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Balancing a cryptocurrency portfolio is similar to balancing a traditional portfolio and helps significantly reduce risk to suit your profile and investment strategy. First of all, you need to diversify your investments between different cryptocurrencies.
Everyone determines the degree of diversification for themselves, since this solution has both advantages and disadvantages. It is believed that even partial diversification can be quite profitable. One way to reduce risks is to store different crypto assets (including stablecoins) in a portfolio and regularly redistribute assets.
To make portfolio management easier, you can use dedicated portfolio trackers or enter your own transaction data into a spreadsheet. Some of these trackers can be linked to your personal wallets and cryptocurrency exchanges, making the process even more convenient.
Introduction
Getting started with cryptocurrency investing is as easy as buying your first Bitcoin (BTC), Ethereum (ETH), or any other cryptocurrency. Some investors prefer to buy and hold the most popular cryptocurrencies, while others prefer to experiment with altcoins. How to achieve the best result? You'll have a better chance of success if you carefully consider your asset allocation strategy and regularly rebalance your crypto portfolio. You can do this in different ways - it all depends on your willingness to take risks. Overall, rebalancing your portfolio is not difficult, and the results can pay off many times over.
What is a crypto portfolio?
A crypto portfolio is a set of cryptocurrencies owned by an investor or trader. Portfolios typically contain a variety of different assets, including altcoins and crypto-financial products. They are similar to traditional investment portfolios, except you own one asset class. You can track your crypto portfolio manually using a spreadsheet or using specialized tools and software to calculate assets and profits. For these purposes, it is best to use a portfolio tracker. Trackers are extremely useful for day traders and other short-term traders, but are also valuable for long-term investors and hodlers.
What is diversification and asset allocation?
When building an investment portfolio, it is 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 distribution of investment funds across different assets or sectors. For example, you can diversify your stocks by investing in different sectors such as agriculture, technology, energy and healthcare. Both strategies help reduce overall risks.
Cryptocurrencies are a single asset class. But in a cryptocurrency portfolio, you can diversify into 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% NFTs and 15% altcoins in your portfolio. For more information, see Understanding Diversification and Asset Allocation.
Concentrated and diversified crypto portfolios
The opinion that a crypto portfolio needs to be diversified is the most common one. This is the standard for investors. However, there are pros and cons to allocating capital across different assets. As we've already discussed, a diversified portfolio helps reduce overall risk and volatility. Losses can be compensated for by profits and thus maintain the stability of your positions. The portfolio also allows you to make a profit from each coin. Not all investments will be profitable, but with proper asset allocation and diversification, the chances of achieving it in the long term increase.
The more diversified your portfolio is, the more accurately it will track the overall market. Most traders and investors strive to overcome the laws of the market and achieve big profits. Highly diversified portfolios produce high returns more often than concentrated portfolios. Usually, high performance is balanced by less efficient assets.
Managing a diversified portfolio requires a lot of time and careful consideration. To invest wisely, you need to be clear about what you are buying. The larger the portfolio, the harder it is to understand its work. 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.
Different types of cryptocurrencies
Bitcoin is the most famous 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
Today it is quite difficult to find new payment coins. When cryptocurrencies first began, most of these projects were conceived solely as systems for transferring funds. Bitcoin is the most well-known of these, although Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC) can also be mentioned. Predating Ethereum and the introduction of smart contracts, these coins were the first generation of cryptocurrencies.
Stablecoins
A stablecoin tracks an underlying asset – fiat currency or precious metal. BUSD coins, for example, are backed by the US 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. Although stablecoins do not always provide great returns, they do, as the name suggests, provide stability.
The cryptocurrency market is volatile, so it's best to have something in your portfolio that consistently holds value. If a stablecoin is pegged to something outside the crypto ecosystem, it will not be affected by a drop in the cryptocurrency market. If you want to move tokens from a coin or project, you can move them to a dollar-backed stablecoin like BUSD, which will increase the security of your funds. Converting to fiat is a much longer process than trading a stablecoin.
