As the cryptocurrency market continues to evolve, the potential gains attract both seasoned investors and newcomers alike. However, the inherent volatility of digital assets can lead to a significant loss if not managed properly. Since cryptocurrencies are lucrative, you must invest in them, and they will definitely give you a chance to generate great returns in the long term. The unpredictability of cryptocurrencies can pose significant risks.
This is where the concept of a well-balanced crypto portfolio comes into play. A thoughtfully constructed portfolio not only aims to maximize returns but also mitigates risks through diversification and strategic asset allocation. Creating a balanced crypto portfolio involves understanding your investment goals, risk tolerance, diversifying risks, rebalancing your portfolio, and the various types of cryptocurrencies available in the market.
In this article, we will explore practical strategies for building a well-balanced crypto portfolio from defining your investment objectives to implementing diversification techniques and regularly reviewing your holdings. We will provide actionable recommendations to help you create a resilient crypto portfolio.
What does it mean to have a well-balanced crypto portfolio?
A well-balanced crypto portfolio involves different types of crypto assets that have different use cases and risk levels. If you are an investor, then you will allocate a certain amount of money to each crypto asset and manage it as necessary when purchasing new ones or selling off the existing ones. A well-balanced crypto portfolio allows you to manage a balance between your crypto portfolio and the entire investment portfolio.
Time is everything when it comes to crypto investment. You have to buy a crypto asset at the right time and you also have to sell it at the right time. Otherwise, you might face significant losses. This is where a well-balanced crypto portfolio comes into play. The portfolio will help you analyze the performance of the crypto assets you are holding. You can remove the underperforming assets from your portfolio and add overperforming ones into your portfolio.
Importance of a Well-Balanced Crypto Portfolio
The primary objective of creating a well-balanced crypto portfolio is to reduce the impact of market fluctuations by successfully mitigating the risks through diversification. Developing a well-balanced portfolio through diversifying your investments will potentially minimize your exposure to risk and also maximize exposure to a wide range of digital assets. The objective of building a balanced portfolio may vary from one investor to another. The strategies will depend on the investor’s goals and risk tolerance.
Understanding the risks of investing in crypto assets
In the volatile world of the cryptocurrency market, it is important to manage numerous risks associated with investing to protect your portfolio. Below are some key risks to consider:
Market Volatility: Cryptocurrencies are highly volatile, resulting in significant downturns and upturns. You may get high returns as well as significant losses, affecting the balance of your portfolio.
Regulatory Changes: The realm of cryptocurrency is subjected to regulatory changes. New laws and policies are implementing day by day, influencing the market behavior and the legality of cryptocurrencies.
Technological Risks: Since cryptocurrencies are highly lucrative, they are subjected to fraudulent activities and scams.
Types of Crypto Portfolio
There are mainly two types of crypto portfolios – concentrated and diversified portfolios. Let’s look into detail.
Concentrated Portfolio
A concentrated portfolio refers to a crypto portfolio that contains only a few assets that have higher exposure. It is better to hold a limited number of assets because they can generate higher returns in the long run. However, choosing winning assets is a difficult task that requires more skill and luck.
Concentrated portfolios are highly susceptible to volatility and have a certain risk element that can have significant effects on your portfolio. If you have allocated crypto assets from the same sectors, it also creates a concentration of risk and higher downside exposure.
Diversified Portfolio
A diversified portfolio refers to a crypto portfolio that holds numerous crypto assets, mainly across different sectors or protocols. Holding a diverse portfolio helps investors limit market risk because their eggs aren’t all in one basket. These portfolios’ structures are also more resistant to market volatility. If the price of one asset falls dramatically, the assets not affected by the price reduction can assist mitigate any losses. This rationale leads equities to the weight of the portfolio assigned to defensive, cyclical, and sensitive sectors, each of which behaves differently in particular market conditions.
Diversified investments share volatility and risk by mirroring market patterns. As a result, this portfolio’s performance may not fluctuate as much as more concentrated portfolios, protecting your portfolio from extreme negative situations.
