TL;DR
Diversification is the key to lowering your overall risk for a crypto portfolio. The most reliable way to reduce investment risks is by spreading your assets between various cryptocurrencies and other assets. The volatility of the cryptocurrency market inevitably calls for a balance between risk and reward. And the best way to gain that is by diversifying your investment portfolio.
Diversifying your cryptocurrency portfolio can help to diversify risk and exposure. Although there are different opinions on what you should include in your portfolio, you can reduce the overall risk by holding different crypto assets, which include stablecoins. In addition, it is key to regularly adjust your portfolio by rebalancing your asset allocation.
Managing your portfolio can be a daunting task. But there are several ways of tracking your transactions, including spreadsheets and third-party portfolio trackers. Some can even be linked with your crypto wallets or the exchanges you use in order to make the process easier.
Introduction
The idea of investing in cryptocurrencies may seem intimidating to the uninitiated, but there are some important steps you can take to help ensure your first experience is a positive one. The most important things to consider before you do anything are your risk tolerance and how much time and money you wish to invest in crypto.
While some investors may consider purchasing the big coins first, others may opt for more of an aggressive portfolio and purchase riskier assets but with huge potential for ROI. Deciding on how to allocate your assets when creating a crypto portfolio can be tricky. There are a number of strategies to consider. We've outlined some guidelines here. Remember, the more carefully you choose your strategy, and the more regularly you rebalance your crypto portfolio, the more likely you are to succeed.
What Is A Crypto Portfolio?
Crypto portfolios are a collection of digital currency assets owned by an investor or trader. A crypto portfolio is similar to a traditional investment portfolio in that it usually contains a variety of different assets, including digital currency and crypto-financial products.
Whether you're a day trader or someone who HODL, you'll want to track your crypto portfolio manually with a spreadsheet or use specialized tools and software to calculate your holdings and profits. Tracking cryptocurrencies is essential for any serious investor whether in the market for short-term gains or long-term growth.
What Are Asset Allocations and Diversification?
When creating an investment portfolio, you should be familiar with the concepts of asset allocation and diversification. Asset allocation refers to investing in different asset classes (e.g., cryptocurrencies, stocks, bonds, precious metals, cash). For example, you could invest 50% of your money in Bitcoin and 50% in stocks.
Diversification is the act of dividing your assets into different investments instead of putting all your eggs in one basket. Without diversification, a single event could negatively affect the majority of your portfolio. For example, say that you were heavily invested in a single cryptocurrency called Bitcoin (BTC) but recent news from China confirmed that BTC is currently banned from trading on its exchanges by China’s government. This means that anyone holding BTC will lose value since it cannot be traded on Chinese exchanges anymore; therefore, if you didn’t diversify your portfolio with other cryptocurrencies like Ethereum (ETH), then your portfolio would have lost value due to the negative news surrounding BTC.
Crypto portfolio strategies range from investing entirely in one coin to taking a more diversified approach. You can buy several coins and store them in your wallet or on physical hardware wallets. Crypto portfolios can also be built using tokenized vehicles including Stablecoins, NFTs, and altcoins. What’s best for your particular situation will depend on your appetite for risk, goals, and strategy. For instance, your crypto portfolio could consist of 40% BTC, 30% Altcoins, 25% NFTs, and 5% stablecoins.
Concentrated vs Diversified Crypto Portfolios
If you're looking to reduce your risk, a well-diversified portfolio may be the answer. Diversification reduces overall risk and lowers volatility in terms of investment capital. Diversifying into different asset classes can be beneficial but there are also cons to this strategy.
As an investor, it's important to learn how to keep your positions stable. Tips include protecting your portfolio by spreading your risk over different coins. The theory is that losses may be offset by gains and your position may be kept stable. Further, even though not every coin may be a winner, in the long run, you are more likely to make more profits.
The vast majority of investors are looking for a way to beat the market and achieve higher gains than most people. A well-constructed portfolio can help you achieve these goals by balancing out the effects of volatile assets on your overall performance.
Further, a large portfolio requires more time and research. It can be difficult to understand what you are buying in such a large portfolio, so it is important to invest wisely. A well-balanced portfolio is a key to maintaining a healthy digital asset fund. Risks are always present, so it's important to have a diverse range of assets (not just Bitcoin and Ethereum) in order to protect against market fluctuations. If your portfolio is across different blockchains, you may also need to use multiple wallets and exchanges to access your assets. The decision to diversify is yours, it is well recommended for any investor.
Types of Cryptocurrencies
Bitcoin is the most famous cryptocurrency, but a well-balanced portfolio should include a few others. Let’s go through some of the coins that traders need to know about.
Stablecoins
Stablecoins are cryptocurrencies that don't experience large fluctuations in value. It may not sound like much of a benefit, but stablecoins can be a great addition to your portfolio if you're concerned about the volatility of standard cryptocurrencies such as Bitcoin and Ethereum. Popular stablecoins in the crypto space range from crypto-backed stablecoins such as DAI or dollar-backed stablecoins like USD Coin.
The cryptocurrency market is volatile, so having something in your portfolio that keeps its value is useful. If you want to move tokens out of a coin or project, you can rapidly transfer them to a dollar-backed stablecoin like USD Coin to safeguard your gains. Converting into fiat is a much longer process than trading for a stablecoin.
Payment Coins
In the early days of cryptocurrency, many projects actually existed solely to serve as payment systems, but now you can be hard-pressed to find any new coins that primarily deal in payments.
