Crypto investing has become increasingly popular in recent years as more and more people are drawn to the potential for high returns. However, it is essential to remember that crypto investing is also a high-risk activity. Prices can fluctuate wildly, and there is always the risk of losing money.
One of the best ways to mitigate the risks of crypto investing is to build a balanced portfolio. You can do this with the help of crypto portfolio allocation. It divides your investment capital among different classes of cryptocurrencies and digital assets. This article will explain the steps to build and manage a crypto portfolio to enjoy maximised returns on your investment.
Understanding Crypto Portfolios
Let’s start by understanding what a crypto portfolio is. A crypto portfolio is a collection of cryptocurrencies held by an individual investor. It is similar to a traditional investment portfolio, which may include stocks, bonds, and other assets.
However, crypto portfolios are unique because they comprise digital assets that no government or financial institution regulates. You can use different software or tools to keep track of your crypto portfolio.
Robust Tools And Software To Track Crypto Portfolios
Currently, several tools and software are available to help you track your crypto portfolios. These tools can provide real-time price data, historical performance charts, and other insights. Some popular crypto portfolio trackers include:
CoinStats is a cryptocurrency portfolio tracker that allows you to track investments in over 3,000 cryptocurrencies across 200 exchanges. It offers a variety of features, including real-time price tracking, portfolio analysis, and market news.
CoinGecko is another popular cryptocurrency portfolio tracker that offers a wide range of features. It allows you to track over 13,000 cryptocurrencies across over 400 exchanges. The tracker also provides various tools to help you research and analyse cryptocurrencies, including price charts, market data, and community rankings.
Delta is a cryptocurrency portfolio tracker that focuses on providing a user-friendly experience. It allows you to track over 7,000 cryptocurrencies across over 200 exchanges. This tracker offers a variety of features to help you manage your portfolios, including price alerts, order tracking, and tax reporting.
KoinX is a cryptocurrency tax computing and portfolio tracking platform popular among beginners. It allows you to track over 25,000 cryptocurrencies across over 180 exchanges. It also offers a variety of features to help you with crypto taxation, transaction classification, and spam token filtration.
CoinMarketCap is the most popular cryptocurrency portfolio tracker. It allows you to track over 20,000 cryptocurrencies across over 500 exchanges. The tracker also offers a variety of data and analysis tools, including market capitalisation, trading volume, and social media metrics.
Now that you have learned about some of the tools and software to track crypto portfolios, it’s time to understand how you can distribute the assets in the portfolio.
Crypto Portfolio Allocation
Crypto portfolio allocation refers to distributing an investor’s crypto assets among different cryptocurrencies. When allocating your crypto portfolio, consider your risk tolerance and investment goals.
A common crypto portfolio allocation approach is investing most funds in large-cap cryptocurrencies, such as Bitcoin and Ethereum. These cryptocurrencies are more established and have a larger market capitalisation, which makes them less volatile than smaller-cap cryptocurrencies.
However, you may also consider investing a small percentage of your funds in smaller-cap cryptocurrencies with high growth potential.
But how can you tackle the risk and maximise your returns simultaneously? The answer to this is simple: you can do this by diversifying your crypto portfolio.
A well-diversified crypto portfolio can help you to reduce risk and maximise returns. Investing in various cryptocurrencies can reduce your exposure to any particular cryptocurrency. This can help to mitigate losses if one cryptocurrency performs poorly.
Strategies For Crypto Portfolio Allocation
One of the challenges of investing in cryptocurrencies is allocating your portfolio among the various types of crypto assets. Unlike traditional investments, such as stocks, bonds, and commodities, crypto assets have different characteristics and use cases that may affect their risk and return profiles.
This section will explore some of the strategies for crypto portfolio allocation and how they relate to asset allocation and diversification concepts.
Asset Allocation vs. Diversification
Asset allocation is deciding how much of your portfolio to invest in different asset classes, such as equities, fixed income, real estate, and crypto. It is based on risk tolerance, time horizon, and investment objectives.
