What Is Rebalancing?
Portfolio rebalancing is the process of realigning portfolio weights back to target allocations after market movements have caused drift. If your target is 50% BTC and 50% ETH, and BTC rallies causing the split to become 60/40, rebalancing sells 10% worth of BTC and buys 10% worth of ETH to restore the 50/50 target.
How Rebalancing Works
Common rebalancing strategies: time-based (rebalance monthly/quarterly regardless of drift), threshold-based (rebalance when any allocation drifts more than 5-10% from target), and hybrid (check monthly, only rebalance if drift exceeds threshold). Each has trade-offs between transaction costs and tracking error. More frequent rebalancing maintains tighter adherence to targets but incurs more fees.
Why It Matters for Traders
Rebalancing systematically enforces buy-low-sell-high behavior by taking profits from outperformers and adding to underperformers. In crypto, where assets regularly move 50-100% relative to each other, rebalancing captures significant value. Studies show that rebalanced crypto portfolios outperform buy-and-hold by 20-50% over multi-year periods. The key is discipline: rebalancing feels wrong because you are selling winners and buying losers, but the math favors it.
