Portfolio rebalancing through DeFi must be simplified to see adoption

Central banks and key leaders are increasingly raising alarms for growing inflation, causing spirals of doubt around the world. Recently, the Secretary of the Treasury of the United States, Janet Yellen called for Congress to raise or suspend the US debt ceiling, signaling that the government will run out of money to pay its bills in October.

What seems to sound more like a horror movie of the future is simply the first news of the world financial publications right now. Yellen stated that the overwhelming consensus among economists and Treasury officials on both sides is that failure to raise the debt ceiling would produce widespread economic catastrophe, "potentially precipitating historic financial crises, stock sell-offs and recession, creating severe debt volatility. market".

The value of the US dollar will continue to decline in the future and people need simple tools, rather than complex ones, more than ever to hedge against financial risk and diversify their portfolios.

Risk events have also become more common in global finance, with margin calls and settlement issues now affecting both traditional finance and decentralized finance (DeFi) as they become increasingly interconnected. Evergrande's current real estate crisis is further proof that poor decision making in a wide variety of markets impact markets that we thought weren't connected, like crypto.

Overall confidence in global finance has waned and understanding of how money works has worsened over time. Historically, the wrongdoings of policymakers have left more than 31% of the world's adult population is unbanked.

However, more countries are beginning to explore different currencies as they decentralized finance it is more widely adopted. Cryptocurrencies, which are inherently complex, are finally moving into the next iteration, seeing increased development of tools and infrastructure that is helping newcomers navigate the risks and uncertainties of the burgeoning but nascent finance movement. It is up to the leaders in this space to help newcomers reduce their portfolio risk.

Related: Mass adoption of blockchain technology is possible, and education is the key

Democratizing finance implies reducing entry barriers to risk management.

Unfortunately, cryptocurrencies are inherently volatile. The hundred billion dollar market liquidations are still nothing out of the ordinary, with market capitalization recently took a hit of $ 2 billion. Speculation, announcements and other events can easily influence investor confidence or lack of confidence, as evidenced by recent events with the SEC crackdown and El Salvador in recent weeks. The SEC was forced to tell investors that beware of volatility and fraud of cryptocurrencies as regulators expand scrutiny of cryptocurrencies.

Even Bitcoin (BTC), despite being relatively established as a cryptocurrency, remains at the mercy of celebrity tweets like Elon Musk, whose actions with Tesla and tweets drove prices down.

The market is relatively new to mainstream adoption, and crypto assets tend to be concentrated among large numbers of whales. The actions of large players greatly influence cryptocurrency price movements, and new investors with less holding power are more likely to be caught off guard due to the complex nature of the DeFi and cryptocurrency market.

Related: Institutional Investors Won't Take On Bitcoin Mainstream, You Will

While in this phase of vulnerability to whale stocks, understanding how to control risk levels is critical to fostering mass adoption, especially for new investors with less capital.

Cryptocurrencies have brought the democratization of access to wealth: 24 hours a day, anyone can access financial assets with the click of a button, with assets that perform higher than any traditional bank fiat asset . The elimination of bureaucracies and intermediaries has allowed greater opportunities for wealth creation, providing assets and tools that can be understood.

But, right now, cryptocurrencies simply reflect the wealth gap in traditional finance because those who are fluent in cryptocurrency languages ​​understand how to be strategic. Ultra-wealthy crypto holders have the means to pay for mutual funds and brokers who have access to traditional backed investment tools, such as providing trading, custody, and financing services to ensure their investments are properly balanced with the market at all times.

What is portfolio rebalancing?

Portfolio rebalancing is the process of realigning the weighting of a portfolio of assets, which involves the purchase or sale of assets periodically to maintain a target level of asset allocation and risk. It can help investors manage downside risks while still participating in most of the benefits.

This process is critical during times of financial instability to help people mitigate the risks of loss and depreciation of their digital assets. Many investors, especially those under 40, do not know how to pay attention to and manage risk in their portfolios, nor do they have the time to do so, nor do they understand why rebalancing is essential for stability and wealth generation.

Rebalancing not only prevents overexposure, but also helps instill good business habits by developing client discipline to adhere to a long-term financial plan that allows investors, young and old, new and experienced, to monitor regularly any potential market movements that may cause losses.

Related: Crypto Asset Diversification vs. All Eggs in One Basket

Most rebalancing strategies are based on time frames (i.e. annual, quarterly, monthly, etc.) but can also be reactionary, i.e. based on the allowable percentage composition of assets, which is more expensive. For example, if the original target asset allocation was 50/50 between assets A and B and asset A performed well, you could have increased the portfolio weight to 70%.

This means that an investor can sell part of A to buy more B and return to the original 50/50 target allocation. While the split need not be uniform across assets, rebalancing is most effective with a good mix of volatile and non-volatile positions in the portfolio., as it protects investors from overexposure to undesirable risks.

In traditional finance, the investor rebalances manually by tracking through spreadsheets and buying / selling through exchanges / brokers or investing in funds where managed by portfolio managers. This process is inconvenient and off-budget for retail investors and should not be limited to just those who have the time and money to pay for it. Certainly, there are new advancements in technology at TradFi through the use of applications that help to automatically track, analyze and rebalance the portfolios that are being used by applications such as Sigfig, Personal Capital or Motley Fool Advisor.

Rebalancing in DeFi can be more advantageous for the investor, as the process can be automated and does not require you to monitor your portfolio and check the value of your assets with the stock markets constantly. People can go to work, sleep, or on vacation, as automated smart contracts spread their earnings across their assets and allow the portfolio to retain a positive net profit.

Expecting your broker to do this for you when you start your nine-to-five job is old times.

We have the opportunity to bring better rebalancing tools to the masses through DeFi

As the value of our dollar continues to decline, people need simple tools, rather than complex ones, more than ever to hedge against financial risk and diversify their portfolios. Now is the perfect opportunity to bring decentralized rebalancing tools to the masses by empowering clients and investors with access to democratized wealth in DeFi that is not at the mercy of a centralized bank or government fighting a recession, and facilitating its profits. financial and security. for the future.

Decentralized finance has great wealth potential. From millennials using crypto to buy close to a million dollar homes, claiming that crypto is the secret to home ownership as reliance on traditional savings falls, the bureaucracy-free world of finance delivers opportunities for anyone with the internet to grow wealth or help accelerate financial inclusion. , especially for the unbanked.

Related: Stablecoin adoption and the future of financial inclusion

But usually, it's the experts, coders, trading experts, and professionals who survive secondary market volatility. It is ordinary users, newcomers, and those without the privilege of understanding the deep complexities of this space who end up losing the most money during these times of financial instability.

Twelve years after the first Bitcoin was generated, you would think that we would have simplified the user experience of blockchain-based finance. We are getting there, but we still have some time left. DeFi is still too complex for newcomers, slowing space adoption. People shouldn't have to take courses to understand how to develop decentralized trading strategies or be forced to manually rebalance a portfolio of multiple tokens through seemingly endless steps, as well as trade them separately on a decentralized exchange or DEX.

Users should be able to decide how to rebalance their portfolio in just a few clicks. Ideally, these parameters can be freely customized by users to suit their risk profiles. The DeFi industry is growing rapidly and it's time for portfolio risk management to keep up.

This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.