With the growing adoption of cryptocurrencies, the steady influx of new crypto projects and tokens into the market, and the increasing complexity of market dynamics, investors are looking for ways to build a profitable, well-balanced crypto portfolio.
The crypto market is volatile, meaning the value of tokens and coins can swing wildly. It may rise in a minute and crash in the next second, which is why due diligence is essential. While trying to craft a well-balanced crypto portfolio, there are different things to consider, such as keeping one’s emotions at bay. For example, making investment decisions out of the Fear of Missing Out (FOMO) and Fear, Uncertainty, and Doubt (FUD) should be avoided as much as possible.
This article outlines some steps investors can take to build balanced crypto portfolios.
What is a Crypto Portfolio?
A crypto portfolio is the collection of an investor’s coins and tokens. This is usually a collage of multiple tokens such as metaverse tokens, NFT coins, GameFi coins, DeFi tokens, and much more. There are different tools that an individual can use to track the assets in their crypto portfolio. Some of them are manual tools, while others are automated. Examples are DeFi Planet Market Pro, CoinMarketCap, and CoinGecko.
An investor may decide to diversify their portfolio to reduce their risks or potential losses, while others may choose to concentrate their portfolio on a few coins. Some investors may focus their portfolio on a few tokens because they want to make higher returns, not minding the risks.
Tips for building a well-balanced cryptocurrency portfolio
Below are some tips to consider while creating a portfolio for digital assets.
Understand your risk tolerance
Generally, in the investment space, investors have varying risk tolerance levels. Some investors are more averse to risky investments than others. In other cases, investors may have a neutral stance towards risk or embrace risk better than others.
Investors’ level of risk tolerance influences the type of assets they accumulate. Those with a higher level of risk tolerance tend to see the volatility of the crypto market as a lucrative opportunity. Risk-averse investors favour a higher proportion of stable assets in their crypto portfolio.
This type of investor is not interested in quick and highly profitable opportunities because high levels of profit tend to go hand in hand with a high level of risk; instead, they prefer digital assets that they believe will be rewarding in the long run.
Hedge against risk
Adding a mix of high, medium, and low-risk investments, then allocating appropriate percentages or weighting, is a great way to hedge the risk in the crypto portfolio.
Because of the volatility of the cryptocurrency market, it may not be prudent to stock one’s portfolio with high-risk digital assets. Rationality is achieved when low-risk investments are balanced with higher-risk investments.
Adjust your portfolio weighting based on market circumstances
An astute investor may adjust the assets in their portfolio to reflect changes in the cryptocurrency market. It is critical to make decisions based on facts rather than emotions.
It is sometimes prudent to convert a significant portion of one’s assets into stablecoins. This may not be the case in other circumstances.
Purchase coins with a high market capitalization
When deciding which cryptocurrencies to buy, buying coins with larger market caps is often a decent option.
Typically, these “large market cap tokens” have greater liquidity and can weather the storm of volatility in the crypto market better than other cryptocurrencies.
Tools such as DeFi Planet Market Pro provide crypto investors with access to the market capitalizations of various coins and tokens.
Always conduct due diligence before investing
Conducting research or due diligence before making investment decisions is crucial in the cryptocurrency market. Though the crypto space is full of innovations, it also sees an influx of projects that only maintain a façade. Unscrupulous actors in the industry are constantly orchestrating various types of scams to defraud unsuspecting investors.
Before purchasing any underlying token, investors should understand how to conduct due diligence on the project. Some important factors to look out for include:
- What are the coin’s use cases?
- What is the coin’s tokenomics?
- How experienced is the development team?
Investors must examine the project roadmap to determine whether the potential milestones are realistic or merely speculative elements that will not be met. A thorough examination of the project whitepaper is also required to understand the project’s utilities. As the crypto space has become a target for hackers, an analysis of the security audit report is also critical for safety.
Some investors make the mistake of purchasing tokens out of FOMO and end up being stuck with worthless tokens.
Only invest what you can afford to lose
With the volatility of the crypto space, it is almost impossible to accurately predict what may happen in the future. For instance, Terra’s LUNA was ranked highly in the crypto market before its crash, ranking among the top ten tokens in terms of market capitalization.
The decline in the value of TerraUSD impacted the value of LUNA, causing it to crash as well. The Terra protocol designed the TerraUSD architecture to be linked to the Anchor Protocol, which resulted in its demise when Anchor discontinued the fixed 20% returns and switched to a variable rate.
The market fell into rather turbulent times following the crash, with some prominent crypto firms caught in the crossfire. Voyager Digital, for example, was forced to file for bankruptcy shortly after the crash.
Regardless of whether these organizations had the resources to hedge their risks, they lost a significant portion of their assets due to the UST and LUNA crashes.
Because market conditions can result in the loss of one’s crypto assets, it is critical for an individual investor to only invest the amount that can be lost.
Some crypto enthusiasts overlook the advantages of holding some stablecoins when investing. This is because they believe stablecoins do not appreciate in value, as 1USDT is usually intended to be 1USD.
So, why should they hold stablecoins if the value of the assets remains constant?
Stablecoins help to provide liquidity in the portfolio, allowing investors to buy crypto assets whenever they want.
In a bear market, for example, an investor may decide to buy some cryptocurrencies because they are cheap at the time, and they may not want to sell other cryptocurrencies to do so.
Many DeFi protocols accept stablecoins, making it easy for investors to access their services.
Diversify your portfolio
A balanced cryptocurrency portfolio must contain a variety of tokens. It is important to have a variety of tokens and coins cutting across different niches and use cases.
Investors don’t have to hold only DeFi coins; they can also collect NFT coins, GameFi tokens, payment coins, metaverse tokens, and much more.
Other tokens can mitigate the adverse effects caused when market conditions negatively impact a particular niche. This is much akin to the famous proverb, “don’t keep all your eggs in one basket.”
For example, Investors who had only Terra’s LUNA in their portfolios suffered the most in the aftermath of the Terra-LUNA crash compared to others who had investments in other tokens.
No matter how cutting-edge the underlying project for a coin is, it is advisable to hold other tokens in the portfolio to minimize risk.
- A crypto portfolio is a collection of coins and tokens owned by an investor.
- An investor may choose to diversify their portfolio in order to reduce their risks or potential losses, while others may choose to focus their portfolio on a few coins.
- Investors’ risk tolerance levels vary.
- A great way to hedge risk in a crypto portfolio is to include a mix of high, medium, and low-risk investments, then allocate appropriate percentages or weighting.
- Investors must conduct due diligence or research potential investment opportunities in the crypto space before getting involved to avoid scams and failed investments.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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