Suppose you are a conservative investor and want to preserve your capital to generate a steady income. In that case, you may allocate more of your portfolio to fixed income and less to crypto.
On the other hand, if you are an aggressive investor who seeks high returns and can tolerate high volatility, you may allocate more of your portfolio to crypto and less to fixed income.
Further, diversification spreads your investments across different assets within the same asset class, sub-classes, or sectors. Diversification aims to reduce the overall risk of your portfolio by minimising the impact of any single asset or industry on your portfolio performance.
For example, if you invest in crypto, you may diversify your portfolio by holding different types of crypto assets, such as Bitcoin, Ethereum, stablecoins, DeFi tokens, NFTs, etc. By doing so, you can reduce the exposure to any specific crypto asset or use case that may underperform and face regulatory or technical issues.
Applying Traditional Investment Concepts
Another way to approach crypto portfolio allocation is to apply traditional investment concepts, but it is essential to consider this asset class’s unique risks and characteristics.
Here are some traditional investment concepts that can be applied to crypto:
- Risk tolerance: Understanding your own risk tolerance before investing in any asset class, including cryptocurrencies, is essential. Cryptocurrencies are highly volatile, so you need to be prepared for the possibility of large price swings.
- Diversification: Diversification is a key risk management strategy that can be applied to cryptocurrencies. This means investing in various cryptocurrencies and other asset classes, such as stocks, bonds, and real estate.
- Dollar-cost averaging: Dollar-cost averaging is an investment strategy in which investors invest a fixed amount of money regularly, regardless of the asset’s price. This can reduce the overall cost basis of an investment over time.
- Long-term investing: Cryptocurrencies are a relatively new asset class, so it is crucial to have a long-term investment horizon. This means being prepared to hold your investments for several years or even decades.
Diversifying Across Crypto Use Cases
Diversifying across crypto use cases is a great way to reduce risk and increase your chances of success in cryptocurrency. There are many different use cases for cryptocurrencies, including:
- Payments: Some cryptocurrencies, such as Bitcoin and Litecoin, are primarily used for expenses. You may buy and hold these cryptocurrencies with the expectation that they will gain wider adoption for everyday payments, potentially increasing in value.
- Decentralised finance (DeFi): DeFi applications allow you to borrow, lend, trade, and invest assets without a centralised intermediary. DeFi offers opportunities to earn interest through lending and liquidity provision. You can also speculate on the tokens associated with these platforms, as their value can be influenced by the success and adoption of DeFi projects.
- Non-fungible tokens (NFTs): NFTs are unique digital assets representing ownership of art, collectables, and in-game items. You can purchase NFTs as assets, hoping their value will appreciate over time, much like art or collectables in the physical world.
- Gaming: Cryptocurrencies are increasingly used in the gaming industry to purchase in-game items and power blockchain-based games. You can participate in the gaming sector by purchasing gaming-related cryptocurrencies. These investments can be speculative, betting on the success and adoption of blockchain gaming platforms.
- Supply chain management: Cryptocurrencies can be used to track the movement of goods through supply chains and to ensure that products are authentic. As an investor, you can invest in cryptocurrencies that focus on supply chain solutions. These investments can be seen as a way to profit from the adoption of blockchain technology in the logistics and authentication industries.
Now that you have understood the strategies for crypto portfolio allocation, it’s time to decide whether you need a concentrated or diversified portfolio.
Concentrated vs. Diversified Portfolios
A concentrated portfolio is one in which an investor holds a small number of crypto assets, typically ten or fewer. It can offer the potential for higher returns, as the focus is on a select group of assets that you believe will outperform the broader market.
However, this approach also comes with higher risk, as the portfolio is more exposed to the performance of a small number of assets. If any one of these assets underperforms, it can have a significant impact on the overall portfolio.
