HodlBot Launches Threshold Rebalancing

There are two main ways to rebalance your portfolio. Periodic rebalances happen on a fixed schedule e.g every 7 days.

With threshold rebalancing, users set an asset allocation boundary and an automatic rebalanced is triggered whenever the boundary is breached. Threshold rebalances can happen more or frequently than periodic rebalancing depending on the volatility of the underlying assets.

Threshold rebalancing example

Picture a portfolio that is comprised of:

  • 25% BTC
  • 25% BNB
  • 25% ETH
  • 25% ZRX

If the rebalancing threshold is set at 15%, then an automatic rebalance is triggered one asset below 10% or above 40%.

When the rebalance is triggered, the over-performing asset will be sold to get the portfolio backed to the original 4-way split.

Why would anyone want to rebalance?

If you don’t rebalance your portfolio, your asset allocations will drift away from their original allocations. This will end up changing your risk-return profile. Rebalancing is a simple method to keep your portfolio on track.

On top of that, rebalancing has been shown to generally improve the performance of a portfolio under these conditions:

  • similar rates of returns across different assets
  • uncorrelated or negatively correlated assets
  • high asset volatility
  • mean-reversion price movement

Because rebalancing increases the allocation to the assets losing in value and decreases the allocation to the assets rising in value, rebalancing gives investors the opportunity to systematically “sell high and buy low”.

For more information check out our study of 10,000+ cryptocurrency portfolios, and the conditions in which a rebalanced portfolio will outperform a drifting one.

Why Would I Switch to Threshold Rebalancing over Periodic Rebalancing?

Periodic rebalances will trigger regardless of whether your portfolio actually needs to be ‘reset”. In some cases, periodic rebalances can cause unnecessary rebalances to trigger, and incur greater trading fees.

With threshold rebalancing, you can specify the maximum deviation you will tolerate. This allows you to rebalance your portfolio only when you really need to.

How Do I Switch to Threshold Rebalancing?

To switch to threshold rebalancing, go to your utilities page on HodlBot.

HodlBot threshold rebalancing settings

Once updated, threshold rebalancing will be applied to every single portfolio, across every single exchange.

What Threshold Should I Choose?

5–10% bands are commonplace thresholds you will find in the financial world. But since cryptocurrency is typically much more volatile, 10–15% may be more appropriate here.

Like rebalancing periods, there is no “best” answer. Typically speaking, the smaller the band, the more you will rebalance. The more you rebalance, the higher your trading fees will be, but the less volatile your portfolio will be.

Written by Anthony Xie

I’m the founder of HodlBot.

I’m a big data nerd. I like to talk about all things data, finance, and crypto. You can find me on Twitter here.