How Rebalancing Works

Over time the price of individual currencies in your baskets move up and down, drifting away from the target weights that allow you to achieve diversification. Rebalancing is the process of buying and selling shares so that your investments continue to be diversified.

Rebalancing happens once per quarter, at the beginning of each quarter. It occurs both with cryptocurrencies within a basket, and between baskets within your portfolio at that time.

 

Basket Rebalancing

Basket Rebalancing is the act of buying and selling cryptocurrencies so funds in a given basket are allocated according to their target weights.

Let's look at a simple example to better understand how rebalancing works.

You have a basket that is comprised of four assets: Bitcoin, Ethereum, Chainlink, and Uniswap. The funds that you deposit in this basket are equally weighted across the four cryptocurrencies.

Over the course of 3 months, Bitcoin and Chainlink have increased in price at a faster rate than Ethereum and Uniswap. As a result, 25% of your deposits are no longer in each of the coins. In other words, changes to the market have caused assets in your basket to drift away from their target percentages.

Cryptocurrencies Target Allocation Actual Allocation
Bitcoin 25% 30%
Ethereum 25% 20%
Chainlink 25% 30%
Uniswap 25% 20%

 

When your assets drift away from their target percentages, you may be exposed to more (or less) risk than you intended when you set the target in the first place. Some of that risk may be uncompensated, meaning that the basket shouldn't expect higher returns despite taking on the additional risk.

Taking actions to reduce this drift is called rebalancing, which Makara does automatically. When we rebalance your basket, your deposits will again be weighted to the distributed equally across the four cryptocurrencies.

Going back to our example, your funds would again be equally weighted across the four cryptocurrencies following the rebalance.

Cryptocurrencies Target Allocation Actual Allocation
Bitcoin 25% 25%
Ethereum 25% 25%
Chainlink 25% 25%
Uniswap 25% 25%

 

Portfolio Rebalancing

In addition to rebalancing within a basket, we also rebalance your funds between baskets. This is known as Portfolio Rebalancing. Like Basket Rebalancing, this is done once per quarter at the start of the quarter.

Over the course of three months, different baskets will likely change in value at different rates. Portfolio rebalancing automatically moves funds between baskets to keep you on track.

Let's say you deposited your funds into two baskets when you signed up for Makara - 50% in each. Due to price changes over the preceding three months, your funds at the end of the quarter are divided 60% and 40% between the two baskets. Portfolio rebalancing will bring your distribution back to a 50-50 split.