Cryptocurrencies have become one of the most lucrative asset classes in the world – their popularity and value have skyrocketed over recent years. As an inherently volatile asset class, cryptocurrencies can offer the unique opportunity to generate life-changing wealth in a short period of time, albeit not without risk.
One of the best ways to take advantage of the lucrative nature of cryptocurrencies while minimizing risk is to build a solid cryptocurrency portfolio. In the world of cryptocurrencies, building a great portfolio is a task – and an art. A cryptocurrency portfolio refers to all the crypto investments an investor or trader owns.
Building the best cryptocurrency portfolio requires diligent research, disciplined risk management, strategic diversification, a sound strategy, regular rebalancing, and most importantly, a clear vision. It is by no means easy and there is no perfect approach. However, there are specific steps you can take to increase your chances of success.
The following article will discuss how all types of investors can create the cryptocurrency portfolio of their dreams and set themselves up for success.
Do your own research (DYOR)
The first basic principle of creating a great cryptocurrency portfolio is to conduct diligent market research. As an investor, you should examine cryptocurrency projects inside and out and be able to accurately answer why you are buying that cryptocurrency and supporting that project.
Doing your own research also reduces risk. It reduces the spread of misinformation and limits assumptions. It also keeps your emotions in check and prevents impulsive decisions due to factors like fear of missing out (FOMO).
Diligent research helps protect your portfolio from market manipulation and hype. Hype refers to a widespread practice in the cryptocurrency space where users promote their cryptocurrency holdings in an attempt to drive up the price. As a result, it is important to make a decision based on your investment thesis and not just because someone told you to.
There are many ways to do your own research. Some ways include reading white papers, taking advantage of crypto tools, analyzing the token economy, and analyzing the team and community behind the project.
*Consider your risk tolerance.
Cryptocurrencies are considered a high-risk investment because they are volatile in nature, often fluctuating by large amounts within a short period of time. However, risk is not necessarily good or bad for an investor. Risk is a two-way street, which means that every cryptocurrency investment carries the risk of major failure and the chance of major success.
*Before creating a cryptocurrency portfolio, it’s essential to assess your risk tolerance. Are you a risk-averse, aggressive investor, or somewhere in between? Determining how much risk you’re comfortable with is the first step in deciding which cryptocurrencies to buy and how to allocate those cryptocurrencies across your portfolio.
*Before we delve into the details, it’s important to distinguish between the two types of cryptocurrencies — stablecoins and traditional cryptocurrencies. Stablecoins are digital currencies whose value is pegged to the value of another asset — often the US dollar — and are designed to reduce the volatility inherent in cryptocurrencies. Some are backed by fiat currency, some are backed by cryptocurrencies, and some are kept pegged through advanced algorithms. Alternatively, traditional cryptocurrencies refer to all cryptocurrencies that are not stablecoins, such as Bitcoin and Ethereum.
In general, more conservative risk-averse investors will allocate a larger percentage of their portfolios to stablecoins than more aggressive investors. Stablecoins mitigate the effects of market volatility.
Diversify your portfolio
Portfolio diversification is a universal investment principle and may be one of the keys to success in the cryptocurrency sector. Diversification refers to the practice of spreading out your investments so that your exposure to any one type of cryptocurrency is limited. In other words, unlike keeping all your eggs in one basket, diversification spreads your eggs across multiple baskets to reduce risk.
Diversification is designed to reduce the volatility of your portfolio over time and help balance risk and reward. It is recommended that all investors diversify their cryptocurrency investments to some extent; however, more experienced investors with stronger investment convictions may choose a more concentrated portfolio.
Focus on market leaders
All cryptocurrency portfolios tend to include Bitcoin and/or Ethereum. Bitcoin and Ethereum are by far the two largest cryptocurrencies in the world by market cap, and they largely drive the rest of the overall cryptocurrency market. Unlike other cryptocurrencies that come and go over the course of months or years, Bitcoin and Ethereum have been solidifying their place in the crypto space for a long time.
Bitcoin is the first cryptocurrency of its kind and is widely referred to as the altcoin of cryptocurrencies. For this reason, all other cryptocurrencies are collectively referred to as altcoins. It is the most decentralized cryptocurrency in the world, and the largest cryptocurrency by market cap. Bitcoin is the only altcoin to have an anonymous creator, pure organic growth, and multiple tests, which has led to it being the most reliable cryptocurrency on the market.
Ethereum (ETH) is the most popular altcoin and the second largest cryptocurrency by market cap. Its leadership in the programmable blockchain space, growing institutional adoption, future upgrades, and deflationary economics put Ethereum in a class of its own.
Think about different sectors.
Another way to diversify your crypto portfolio is to invest in different sectors within a sector. Not only does this allow you to benefit from growth in multiple sectors, it also offsets portfolio volatility if one sector suffers significantly. Some promising sectors include smart contracts and virtual worlds. Not sure which cryptocurrency to pick for the long term? Don’t worry! Here are Benzinga’s top crypto investments for 2030.
Consider smaller cryptocurrencies with greater growth potential.
Finally, while investing in market leaders is generally considered safe, the downside is that it limits growth potential. To combat this, investors can allocate a portion of their portfolio to smaller cryptocurrencies with greater upside potential. Since these cryptocurrencies are less established than larger ones, they may require smaller positions to generate higher returns, meaning investors can benefit from more explosive growth.
Investment Strategies
Once you know which cryptocurrencies you want to add to your portfolio, the next step is to figure out how to stack these cryptocurrencies in an effective way. You can use multiple strategies to invest in the cryptocurrency market; however, three strategies stand out above all. They should be used together. They are as follows:
Average dollar cost
Dollar-cost averaging (DCA) occurs when investors regularly buy assets in increments over a period of time—for example, on a daily or weekly basis. The strategy reduces the impact of price changes from volatility by calculating the average price. It also eliminates the emotion of investing and allows investors to build portfolios in a precise and disciplined manner.
Buy fear
In the past, scary times have often turned out to be the best times to accumulate cryptocurrencies at rock-bottom prices. While market sentiment may fluctuate, the fundamentals of crypto projects are firm and unshakable.
Fear buying can be done in several ways. One approach is to use a sentiment analysis tool, such as the Bitcoin Fear and Greed Index, which measures the relative fear in the market on a daily basis. However, another strategy is to buy cryptocurrencies during bear markets, long downtrends, or after capitulation phases.
The rationale for fear buying stems from the fact that the cryptocurrency market is cyclical and highly emotional. It is important to note that while fear buying is a sound strategy, the underlying assumption is that the purchased cryptocurrency will rise in price at a future date; however, many cryptocurrencies never return to their all-time highs.
Rebalance your portfolio regularly.
Rebalancing can be a pivotal part of managing your cryptocurrency portfolio. Cryptocurrencies are volatile by nature. As prices change, you may need to buy and sell cryptocurrency projects to maintain a balanced portfolio that aligns with your initial diversification strategy.
For example, if some of your smaller crypto investments increase in value, you might consider trading some of them for larger cryptocurrencies to maintain your desired asset allocation.
Benefit from cryptocurrency portfolio trackers
Last but not least, the best cryptocurrency wallets have advanced software that can be used to manage them. Being able to see your winners and losers and evaluate your gains and losses in real time is essential to keeping your portfolio healthy and equipped to meet your financial goals.
Reference links:
https://www.benzinga.com/money/how-to-build-the-best-crypto-portfolio