Cryptocurrency Portfolio Rebalancing – How often & why?

When you start using Portfolio Optimization based on the Modern Portfolio Theory (MPT) by Harry M. Markowitz you may ask the following questions:

Question 1: “How do I properly adjust my portfolio to recent events?”

The correlations between different crypto assets don´t always stay the same. That´s why the optimized portfolio structure doesn´t always stay the same.
Let´s take a look at Bitcoin (BTC) and Bitcoin Cash (BCH).
They often have a similar behaviour and the prices go in the same direction.
But from 10^th to 12^th November 2017 the price of Bitcoin Cash increased by +200% while Bitcoin´s price dipped.

The reason is that many miners shifted their money from Bitcoin to Bitcoin Cash.

Using this contrary behaviour in order to benefit from a diversification effect and therefor reduce portfolio volatility makes sense.

So if you want to update your portfolio structure to such an event, you should rebalance it.

That means you calculate the optimized portfolio weights for your selected assets again and shift your investments accordingly.

Question 2: “How often do I have to rebalance?”

Well it depends.

Rebalancing everyday is very time-consuming and maybe uneffective, because you always have to pay transaction fees.

Rebalancing every week can make sense, if you have the time to do it.

Let´s take a look at the different weights of a monthly rebalancing Timothy Chong Zhi Xian calculated for Bitcoin, Ethereum, Litecoin, Dash and Ripple.

Looking at this chart, I think monthly rebalancing is enough to keep track with recent events. You can see there are some changes from one month to another, but the whole portfolio doesn´t change drastically within one month.

Depends on how much time you have, I recommend to rebalance somewhere between every 7^th day or every month.