Overexposure to a single asset increases risk, especially if it suddenly underperforms.
- Staying on Strategy: Rebalancing brings your portfolio back to your planned allocation, keeping your long-term goals intact.
Essentially, rebalancing is an easy way to solve a lot of problems at once.
It is actually a key element in the low-effort system I used to 20X my money in 16 months.
When to Rebalance
Timing is crucial when it comes to rebalancing. There are two main approaches to consider:
- Time-Based Rebalancing
Set a fixed schedule—monthly, quarterly, or even annually—to review your portfolio and adjust it back to its target allocation. - Threshold Rebalancing
Rebalance whenever an asset’s weight deviates beyond a predefined range (e.g., 10%). For instance, if Bitcoin grows to 70% of your portfolio when your target was 50%, it’s time to rebalance. - Cycle Rebalancing
Rebalancing according to The Altcoin Cycle. This is the most powerful method of rebalancing, and it’s actually quite easy. More on this later in the article.
How to Rebalance Your Portfolio
- Set Your Target Allocations
Decide how much of your portfolio you want to allocate to each asset or sector. For example:- 60% Bitcoin
- 25% Ethereum
- 15% Altcoins split into different sectors (more on altcoin sectors later in the article)
- Adjust to Targets
If one asset has grown disproportionately, sell a portion and redistribute to underweighted assets. For example, if Bitcoin has grown to 70%, sell the excess 10% and allocate it to Ethereum or altcoins. - Consider Costs
Account for trading fees and tax implications when rebalancing. Use exchanges with competitive fees to minimize expenses.
Rebalancing Across Altcoin Sectors
Rebalancing isn’t just about adjusting individual coin weights; it’s also crucial to maintain proper diversification across crypto sectors.
The altcoin market is divided into various sectors such as DeFi (Decentralized Finance), Gaming, Infrastructure, DePIN (Decentralized Physical Infrastructure), etc., each with different levels of risk and potential reward.
Why Sector Rebalancing Matters
- Risk Diversification: A heavily concentrated portfolio in one sector is more vulnerable to downturns in that specific area. Spreading investments across sectors minimizes this risk.
- Capitalizing on Trends: Crypto sectors often rally at different times. By maintaining a balanced allocation, you can pivot toward emerging trends without overexposure to declining sectors.
- Volatility Control: A sector-diverse portfolio tends to experience smoother returns compared to one that’s overly focused on high-volatility sectors.
Here’s a list of the sectors ranked by risk level:
- Risk level 1: Index (Bitcoin)
- Risk level 2: L1, Infrastructure
- Risk level 3: L2, DeFi
- Risk level 4: DePIN
- Risk level 5: Gaming, AI
- Risk level 6: Meme, Metaverse & NFT
How to Rebalance Across Sectors
- Set Sector Goals
Start by defining target allocations for each sector based on your risk tolerance. For example:- Conservative: 40% in Infrastructure, 30% in DeFi, 20% in Layer 2, 10% in Gaming.
- Aggressive: 25% in DeFi, 20% in Gaming, 15% in AI, 15% in Memecoins, 15% in Infrastructure, 10% in DePIN.
- Monitor Sector Weighting
Over time, certain sectors may outperform others, leading to imbalances. For instance, if DeFi coins surge and now represent 50% of your portfolio (up from your 30% target), you can reduce exposure to that sector and reallocate to underperforming areas like Gaming or DePIN. - Rebalance During Altcoin Cycles
Aligning sector allocations with the altcoin cycle enhances your strategy:- Altcoin Season: High-risk sectors like Gaming, AI, and Memecoins tend to outperform, so reallocating to these sectors can boost returns.
- Bitcoin Season: Safer sectors like Infrastructure and Layer 1 coins perform better, making them ideal candidates for increased allocation.
- Revisit Regularly
A quarterly review is often sufficient to rebalance across sectors unless there’s a significant market shift.
Rebalancing According to the Altcoin Cycle
The crypto market operates in cycles, particularly the altcoin cycle, which alternates between:
- Bitcoin Season: Bitcoin outperforms altcoins.
- Altcoin Season: Altcoins outperform Bitcoin.
Adapting your portfolio to these cycles can dramatically improve returns. Here’s how:
- During Bitcoin Season: Increase your allocation to Bitcoin. For example, shift to a portfolio with 80% Bitcoin, 10% Ethereum, and 10% altcoins. This positions you to benefit from Bitcoin’s rally relative to altcoins.
- During Altcoin Season: Reduce Bitcoin exposure and increase your allocation to altcoins. For example, rebalance to 40% Bitcoin, 20% Ethereum, and 40% altcoins to capitalize on altcoin momentum.
See the Altcoin Cycle of 2023 on the chart below:
Indicators like Bitcoin dominance and the Altcoin Season Index can help identify these cycles. Timing these shifts correctly ensures your portfolio stays in sync with market trends.
Rebalancing according to this cycle would have netted you roughly 6X returns. In terms of effort, it would take you roughly 30 minutes a month.
I regularly give updates on where we are in the altcoin cycle and what sectors are performing best in The Premium Newsletter.
Mistakes to Avoid When Rebalancing
- Overtrading
Frequent rebalancing can erode gains with fees and taxes. Stick to a schedule or clear thresholds to avoid unnecessary adjustments. - Neglecting Market Trends
Rebalancing blindly without considering market conditions—like the altcoin cycle—can lead to missed opportunities or increased risk. - Emotional Decisions
Rebalancing is a strategic process, not an emotional reaction. Avoid panic selling or chasing hype-driven assets.
How Premium Can Help
Rebalancing your portfolio requires knowledge, timing, and discipline. That’s where Premium comes in. Here’s how it can help:
- Altcoin Cycle Updates: Weekly insights into Bitcoin and altcoin seasons, helping you rebalance at the right time.
- Monthly Portfolio Breakdown: Get a breakdown my personal portfolio of high-potential altcoins to inform your decisions.
- Pro Strategies: Learn from an expert how to optimize your rebalancing strategy without second-guessing.