On the other hand, a diversified portfolio has a variety of assets across different asset classes, sectors, and geographies. It seeks to spread risk across a range of assets. By holding various assets, the portfolio is less exposed to the performance of any asset, which can help mitigate risk.
While diversification may reduce the potential for very high returns, it also helps limit losses during market volatility.
Here are some of the benefits of diversification in cryptocurrency:
- Reduced risk: Diversification helps reduce the risk quotient of your portfolio by spreading your investment across various assets. If one asset underperforms, the impact on your overall portfolio will be less severe.
- Increased potential returns: While diversification may reduce the risk of your portfolio, it can also increase your potential returns. Investing in various assets makes you more likely to benefit from the market’s upside.
- Improved liquidity: Diversified portfolios are typically more liquid than concentrated portfolios. This means you can buy and sell assets in a diversified portfolio more easily, which can be important in a volatile market like cryptocurrency.
However, effectively managing a diversified cryptocurrency portfolio poses challenges due to the multitude of assets available. To simplify the process, conduct thorough research on each cryptocurrency, comprehending their teams, technologies, and use cases. Portfolio tracking tools can aid in monitoring asset performance and identifying underperforming assets, facilitating adjustments.
Moreover, maintaining portfolio balance is crucial. Periodic rebalancing ensures alignment with your risk tolerance and investment objectives. This may entail selling profitable assets and acquiring more of those with lower returns.
Types Of Cryptocurrencies
Bitcoin (BTC) is the first and most widely recognised cryptocurrency. It was created by an anonymous person or group known as Satoshi Nakamoto in 2008. It operates on a decentralised, peer-to-peer network and serves as digital gold, storing value and making secure, anonymous transactions.
The token relies on blockchain, which records all transactions in a public ledger.
Ethereum (ETH) is a prominent cryptocurrency that extends beyond digital currency. Launched in 2015 by Vitalik Buterin and Gavin Wood, Ethereum is a decentralised platform for building smart contracts and decentralised applications (DApps).
It employs the Ethereum Virtual Machine (EVM) to execute these contracts, enabling a wide range of applications, from decentralised finance (DeFi) to non-fungible tokens (NFTs).
Categories Of Cryptocurrencies
Cryptocurrencies can be categorised into several main groups based on their intended use and functionality:
Payment Coins: Payment coins like Bitcoin and Litecoin are cryptocurrencies primarily designed to facilitate transactions. They serve as digital cash, offering fast, secure, and borderless peer-to-peer (P2P) payments.
Stablecoins: Stablecoins are cryptocurrencies designed to maintain a stable value, often pegged to a traditional currency like the US dollar. They provide stability in the volatile crypto market and are commonly used in trading and as a store of value.
Security Tokens: Security tokens represent ownership in real-world assets like stocks, bonds, or real estate. They are subject to securities regulations and offer tokenised ownership in these assets, making them tradable on blockchain platforms.
Utility Tokens: Utility tokens grant access to specific functions or services within a blockchain ecosystem. They are not investments but are used for activities like accessing DApps, paying fees, or participating in a project’s network.
Governance Tokens: Governance tokens are used in decentralised autonomous organisations (DAOs) to allow token holders to vote on network proposals and changes. They give you a say in the governance and decision-making of a blockchain platform.
Financial Crypto Products: These are financial instruments and products built on blockchain technology. They include derivatives, lending and borrowing platforms, decentralised exchanges, and other financial services tailored for the cryptocurrency market, providing opportunities for trading, investing, and managing digital assets.
Building A Balanced Crypto Portfolio
To answer how to build a well-balanced crypto portfolio, let’s dive into the strategies explained below:
High, Medium, And Low-Risk Investments
Cryptocurrencies can be broadly divided into three categories based on risk: high, medium, and low.
- High-risk investments: These are typically new and innovative projects with the potential for high rewards but also high risk. Examples include altcoins like Solana, Avalanche, and Cosmos.
- Medium-risk investments: These are established cryptocurrencies with a track record of success, but they are still subject to market volatility. Examples include Bitcoin and Ethereum.