Bitcoin and its peers were the first generations of “virtual currencies,” but they only provided functionality that allowed users to perform basic transactions. These include Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC), among others. It was only after Ethereum introduced smart contracts that we saw the second generation of cryptocurrencies with significantly more advanced capabilities. BNB Smart Chain, and Solana, among others, are more smart contract-based.
Governance Tokens
Governance tokens are used to allow holders to be part of the decision-making process for the underlying project. Holding a governance token gives you voting power on projects, and depending on the project, you may also be paid in dividends or even receive a share of the revenue generated by the project. Governance tokens are generally found in Decentralized Finance (DeFi) platforms like PancakeSwap, Uniswap or SushiSwap. The value of the token is correlated to the overall performance of the underlying project.
Security Tokens
Security tokens are regulated by local regulators and must go through a legal process before issuance. Just like traditional securities, a security token can represent many things. It could be equity in a company, a bond issued by a project, or even voting rights.
Utility Tokens
A utility token is a digital asset that can be used to consume or interact with a particular network service or product. Examples include BNB, ETH, and SOL. You might use them to pay for transaction fees when interacting with DApps. A utility token’s value should theoretically be linked to its utility's value.
What Are Financial Crypto Products?
Financial products are investment instruments people can make to get exposure to a certain market. Think of this as investing in bonds, ETFs, or mutual funds rather than holding shares. Likewise, there is a wide range of financial crypto products an investor can invest in across different DApps and blockchains. Adding financial crypto products to your portfolio can help diversify your investment.
Crypto Portfolio Trackers
Portfolio tracking is a great way to monitor the price of an asset and your progress and make informed decisions when it’s time to rebalance your holdings. Here are some examples of portfolio trackers that you might want to consider:
Coinmarketcap
CoinMarketCap is a renowned crypto price tracker that has built up a huge following. It also has a portfolio feature that makes it useful for tracking all your assets in one place. The portfolio tracker is available on desktop and mobile devices, but there's no automatic exchange integration. To add in your holdings manually, you need to log in and add them manually - it doesn't handle wallet or exchange tracking automatically.
Cryptowat.ch
Cryptowat.ch is another crypto price tracking platform where users can track their portfolios. Another sweet feature of this website is the number of tools offered to traders. You can add your portfolio and begin tracking your crypto holdings.
Coingecko
CoinGecko is a free-to-use price tracking tool for cryptocurrency. It also has a portfolio option, which allows you to quickly see your holdings and view their price history. The website also offers detailed charts and statistics, as well as news updates from leading cryptocurrency press outlets.
Building A Well-Balanced Portfolio
Each crypto trader has their own idea of what a well-balanced crypto portfolio should look like. But, there are some general rules worth considering:
Consider Splitting Portfolio into High, Medium, and Low-Risk Investments
If you're looking to grow your money over time, it helps to start investing with a balanced portfolio that has a mix of high-, medium- and low-risk investments. This will help you take advantage of the market's ups and downs while keeping your risk profile in check.
Keep Tabs on Current Crypto Values
CoinMarketCap and CryptoWatch are incredible tools offered to traders allowing them to check the price of a specific crypto asset. This can be a great way to track crypto-assets and the price they are trading at.
Read the Research
Crypto white papers, research reports, and roadmaps can offer a unique perspective on decentralized technologies. These documents often explain how a cryptocurrency works, what it’s designed to do, and a roadmap for the currency. This can give you insight into the project and team.
Pay Attention to How a Currency is (or will be) Used.
Cryptocurrency value is dependent on many factors. What gives a particular cryptocurrency its value? A currency that ultimately has no concrete use may not be valuable in the future, whereas a currency predicated on innovation or developing new systems or technologies may be valuable over time.
Add Stablecoins to Add Liquidity to your Portfolio.
Stablecoins are a great way to lock in gains or to hold during market volatility. They are also key to unlocking many things in the DeFi space including lending protocols and many other projects. Consider adding some to your portfolio.
Consider Rebalancing your Portfolio.
The crypto market can change at the whim of a second. Consider adding and exiting certain coins based on the market. Doing so can help you during volatile times.
Allocate New Capital Strategically in Order to Avoid Overweighing your Portfolio on a Single Coin.
Being at the receiving end of a pumping coin can tempt the investor to add more money to this coin. Don’t let greed get in the way, instead research new ways that could serve your money better.
Consider selling your Crypto to Lock in any Gains (Take Profits)
If your crypto holding has appreciated over 30% or more then consider locking in gains by selling a few at a time. This ensures that you don’t miss any gains. Consider optimizing your portfolio by cashing out at certain price targets. Doing so will help you lock in gains and avoid any reversal that may occur.
Invest What you can Afford to Lose
Sounds too easy but you’ll be surprised how many investors invest their life savings into a project and then lose it. The money you invest shouldn’t be more than you can afford to lose. Ask yourself this question, if I invest x amount will I still be financially stable if I lost it?
Final Thoughts
While Bitcoin is the main driver of cryptocurrency prices, there are certainly other factors to consider when determining your ideal portfolio. For example, if you're heavily into high-risk investments but with high ROI, some of your funds may be exposed to the high market risk and market volatility that comes with speculating on those coins. That said, diversifying your crypto portfolio is critical to protecting your wealth in times of volatility as well as ensuring better returns over time.
Comments