Rebalancing is the process of adjusting the proportions in an index or portfolio to match the initially set parameters.
The difference between an index and a portfolio: The primary distinction between an index and a portfolio is their composition and purpose. An index, for instance, represents a "top-list" of cryptocurrencies. Take the systemic index JJO35 as an example: it encompasses the top 35 coins by market capitalization. This index automatically acquires leading coins and disposes of those falling out of its ranking. This adjustment happens irrespective of the chosen rebalancing method, as the index's primary goal is to track the current top cryptocurrencies. On the other hand, a portfolio consists of a collection of cryptocurrencies chosen by an individual or entity and doesn't necessarily change based on any specific ranking.
In J'JO, you can set up two types of automatic rebalancing for your index or portfolio:
- Periodic rebalancing: the index or portfolio is automatically adjusted at set time intervals to match the original proportions. This method reduces risks from sharp price fluctuations and generally enhances returns.
Thus, if your index/portfolio contains 5 coins and a 14-day rebalancing is set, and the ranking of the 5 coins changes on the 5th day, the index/portfolio will only be adjusted on the 14th day.
When creating your own index or portfolio, you can set rebalancing with any other frequency. You can enter the appropriate number, and the balance of your index will change every day. Due to the high volatility of the crypto market, J'JO recommends 14-day or 28-day rebalancing periods.
- Threshold rebalancing: if the share of any cryptocurrency in the index or portfolio deviates by a set threshold percentage either positively or negatively, an automatic rebalancing occurs.
Threshold rebalancing example:
Suppose you set a threshold value of 15%.
If your index consists of 5 assets, each making up 20%, then the weight of each asset is 1/5 or 0.2 of the portfolio.
If one of these assets increases by 15% from its initial price, its share in the index will rise to 23% (0.2 + 15% = 0.23).
To return the index to its original values, it's necessary to sell the excess of the asset that grew to 23% and buy the other assets, which now weigh less than 20%.
J'JO will do this automatically and return the portfolio to its initial proportions.
Please note that when creating your own portfolio or index, you can set only one type of rebalancing: periodic or threshold.