- Low-risk investments are stablecoins, cryptocurrencies pegged to a fiat currency such as the US dollar. They offer less potential for upside but are less volatile and, therefore, less risky.
A well-balanced crypto portfolio will include a mix of all three types of investments. The exact allocation will depend on your individual risk tolerance and investment goals.
Stablecoins can reduce risk and volatility in your crypto portfolio. They can also be used to rebalance your portfolio and provide liquidity.
For example, if your altcoins have increased significantly, you can sell some and buy stablecoins to maximise profits. You can then use these stablecoins to buy more altcoins when the market dips.
Strategic Capital Allocation
When allocating capital to your crypto portfolio, it is essential to consider your risk tolerance and investment goals. If you are new to crypto, starting with a smaller allocation and gradually increasing it as you become more comfortable and knowledgeable is best.
Limiting your crypto allocation to 5-10% of your total investment portfolio is a good rule of thumb. This will help to mitigate risk and protect your overall wealth.
Research And Due Diligence
Before investing in any cryptocurrency, it is essential to do your own research and conduct due diligence. This includes understanding the project’s white paper, team, and roadmap. It is also necessary to consider the overall market conditions and the potential risks and rewards of the investment.
There are many resources available online to help you research cryptocurrencies. Some popular websites include CoinMarketCap, CoinGecko, and CoinDesk. You can also find informative articles and videos on YouTube and other social media platforms.
It is crucial to have a risk management plan in place before you start investing in cryptocurrencies. This includes setting stop-loss orders and rebalancing your portfolio regularly.
Stop-loss orders will automatically sell your coins at a predetermined price to limit losses. Rebalancing your portfolio will ensure that your asset allocation aligns with your risk tolerance and investment goals.
If you’re looking for answers on how to diversify your crypto portfolio, the strategies below will help you have a balanced portfolio.
Investing In Market Leaders
One of crypto’s most common diversification strategies is investing in market leaders, such as Bitcoin and Ethereum. These cryptocurrencies have the largest market capitalisations and are the most well-established projects in the industry.
While they may not offer the highest potential returns, they are less risky than smaller, newer cryptocurrencies.
Focus On Cryptos With Different Use Cases
Investing in cryptocurrencies with different use cases is another way to diversify your crypto portfolio.
For example, you could invest in a mix of cryptocurrencies used for payments, smart contracts, decentralised finance (DeFi), and non-fungible tokens (NFTs). By doing so, you can reduce your risk exposure to any particular sector of the crypto market.
Smart Contract Blockchain Networks
Smart contract blockchain networks, such as Ethereum, Solana, and Avalanche, are another potential area for diversification. These networks allow developers to build decentralised applications (dApps) and other financial products. Investing in these networks can expose you to the growing DeFi and Web3 ecosystems.
Dividing Portfolio Into Bitcoin, Ethereum, and Others
A simple but effective diversification strategy divides your portfolio into three parts: Bitcoin, Ethereum, and other cryptocurrencies. You can allocate your funds to each part according to your risk tolerance and investment goals.
For example, if you are a more conservative investor, you might allocate a more significant percentage of your portfolio to Bitcoin. If you are more aggressive, you might give more to other cryptocurrencies with higher potential returns.
Exploring Cryptocurrency Stocks
Another way to diversify your crypto exposure is to invest in cryptocurrency stocks. These are stocks of companies involved in the crypto industry, such as cryptocurrency exchanges, mining companies, and software development companies.
Investing in cryptocurrency stocks can be a less risky way to gain exposure to the crypto market, as it does not involve directly owning cryptocurrencies.
Investing In Smaller Crypto Tokens
While investing in smaller crypto tokens can be riskier, it also has the potential to generate higher returns. If you are comfortable taking on more risk, consider investing a small percentage of your portfolio in smaller crypto tokens with high potential growth.
