How-To: Building a Well-Balanced Crypto Portfolio

Introduction

Getting started with cryptocurrency investments is as simple as buying your first bitcoin (BTC), ether (ETH) or any other cryptocurrency. Some investors prefer to buy and hold the most popular cryptocurrencies, some prefer to experiment with altcoins. So how do you get the best results? You will have a better chance of success if you think carefully about your asset allocation strategy and engage in regular balancing of your crypto portfolio.

What is a crypto portfolio?

A crypto portfolio is a set of cryptocurrencies owned by an investor or trader. Portfolios typically contain many different assets, including altcoins and crypto- financial products. They are similar to traditional investment portfolios, except that you own one asset class. You can track a crypto portfolio manually using a spreadsheet or through specialized tools and software to calculate assets and returns. A portfolio tracker is best for these purposes. Trackers are extremely useful for day traders and other short-term traders, but are also valuable for long-term investors.

What is diversification and asset allocation?

When creating an investment portfolio, it's important to become familiar with the concepts of asset allocation and diversification. Asset allocation means investing in different asset classes (e.g., cryptocurrencies, stocks, bonds, precious metals, cash, etc.). Diversification is the allocation of investment funds to different assets or sectors. For example, you can diversify your stocks by investing in different sectors such as agriculture, technology, energy and health care. Both strategies help reduce overall risk.

Cryptocurrencies are a single asset class. But in a cryptocurrency portfolio, you can diversify products, coins and tokens that are used in different ways and for different purposes. So, for example, you can collect 40% bitcoins, 30% stablecoins, 15% NFT and 15% altcoins in your portfolio.

Different types of cryptocurrencies

Bitcoin is the best-known cryptocurrency and the largest by market capitalization. But a well-balanced portfolio should include a variety of coins to reduce overall risk. Let's take a closer look at some of them.

Payment coins.

It's pretty hard to find new payment coins today. When cryptocurrencies were first conceived, most of these projects were conceived solely as money transfer systems. Bitcoin is the best known of them, though you can also name Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC). These coins, which existed before Ethereum and the introduction of smart contracts, were the first generation of cryptocurrencies.

Stablecoin

Stablecoin tracks an underlying asset - a fiat currency or precious metal. BUSD coins, for example, are backed by the U.S. dollar at a 1:1 ratio. PAX Gold (PAXG) works on the same principle, but pegs the coin to the price of one troy ounce of gold in reserves.

Security Tokens

Like traditional securities, security tokens can represent many things: equity in a company, a project bond, voting rights, and more. Security tokens are digitized and placed on a blockchain, meaning they function under the same rules as other tokens.

Utility tokens

Utility tokens are used as a key to a service or product. For example, BNB and ETH are utility tokens. Many projects are issuing their own utility tokens to raise funds when placing coins.

Management token

With a management token, you can get a say in the project and even a share of the revenue. These tokens can be found on decentralized funding platforms (DeFi) - PancakeSwap, Uniswap or SushiSwap. The value of a management token, like a utility token, depends directly on the success of the underlying project.

Concentrated and diversified crypto portfolios

The opinion that a crypto portfolio should be diversified is the most common one. This is the standard for investors. However, allocating capital to different assets has its pros and cons. As we said, a diversified portfolio helps reduce overall risk and volatility.

Losses can be offset with profits and thus keep your positions stable. A portfolio also allows you to make a profit on every coin. Not all investments will be profitable, but with proper asset allocation and diversification, your chances of making a profit increase over the long term.

The more diversified your portfolio, the more accurately it will track the market as a whole. Most traders and investors strive to overcome the laws of the market and make large profits. Highly diversified portfolios produce high returns more often than concentrated portfolios. Typically, high performance is balanced by less efficient assets.

Managing a diversified portfolio takes a lot of time and careful study. To invest wisely, you need to be clear about what you are buying. The larger the portfolio, the harder it is to figure out how it works. If your portfolio is filled with assets from different blockchains, you will need to use multiple wallets and exchanges to access them. The decision to diversify or not is up to you, but at least a small amount of diversification is always recommended.

How to create a well-balanced crypto portfolio

Every investor or trader has their own idea of what a well-balanced crypto portfolio should be. However, there are general rules to follow:

1. Divide the investments in your portfolio by risk levels: high, medium and low. Determine their weight accordingly. A portfolio with a large portion of high-risk investments is definitely not balanced. Such investments can make big profits as well as huge losses. Your risk profile will help you figure out what works best for you, but it's always best to create some diversity in your portfolio.
2. Stablecoins can provide liquidity to your portfolio. They are key to many DeFi platforms and can help you lock in profits or exit a position quickly and easily.
3. You can rebalance your portfolio if necessary. The cryptocurrency market is very volatile and you have to make decisions depending on the current situation.
4. Allocate new capital strategically to avoid overloading one area of your portfolio. When you make large profits from one coin, you may be tempted to invest more money, but don't give in to the feeling of greed and think carefully about each step.
5. Do your own research on all available information - this advice will always be relevant. You invest your own money, so don't rely solely on the opinion of strangers.
6. Invest as much as you are willing to lose. If you're worried about your portfolio, it's probably not well balanced. Try to secure positions that will prevent you from incurring serious losses if things go south.

Conclusion

The cryptocurrency market depends a lot on the state of bitcoin, but you should not neglect the importance of balancing your portfolio. Investments in different cryptocurrencies can offset the losses associated with a bitcoin crash, so diversification is very important. Remember that portfolio balancing is not just about holding different coins. A sound strategy is an important tool in creating a portfolio that meets your risk appetite.