Binance has introduced the Binance Rebalancing Bot, a new feature on its crypto trading platform. In this post, we'll explore what portfolio rebalancing is, how it works on Binance, and whether it makes sense for traders like you and me.
Portfolio in Balance
Rebalancing a portfolio requires you to have a portfolio at all, one with fixed weightings of asset classes. I gave an example of such a crypto portfolio with fixed weightings of asset classes in an earlier post of mine with the title "Portfolio Diversification Explained For Beginners - How To Invest $1000 in Crypto?". Here is an example of a balanced and lower-risk crypto portfolio consisting of 35% Bitcoin, 20% Ethereum, 10% BNB, 10% Polkadot, and 5% for some low-cap altcoins. This example is already three years old but the article is an evergreen and still a good read. Based on your risk tolerance, you determine your asset allocation in your portfolio.
What you always have to keep in mind is that your portfolio is not a static thing, it is actually extremely fluid as the prices of cryptocurrencies fluctuate. The values of your asset classes change over time and some increase in value more than others. This shifts the asset allocation you previously set.
How To Set Up A Rebalancing Bot On Binance
If you don't want to constantly monitor the markets for portfolio rebalancing, you can automate the whole process by setting up a Rebalancing Bot on Binance.
You have two options to set up your initial crypto portfolio with the rebalancing Bot. You have two options for setting up your portfolio: you can set it up manually, or you can create an AI-generated category portfolio based on the relevant coins' market cap and category.
For the manual allocation of your crypto assets, you have to include at least two different coins or tokens in your portfolio and then you can determine the allocation of each one in percentage.
In the next step, you have to determine how much you want to invest in your initial portfolio and finally, you have to set the auto-rebalance parameters. You can either rebalance your portfolio by coin ratio or by time. I personally would always recommend setting the auto rebalance by coin ratio and not by time. The reason is that sometimes nothing happens over a long period of time and sometimes prices are skyrocketing overnight. That's why rebalancing by coin ratio makes much more sense than rebalancing by time periods.
Is Portfolio Rebalancing Beneficial?
The big question now is if automated portfolio rebalancing on Binance is beneficial for a crypto investor. How does rebalancing affect the performance of a portfolio?
The portfolio rebalancing method is controversial among financial professionals. In a falling market, the decline in value is likely to accelerate and increase volatility. On the other hand, in a rising bull market, you curtail your participation but you can also improve your returns by selling overperforming assets for underperforming assets.
I believe that portfolio rebalancing is important for proper risk management through proper diversification.
My Final Conclusion
Do you invest in cryptocurrencies with a predetermined asset allocation, or do you simply accumulate any token that finds its way into your wallet? Please share your thoughts in the comments.
By the way, if you haven't registered on Binance yet, you can sign up to try the rebalancing bot yourself by using my referral link and the code E3PGAJCE. By doing so, you'll save on trading fees every time you make a trade on Binance.
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