The Importance Of Rebalancing
Once you have diversified your crypto portfolio, it is essential to rebalance it regularly. This means adjusting your allocation to each cryptocurrency to maintain your desired risk exposure.
For example, if one cryptocurrency in your portfolio has outperformed the others, you may want to sell some of it and reinvest the proceeds in other cryptocurrencies.
Managing Your Crypto Portfolio
If you want to manage your crypto portfolio effectively, you can follow the following steps:
Diversification As The Cornerstone
Cryptocurrency is a volatile asset class, so it’s essential to diversify your portfolio to reduce risk. This means investing in various cryptocurrencies and other types of assets, such as stocks and bonds.
Setting Clear Investment Goals
Setting clear investment goals is essential before investing in any cryptocurrency. What are you hoping to achieve by investing in crypto? Are you looking for short-term gains or long-term growth? Once you know your goals, you can develop an investment strategy that aligns with them.
Conducting Thorough Research
Once you’ve identified a few cryptocurrencies you’re interested in investing in, conducting thorough research is essential. This includes learning about the project’s team, technology, and use case. You should also read the whitepaper and any other relevant documentation.
Risk Management Principles
It’s important to remember that cryptocurrency is a risky asset class. Before investing any money, you should carefully consider your risk tolerance. It would help if you also implemented risk management strategies, such as stop-loss orders and position sizing.
The cryptocurrency market constantly evolves, so staying informed about the latest news and developments is essential. This includes following industry experts on social media and reading industry publications.
Regular Portfolio Review
Reviewing your crypto portfolio and adjusting as needed regularly is essential. This may involve rebalancing your portfolio to maintain your desired asset allocation or selling underperforming assets.
Crypto Portfolio Trackers
Portfolio trackers are essential tools for cryptocurrency investors and traders. Their primary roles include:
- Real-Time Monitoring: Portfolio trackers provide real-time updates on the performance of your cryptocurrency investments. You can see their portfolio’s current value, individual asset prices, and overall market trends.
- Asset Diversification: They help you diversify your investments by displaying a comprehensive view of all your holdings. This aids in making informed decisions about allocating assets to reduce risk.
- Profit and Loss Analysis: These tools calculate and display profit or loss for each asset, providing insights into the success of investment decisions. You can track gains and losses over time.
- Historical Data: Portfolio trackers maintain historical data, allowing you to analyse how their portfolio has performed over weeks, months, or years. This historical perspective is crucial for long-term investment strategies.
- Price Alerts: They can notify you when a particular asset reaches a specific price point. This feature enables investors to seize opportunities or mitigate losses by making timely decisions.
- Transaction Records: Portfolio trackers store transaction history, making it easier to track buys, sells, and transfers. This is particularly helpful for tax reporting and accounting purposes.
- Risk Management: By analysing the correlation between assets and their performance, portfolio trackers help you manage risk and adjust your holdings accordingly. They identify assets that may need rebalancing.
- Customisation: Many portfolio trackers allow you to customise your portfolio view, organising and displaying assets to suit your preferences and investment goals.
KoinX stands out as an excellent portfolio tracker. It has various useful features designed to simplify your investment tracking experience.
With KoinX, you can keep tabs on asset prices in real-time, easily filter out spam tokens, disconnect any accounts you no longer use, gain valuable insights into your portfolio, and have your transactions automatically categorised based on their nature, whether it’s related to mining, trading, staking, or airdrops.
Crafting a well-balanced crypto portfolio is an art form. It requires careful consideration of your investment goals, risk tolerance, and time horizon. It also requires a deep understanding of the cryptocurrency market and the different types of cryptocurrencies available.
Moreover, the crypto investment landscape can be complex and daunting, especially for new investors. So, it is essential to do your research to understand the risks involved before investing money in cryptocurrencies.
Further, you can use a crypto portfolio tracker like KoinX to keep track of your investment. You can keep an eye on your portfolio performance in real-time and filter out spam tokens that you may have received, thereby making informed investment decisions. So why wait? Join KoinX today!