Types of Cryptocurrencies
Currently, thousands of cryptocurrencies are out there, with many more emerging daily. All the cryptocurrencies depend on blockchain technology, but there are some differences. Let’s look at the popular types of cryptocurrencies.
Payment Cryptocurrency
This is the first type of cryptocurrency, perhaps the most popular cryptocurrency, Bitcoin comes under this category. Payment cryptocurrencies are not only used as a medium of exchange but also used as a P2P digital currency to facilitate transactions. Other examples of payment cryptocurrencies are Bitcoin, Litecoin, Monero, Dogecoin, and Bitcoin Cash.
Utility Tokens
Utility Token is the second one on our list. They are a cryptographic asset that runs on top of any other blockchain. Utility tokens are inflationary, meaning the more tokens are created, their value will expected to fall. Popular types of utility tokens are service tokens, finance tokens, and governance tokens.
Stablecoins
Since many digital assets are prone to fluctuations, stable coins are intended to act as a store of value. Despite being based on a blockchain, this kind of cryptocurrency retains its value because it can be traded for one or more fiat currencies. Stable coins are linked to a tangible currency, usually the euro or the US dollar. To ensure the value of the cryptocurrency, the organization in charge of managing the peg is supposed to keep reserves. Investors who may use stable coins as a savings vehicle or as a medium of exchange that permits frequent value transfers free from price fluctuations are drawn to its steadiness.
How to Create a Well-Balanced Crypto Portfolio?
Building a well-balanced cryptocurrency portfolio requires smart planning to reduce risks while increasing potential returns. Here are some crucial measures to help you.
Diversify Risk
Diversification is one of the greatest ideas for balancing your crypto portfolio. However, over-diversification will lead to market mirroring, so it is crucial to diversify to a certain point.
Consider the following three tips when you diversify your crypto portfolio:
Invest in assets with varying risk profiles: DIvide your investments across large, medium, and small-cap crypto assets and assign suitable weightings. Generally, the lower the market capitalization, the greater the risk. Your risk profiles will figure out what is more beneficial to you but try to strike a balance in every single category.
Choose the appropriate quantity of assets: While there is no magic number that determines diversity, if you are unable to keep up with crucial moves, updates, and news regarding all of your assets, you may have an excessive amount in your portfolio. Benjamin Graham, Warren Buffet’s mentor, advocates that investors establish a portfolio of 10 – 30 stocks for optimal diversity. It is also applicable to cryptocurrencies.
Distribute among several assets and sector types: An efficient method of risk management is to choose assets with diverse use cases across several crypto sectors or protocols. Investing in a different industry could help offset losses if one experiences a downturn. For instance, if the payment sector is doing well, keeping Bitcoin from that sector could stabilize your entire portfolio in the event that the DeFi sector has a sell-off and your Maker investment is impacted. You can hold onto your position till the market situation improves with the help of this diversification.
Include Stable coins
We have explored the different types of cryptocurrencies in the above section. Stable coins are one of the most popular cryptocurrencies. If you allocate a section of your crypto portfolio to stable coins that can definitely offer you liquidity for your portfolio. Having stable coins in your portfolio will give you an additional advantage to quickly and easily align with the market opportunities as they arise.
Rebalance Your Portfolio
Portfolio rebalancing refers to the adjustment of your portfolio to align with your original risk-reward profile and objectives. Rebalancing allows investors to rebalance risk by purchasing as well as selling different assets at the right time. You can rebalance your portfolio anytime you want but it is best to rebalance your portfolio according to the market changes.
Do Your Own Research
Conducting thorough research is the foundation of creating a well-balanced crypto portfolio. Since cryptocurrencies are highly volatile, it is important to research the market trends, price drops, etc. You can consider expert advice from professional investors or financial experts. A thorough knowledge of the crypto market and price fluctuations will help you to make effective and informed decisions.
