What Is Rebalancing?
Rebalancing is the process of realigning the weightings of a portfolio's assets to maintain a desired target allocation. Over time, some assets outperform and become overweighted while others underperform and become underweighted. Rebalancing sells the winners and buys the losers to return to target weights.
How Rebalancing Works
Rebalancing can be done on a schedule (weekly, monthly, quarterly) or triggered by threshold deviations (when any asset drifts more than 5% from target). In volatile crypto markets, threshold-based rebalancing is often more appropriate because allocations can shift dramatically within days. DeFi protocols and CEX tools can automate this process.
Why It Matters for Traders
Rebalancing captures a "rebalancing premium" by systematically buying low and selling high. In a portfolio of volatile, mean-reverting crypto assets, regular rebalancing has been shown to add 1-5% annually compared to a buy-and-hold approach. The key is transaction costs — rebalancing too frequently in crypto incurs fees and tax events that can erode the benefit.
