Investing in crypto requires a carefully planned strategy for the allocation of funds. It plays a key role in trading, allowing you to navigate the market with greater confidence.
Equally important is the understanding of the numerous risks and their management. As the cryptographic landscape continues to evolve, constant learning and market research is the way to success. Learn more about building a balanced portfolio and the best risk diversification strategies.
What is a crypto portfolio?
A crypto portfolio is a set of cryptocurrencies that are at the disposal of a trader. Its main objective is to allocate assets and risks for maximum profit.
Maintaining a balanced portfolio means structuring investments according to an acceptable level of risk. The crypto market functions similarly to the traditional stock market and is similarly exposed to volatility. However, approaches to portfolio formation differ between them.
Cryptocurrency exists on the basis of a decentralized system, thanks to which the risk of fraud is minimized. However, increasing trader activity may cause token prices to fluctuate. So it is important to maintain a balance between stablecoins, leading currencies and volatile cryptocurrencies.
The basics of creating a crypto portfolio
The primary goal of building a well-balanced portfolio is to minimize the impact of market volatility through diversification. Let's consider a few basic rules for creating an ideal portfolio:
Follow the market leaders. The simplest advice for creating a cryptocurrency portfolio is to copy the actions of experienced traders who demonstrate the best financial results. A copy trading tool is ideal for this.
Invest in smart contracts. One of the most successful crypto projects are blockchain networks that can run smart contracts. There are a variety of ways to use them, including launching decentralized applications (dApps) and new tokens. Since each blockchain has its advantages and disadvantages, some investors spread their funds between several of them.
Rebalance the portfolio. Rebalancing is a key part of cryptocurrency portfolio management. Due to regular price changes, certain tokens need to be bought and sold to maintain stability. For example, if several of the usually cheaper cryptocurrencies increase in value, one can exchange some of them for more expensive ones in order to maintain the desired asset allocation.
Pay attention to other types of assets. To reduce the risk of capital loss, it is worth investing not only in cryptocurrency, but also in traditional assets with low risk and fixed income, for example, bonds, stocks, etc.
Concentrated and diversified crypto portfolio
There are two main approaches to creating a crypto portfolio: concentrated and diversified. Each has its own characteristics that should be taken into account.
Concentrated portfolio
Contains few assets. Holding a smaller number of cryptocurrencies can yield higher returns if they perform well over a period of time. However, it is not easy to choose winning assets, it requires a lot of time to study the dynamics of the market. In addition, with the potential for high returns comes the risk of loss.
Prone to volatility. Any slight change in market sentiment can adversely affect a concentrated crypto portfolio. The risk of significant losses is high if the user owns one or more assets.
Diversified portfolio
Contains a significant number of different cryptoassets. Holding a variety of cryptocurrencies helps an investor reduce market risk and protect against market volatility. If the price of one asset falls significantly, the stability or profitability of others will help offset or minimize losses.
Evenly distributes risks. The profitability of such a portfolio may not be as significant as that of concentrated versions, but this structure protects users from significant losses. A properly diversified portfolio can lose significantly in value only as a result of a general collapse of the crypto market.
Therefore, beginners should pay attention to diversified portfolios, which provide balance and a lower level of risk, compared to concentrated ones.
Tips for building a good crypto portfolio
There are many ways to diversify a crypto portfolio. Let's consider the most common strategies.
Use a variety of cryptocurrencies
Cryptocurrency, in addition to its traditional form, can be presented in other forms:
Game Coins are digital assets that are in-game items, currency or other virtual goods.
Meme coins are a type of cryptocurrency associated with social media memes.
Metaverse tokens are a virtual currency used for digital transactions in the metaverse
Such coins are not necessary to create a balanced crypto portfolio, but such diversity protects against volatility.
Don't ignore stablecoins
Using stablecoins helps ensure portfolio liquidity. The presence of this class of cryptocurrencies minimizes risks in trading, allows traders to quickly convert assets into a stable currency during periods of market fluctuations. This reduces losses and waiting time for exchanging to fiat.
Investing in ETFs
Cryptocurrency exchange-traded funds (ETFs) are a new investment method that offers access to assets without holding cryptocurrency. They allow investors to purchase a portion of an ETF without having to purchase tokens. Cryptocurrency exchange funds allow users to diversify assets without fees and the hassle of buying and exchanging tokens on their own.
Don't be afraid of lesser known tokens
It's no secret that smaller crypto projects carry a higher risk of loss, but they can also be extremely profitable due to significant volatility. Although the main part of the portfolio should consist of market-leading tokens, it is worth finding a place for smaller currencies. Before buying little-known cryptocurrencies, do your research to make an informed investment decision.
Therefore, to preserve capital, invest in stablecoins, and to increase income, invest in various types of volatile cryptocurrency. Make sure that decisions about building a balanced crypto portfolio are based on your own research, not random information from social media or an irrational desire to make a quick profit.
Binance Index Linked Auto Investing Plan
In 2022, Binance launched the "Binance CoinMarketCap (CMC) Top 10 Equal-Weighted Index". This index tracks the largest cryptocurrencies by market capitalization listed on CMC to help users track overall market performance. For its part, Binance's automatic index-linked investment plan allows you to purchase a diversified basket of cryptocurrencies.
Automated investing is a technology-based investment management method that automates the purchase of cryptocurrency using a Dollar Cost Averaging (DCA) strategy. Thanks to this feature, users can choose their preferred digital asset and automatically distribute funds at regular intervals. Binance's automatic index-linked investment plan ensures consistent purchases regardless of market volatility. Balanced allocation ensures portfolio diversification and balanced exposure to each asset. Explore the possibilities of automatic investing and dive into the crypto space.
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