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Introduction
Forming a crypto portfolio is a very individual process, each investor and trader does it according to their own strategy depending on the acceptable degree of risk, preferences and desired profit. However, it is best for a novice market participant to stick to the basic rules at first.
What is diversification and asset allocation?
When creating an investment portfolio, it is very important to become familiar with the concepts of asset allocation and diversification.
Asset allocation refers to investing in different asset classes (e.g., cryptocurrencies, stocks, bonds, precious metals, cash, etc.).
Diversification is the allocation of investment funds to different assets or sectors. For example, you can diversify your stocks by investing in different sectors such as agriculture, technology, energy and health care. Both strategies help reduce overall risk.
Cryptocurrencies are a single asset class. But in a cryptocurrency portfolio, you can diversify products, coins and tokens that are used in different ways and for different purposes.
Different types of cryptocurrencies
Bitcoin is the best-known 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
It's pretty hard to find new payment coins today. When cryptocurrencies were first conceived, most of these projects were conceived solely as money transfer systems. Bitcoin is the best known of them, though Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC) can also be named. These coins, which existed before Ethereum and the introduction of smart contracts, were the first generation of cryptocurrencies.
Stablecoins
Stablecoins track the underlying asset - a fiat currency or precious metal. BUSD coins, for example, are backed by the U.S. 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.
The cryptocurrency market is volatile, so it's better to have something in your portfolio that consistently holds value. If a Stablecoin is tied to something outside of the crypto ecosystem, a fall in the cryptocurrency market won't affect it.
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 a blockchain, meaning they function under the same rules as other tokens. Security tokens are under the jurisdiction of local regulators and must go through certain legal processes before they can be issued.
Utility tokens
Utility tokens are 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 in decentralized applications (DApps). Many projects are issuing their own utility tokens to raise funds when placing coins. The value of a token will directly depend on its effectiveness.
Management token
With a management token, you can get a say in the project and even a share of the revenue. These tokens can be found on decentralized funding platforms (DeFi) - PancakeSwap, Uniswap or SushiSwap. The value of a management token, like a utility token, depends directly on the success of the underlying project.
Basics
To begin with, you need to balance your portfolio, this is equivalent to balancing a traditional portfolio consisting of stocks and bonds, that is, you need to balance high-yielding risky assets with safer yet less profitable ones. Balancing a portfolio and helps to significantly reduce risks according to your profile and investment strategy. First of all, you need to diversify your investments between different cryptocurrencies.
Diversification
In forming a crypto portfolio, the more percentages of Bitcoin and Ethereum in your portfolio, the more stable it is because their volatility, compared to altcoins, is less, although Ethereum is also an altcoin. To some extent, such a portfolio will be safer, but in contrast, its potential percentage return falls.
The golden mean is considered to be: 30% BTC, 20% ETH, 40% Altcoins and 10% in Stablecoins. However, like I said before, each market participant determines the degree of his diversification independently. Also, I do not recommend to have more than 15-20 assets in portfolio, because it will be very difficult to keep track of them.
Market phases
One more important point, every more or less educated market participant knows that depending on the phase and moment of the market one should be in different types of assets.
Conventionally there are 3 phases of the market: falling, consolidation and growth.
The fall (bear market)
- during this time, the ideal variant is of course to be in stabelcoins, because they are stable in their price (the choice of stabelcoin is also very important, for details see "Everything you need to know about stabelcoins"), then comes Bitcoin and Ether, and at the end of the list are altcoins. During a bear market, you can put your stablcoins into a liquidity pool to make sure you're making money all the time
The consolidation phase
is the time when the smartest wallets are buying. Everyone has his own preferences, but you have to understand, that until the Bitcoin domination does not exceed 50-56%, the main movement will be shown by it, after that the alt-season will start and the alts will fly to the sky.
The growth stage (bull market)
In its first phase, it is preferable to give priority to Bitcoin, say 80% BTC and 20% Altcoins. In the second phase, after Bitcoin dominance reaches 50-56%, I advise to transfer the lion's share of Bitcoin to the fundamental Altcoins. In the final part of the rise, when you can already see the fall, you need to start fixing assets, in the end a great option when before the bear market you have 80-90% in stabelcoins in your wallet and the rest in coins.
- These are all complex points that are hard to grasp even with experience, just know that such peculiarities exist and should be taken into account.
How to create a well-balanced crypto-portfolio
As I keep repeating, every investor or trader has their own idea of what a well-balanced crypto portfolio should be. However, everyone adheres, to a greater or lesser extent, to the basic rules when forming it.
1.Allocation of Funds
Divide the investments in your portfolio into risk levels: high, medium and low. Determine their weighting accordingly. A portfolio that has a large portion of high-risk investments is definitely not balanced. Such investments can make big profits as well as huge losses. Your risk profile will help you figure out what works best for you, but it's always best to create some diversity in your portfolio.
2. New capital
Allocate new capital strategically to avoid overloading one area of your portfolio. It can be tempting to invest more money when you make a large profit on a single coin, but resist the feeling of greed and think carefully about each step.
3. Use your head
Do your own research - this advice is always valid. You invest your own money, so don't rely solely on the opinion of strangers.
4. Only free money
Invest as much as you are prepared to lose. If you're worried about your portfolio, it's probably not well balanced. Try to ensure that you have positions that will prevent you from incurring serious losses if things go south.
5. Asset Analysis
It is also very important to take the time and effort to analyze any particular coin that catches your eye. I strongly recommend you to buy only fundamental altcoins and not to be fooled by ads of "rockets" and schitcoins, which according to statements will make 3000% soon, it is a very dangerous activity, because these assets are usually very volatile and inflated, like a soap bubble, which is about to burst.
6. Portfolio Vision
It's also important to regularly monitor the portfolio and track the dynamics. Some do it on paper, some do it in a spreadsheet like Excel, I advise you to use special trackers to track portfolios for maximum convenience. I mean third-party applications where you will input your own cryptocurrency holdings. These applications will track and display price movements and some other indicators in one place, and due to the fact that the applications themselves don't have access to your assets, the safety of your funds is not jeopardized. Some of these applications can be tied to your personal wallets and the exchange itself, but I do not recommend you to do this, because it is an additional access to your money, so you do not need this "happiness". Here are applications that I personally have been using for a long time, they are convenient and reliable: Coin Stats and Dropstab.
7. Storing Assets
Equally important is how you store your assets, I will not elaborate on this now, because there is a separate article on "Cryptocurrency storing culture" on the website and in Telegram.
Summary
The most important thing in building a cryptocurrency portfolio is the discipline of following the accepted rules and your plan, because this process never stops.
It is extremely important to stick to your deliberate strategy of actions and not to be distracted by unnecessary "noise", but you need to remain open to new developments and have a backup plan of action.
Peaceful skies and good luck to all, dear Friends!
Your M.J.
