When investing in the cryptocurrency space, there are different market dynamics to consider compared to traditional equity markets. Cryptocurrencies are highly volatile due to low market caps, uncertain regulatory guidelines, and risks associated with new technology.

Despite these risk factors, the market continues to grow with an increasing amount of volume, transactions, and nodes securing the network. The name of the game is high risk, high reward, but if you manage risk properly, then you can increase the chances of large returns.

One simple strategy to help negate risk (and in the spirit of spring cleaning) is through portfolio rebalancing.

Portfolio rebalancing is highly recommended to help:

• Maintain a balanced portfolio
• Regularly assess your holdings
• Stay up to date with new evolvements in the industry

Maintain a balanced portfolio. Portfolio rebalancing will keep you disciplined by regularly re-weighting your portfolio. The process will force you to sell a portion of your winners and re-invest in assets which are underperforming.

Start organizing the weightings of your portfolio by creating target allocations.

For example, let’s say you hold the following crypto assets in your portfolio and set the following target allocations:

• 1. Bitcoin (BTC) - 60%
• 2. Ethereum (ETH) - 20%
• 3. Litecoin (LTC) - 10%
• 4. Cash - 10%

If Litecoin increases in price drastically, by say 40%, then your overall portfolio value will be tied to Litecoin more than desired.

This means that to hedge risk properly, you should rebalance your portfolio to your target percentages by selling Litecoin and re-investing in the other assets which are performing less.

Regularly assess your holdings. The next common question is about how often you should rebalance your portfolio. There’s no set rule, but with regards to the stock market, most professionals will recommend at least once per year. In the cryptocurrency markets, I recommend at least once per quarter, which further enforces the importance of rebalancing. Doing this regularly will force you to assess your holdings and make critical decisions on whether some assets are worth keeping in your portfolio. If an asset is consistently underperforming, then it’s worth considering why. Don’t catch a falling knife.

Stay up to date with the market. As you explore lower market cap cryptocurrencies, the market volatility will become very clear. And when I say volatility, it’s not only in reference to price volatility but also the risk to a project’s existence. With new technology, projects come and go quickly, get acquired or merge, and successful ones scale quickly. This can be compared to disruptive, low market cap stocks in the $50M-$1B range. So, rebalancing will force you to not just view the performance of your portfolio’s assets, but also educate yourself on new competitors and compare them to your existing holdings.

The process of rebalancing a crypto portfolio is virtually the same as rebalancing an equity portfolio, but there are a couple more steps involved which create more friction in a cryptocurrency traders operations.

Rather than leaving funds with a broker, well-versed cryptocurrency traders trust their assets to be held in a hot wallet - which is a personal, locally stored wallet that is more protected from hackers. Instead of leaving funds on an exchange, or with a third party, it’s highly recommended to store funds in a hot wallet so that you and only you control your funds. The friction here is that it can take 10, 20, or 30 plus minutes to transfer funds from your wallet to an exchange, but it’s well worth the added protection. Always keep your funds in a personal wallet.

To summarize, keep your crypto assets in a personal wallet, and don’t let the added friction deter you from responsibly managing a tidy portfolio. As these volatile assets rise and fall, be sure to regularly rebalance to maintain a healthy investment strategy.

Brent Traidman is the CRO of leading crypto wallet, BRD. He has over 15 years of experience leading high impact growth software companies, of which many have had successful exits.