The cryptocurrency market is vast, with numerous cryptocurrencies(both coins & tokens). It’s a dilemma for every investor to pick a profitable asset. Minimizing risks and maximizing profits over the long term is the ideal goal of an investor. However, it varies according to financial requirements and the risk appetite of an individual. Here are a few strategies to help you if you are building a crypto portfolio.
What Is A Crypto Portfolio?
When an investor buys and owns a collection of cryptocurrencies, it is called a crypto portfolio. It includes altcoins, tokens, crypto financial products, and other assets. Here you are with one asset class, unlike a traditional portfolio with higher risks. Before September 2021, the crypto market in the United States was completely unregulated. However, it received regulatory scrutiny that affected the valuations of many currencies.
Specialized tools and advanced software will guide you better with calculations of profits and holdings. Keeping all these things in mind, crypto investors may want to know how they can create a balanced crypto portfolio.
Asset Allocation And Diversification
Asset allocation means investing in multiple asset categories like bonds, cash, stocks, cryptocurrencies(stablecoins, payment coins), metals, tokens(security tokens, governance tokens, utility tokens) etc. Diversification indicates investment across different assets or sectors. For example, you can diversify your holdings by investing in various industries like manufacturing, technology, healthcare, and agriculture. Both methods decrease the overall risk. Similarly, one can build their portfolio with an allocation among bitcoins, stablecoins, NFTs, and altcoins.
Diversified Vs. Concentrated Portfolios
Traders and investors try to beat the market with volume games in the long run. A diversified portfolio reduces volatility and overall risk. You have more chances to make profits as losses can be offset with the coins you own. Building a crypto portfolio that is diversified leads to better performance than a concentrated portfolio. However, it requires more time and research. And if your investment is across different blockchains, you may need multiple wallets for coin exchange. Hence, a big yes to diversified portfolios for stability compared to concentrated portfolios. Diversification also has its cons, where you extend your capital around different assets. Although not every investment will pay you more instantly, some investments are made to keep your position stable.
Tips To Build A Balanced Portfolio
1. Don’t apply high-risk high return formulas everywhere. Split your portfolio with low, medium, and high-risk investments. High-risk investments provide more significant gains but may cause huge losses.
2. For stability to your portfolio, hold some stablecoins. The best thing about stablecoins is it helps in the easy lock-in and exit of a position.
3. Keeping the volatility of the crypto market in mind, rebalance your portfolio depending on the current situation.
4. To avoid overweighting any particular area, allocate gained money to other coins. E.g. if you recently earned a significant amount from one coin, that will attract you more and more. Avoid greed and place your money in other places.
5. Do as much research as possible. Cryptocurrency Scams are common these days. So stay away from advice from youtube and online influencers.
6. Always know your risk appetite. Invest only the amount you can lose. If your portfolio gives you a constant headache, it’s not balanced.
Balancing a crypto portfolio is different from balancing a traditional portfolio. The diversification is subject to your investment strategy. So you can reduce the risk by investing in various cryptocurrencies. Third-party portfolio trackers like CoinMarketCap, Delta, and CoinGecko are preferred to maintain a perfect balance among your crypto assets. A third-party portfolio tracker helps you build a crypto portfolio by rebalancing your asset allocation strategy. With all the above-discussed strategies, you can create a strong crypto portfolio.