Never Invest More Than You Can Afford to Lose
Investing in cryptocurrencies can be thrilling and potentially lucrative, but it also carries significant risks due to the market’s inherent volatility. One of the most fundamental principles of investing is to never invest more than you can afford to lose. This guidelines is crucial for maintaining financial stability and emotional well-being as you navigate the ups and downs of the crypto market.
Ways to Diversify Your Crypto Portfolio
Diversifying your crypto portfolio is essential for managing risk and enhancing potential returns. Here are the effective strategies to achieve a well-balanced portfolio.
Buy the Market Leaders
Allocating your money among the cryptocurrencies with the biggest market caps is an easy choice. For instance, you may limit yourself to the top ten or twenty cryptocurrencies. Even though they are still erratic, these coins typically offer greater stability than smaller ones. Stable coins are typically excluded from using this technique. For instance, stable coins like USD coin (USDC) and Tether (USDT) are among the most popular cryptocurrencies, but they are also designed to keep their value at $1. You might wish to avoid these cryptocurrencies because they aren’t made to appreciate in value.
Focus on Cryptocurrencies with Different Use Cases
Cryptocurrencies have numerous uses, allowing you to decide where to invest your money. Below are some examples of crypto use cases:
- Payment coins are fast and come with low-cost transactions anywhere in the world.
- Decentralized finance (DeFi) acts as an alternative to traditional financial services by leveraging blockchain technology.
- The use of gaming coins enhanced the power of blockchain video games.
- The Metaverse platform allows users to explore and communicate with others using a virtual world.
- Privacy coins facilitate untraceable transactions.
Invest in Smart Contract Blockchain Network
Blockchain networks with smart contracts functionality are among the most successful cryptocurrency initiatives. A smart contract is similar to a program that operates on a blockchain. This is a competitive field because smart contract blockchains can be utilized in a variety of ways, such as the introduction of new cryptocurrency tokens and decentralized apps (dApps). Some investors allocate funds over multiple blockchains since each one has unique benefits and drawbacks. The cryptocurrencies for some of the largest smart contract blockchains are as follows:
- Ethereum (ETH 0.68%)
- Cardano (ADA 6.34%)
- Solana (SOl 5.06%)
- BNB (BNB 2.46%)
- Avalanche (AVAX 3.19%)
Divide your Portfolio into Bitcoin, Ethereum, and Everything Else
There is no such thing as a safe cryptocurrency investment, but Ethereum and Bitcoin are the closest. Since Etehreum’s debut, it has typically been the second-largest cryptocurrency after Bitcoin. They have a higher chance of remaining in business for a long time because they are the market leaders.
You might give Bitcoin and Ethereum top priority if you wish to balance your portfolio in favor of the less hazardous cryptocurrencies. For instance, you may purchase Bitcoin with one-third of your cryptocurrency cash, Ethereum with another-third, and any other cryptocurrencies that align with your interest with the remaining portion.
Invest in Smaller Crypto Tokens with Greater Growth Potential
Investing in smaller crypto assets is highly risk and at the same time extremely profitable if they take off. You can add around 25 to 50 cryptocurrencies to your portfolio. However, consider adding some smaller crypto tokens you like the most.
Investing in ETFs
Recently, cryptocurrencies have entered into the ETF market as a new investment option. Since they may be exchanged on the stock market, exchange-traded funds (ETFs) are comparable to mutual funds. However, the value of cryptocurrencies is backed by them.
In this manner, investors can buy a share of an ETF without needing to buy real coins or businesses involved in cryptocurrencies. This is the method to enter a more volatile cryptocurrency market, which is what many investors who are new to the market from traditional financial institutions like banks looking for.
Conclusion
Creating a well-balanced crypto portfolio is not just about selecting a variety of cryptocurrencies. It is about strategically managing risk while positioning yourself for potential growth. By understanding your investment goals, diversifying your assets across different types and sectors, and maintaining a disciplined approach to asset allocation and rebalancing, you can navigate the volatile crypto market more effectively. Staying informed about market trends and developments is essential for making timely adjustments to your portfolio. Remember that the cryptocurrency landscape is constantly evolving, and what works today may need to be reassess in the future. Always invest within your limit.