Periodic rebalancing is the act of rebalancing a portfolio at a regular interval or “period”. At the end of each interval, the portfolio will be rebalanced to once again match the target allocations.
Some examples of common rebalancing periods include 1 hour, 1 day, 1 week, and 1 month rebalance periods. Each of these periods will be evaluated later in this study.
Periodic rebalancing has been a trusted strategy by new cryptocurrency investors due to the simplicity of understanding when and how the portfolio will be maintained.
For example, if a 1 day rebalance period is set for a portfolio, the portfolio will be realigned with the target allocations at the same time every day. This consistency provides a clear expectation for how the strategy will be implemented.
Portfolio Rebalancing for CryptocurrencyThreshold Rebalancing
Threshold rebalancing uses the same core concepts as periodic rebalancing, but instead of implementing a consistent interval to decide when to rebalance, threshold uses the deviation from the target (desired) allocations to determine when to trigger a rebalance.
The threshold that is evaluated for triggering a threshold-based rebalance is based on the following formula:
Formula: ((C - D) / D) x 100
Where,C is the current allocation. D is the desired allocation. We multiply by 100 to convert from a decimal to a percentage.
If we use the previous example where BTC had a current allocation of 30% and the desired allocation of 25%, we would, therefore, be able to calculate its current deviation by plugging those values into the formula.
BTC Deviation = ((.30 - .25) / .25) x 100
BTC Deviation = 20%
With a current deviation of 20% that means if we had a threshold below 20%, the entire portfolio would be rebalanced.
In this study, we will be evaluating thresholds that range from 1% to 30%. That way we can observe a wide vari...