Security tokens
Like traditional securities, a security token can represent many things: equity in a company, a project bond, voting rights, and more. Security tokens are digitized and placed on the blockchain, that is, they function according to the same rules as other tokens. Security tokens are subject to the jurisdiction of local regulators and must go through certain legal processes before being issued.
Utility tokens
A utility token is used as a key to a service or product. For example, BNB and ETH are utility tokens. They can be used to pay transaction fees for decentralized applications (DApps). Many projects issue their own utility tokens to raise funds when staking coins. The value of the token will directly depend on its effectiveness.
Governance token
If you have a management token, you can get voting rights in the project and even a share of the income. These tokens can be found on decentralized finance (DeFi) platforms – PancakeSwap, Uniswap or SushiSwap. The value of a governance token, like a utility token, directly depends on the success of the underlying project.
Financial crypto products
A portfolio does not always have to contain different coins - various financial crypto products can also diversify it. It's not just about owning stocks, but rather investing in government bonds, ETFs or mutual funds. You can invest through blockchains and DApps in a huge number of products.
If you are new to this topic, you can find a variety of financial products on Binance. To view them, log into your Binance account and go to the [Finance] section. Each of these products has a different level of risk, so first thoroughly understand how they work.
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 that should be followed:
1. Divide the investments in your portfolio by risk level: high, medium and low. Accordingly, determine their weight. A portfolio with a large portion of it in high-risk investments is definitely unbalanced. Such investments can bring both large profits and huge losses. Your risk profile will help you figure out what's best for you, but it's always best to create some variety in your portfolio.
2. Stablecoins can provide liquidity to your portfolio. They are the key to many DeFi platforms and can help you take profits or exit a position quickly and easily.
3. If necessary, you can change the balance of your portfolio. The cryptocurrency market is very volatile and you must make decisions based on the current situation.
4. Allocate new capital strategically to avoid overloading one area of your portfolio. When making a big profit from one coin, it may be tempting to invest more, but resist the feeling of greed and think through each step carefully.
5. Study all available information yourself - this advice will always be relevant. You are investing your own money, so don't rely solely on the opinions of strangers. For tips on identifying potential scammers, see 5 Common Types of Cryptocurrency Scams and How to Avoid Them.
6. Invest as much as you are willing to lose. If you're worried about your portfolio, it's probably poorly balanced. Try to ensure that you are in a position that will allow you to avoid serious losses if things go south.
Crypto portfolio trackers
A portfolio tracker is a program or service that allows you to monitor the movement of your assets. With a tracker, you can evaluate how your current allocation compares to your long-term goals and track your progress. We recommend considering the following trackers:
CoinMarketCap
CoinMarketCap is an extremely popular price tracker that has developed its own portfolio tracking feature. The portfolio tracker is available for free on PC and mobile devices. To use the portfolio tracker, you need to add your assets manually as it does not connect to a wallet or exchange. It is also possible to add the value of purchased assets to more accurately track your profits.
CoinGecko
The CoinGecko tracker is known for tracking cryptocurrency prices, but it also allows you to track your portfolio. This tracker is available for free in a browser or on a mobile device. If you're already using CoinGecko to track cryptocurrencies, then it's definitely worth a try for portfolio tracking.
Block folio
If you need to trade and manage your portfolio at the same time, Blockfolio is a great option. The company has been around since 2014 and is well known in the crypto space. However, the tracker is designed only for mobile devices and is therefore inferior to other trackers that can be used in the browser.
Delta
Delta is a mobile app that allows you to view your crypto portfolio and traditional investments simultaneously. It is supported by 20 exchanges and various wallets, including Binance. Both free and paid versions are available, but you cannot trade in the app.
Summary
The cryptocurrency market largely depends on the health of Bitcoin, but do not neglect the importance of balancing your portfolio. Investing in different cryptocurrencies can offset losses associated with the Bitcoin crash, so diversification is very important. Remember that balancing a portfolio isn't just about holding different coins. A sound strategy is an important tool in creating a portfolio that suits your risk appetite.
