Starting a crypto investment requires one to learn first how trading works and what are the factors affecting the highly volatile price of cryptocurrencies. Skipping this first step allows you to learn from the market all the ways and means in a costly manner — this means losing your crypto assets.
No matter who you are — a newbie or a seasoned investor in other platforms, it is still important to manage risks through making a balanced portfolio, especially in the crypto space.
In this article, we will guide you to creating a well-balanced crypto portfolio that will alleviate your worries on the unpredictable crypto market.
What is a crypto portfolio?
A crypto portfolio is a collection of digital assets that investors purchase in hopes of making profits. Cryptocurrency portfolios hold assets such as Bitcoin, Ethereum, Tether, Chainlink, Cardano, etc. The difference between a normal portfolio and a crypto portfolio is that the crypto investor holds his assets in a digital blockchain wallet.
Cryptocurrencies are decentralized assets that can be purchased through exchanges, decentralized exchanges, OTC trading desks, and P2P trading platforms. Cryptocurrencies are more volatile than TradFi investments (i.e stock) and take more experience to manage.
Why create a crypto portfolio?
The creation of a crypto-portfolio is an approach that allows you to neutralize the impact of the high volatility of crypto assets. Price fluctuations in the rates of even the most powerful cryptocurrencies sometimes reach 50% per day. Such spikes provide not only great prospects for receiving dividends, but also carry significant risks for investors.
When reaching the best crypto portfolio allocation, an investor can diversify risks and manage capital to achieve investment goals. You need to remember that no matter how stable the value of coins is, it will always fluctuate, and only the correct distribution of investments will make your funds resistant to fluctuations.
Building your crypto portfolio
There is no one-size-fits-all approach when building a crypto portfolio as you can find different sources on the Internet that vary from diversification to making calculated risks. In this article, we list general guidelines that can help you achieve a balanced yet diversified portfolio, while mitigating the fluctuating prices of crypto assets. By following these guidelines, you can put yourself in a better position to succeed in the exciting world of cryptocurrency.
What do you want to achieve?
Setting and achieving goals is a key part of successful crypto investing. Having a clear idea of what you want to achieve can set yourself up for success and avoid making common mistakes. When it comes to goal setting, clarity is key. Be as specific as possible about what you want to achieve. For example, rather than setting a goal to “make money,” set a goal to “double my investment within six months.”
It’s also important to be realistic in your goal setting. Don’t set goals that are impossible to achieve, or you’ll only end up disappointed. If you’re new to crypto investing, it’s best to start small and gradually increase your goals as you gain experience.
Once you’ve set your goals, it’s important to create a plan to achieve them. This plan should include what coins you’ll invest in, how much you’ll invest, and when you’ll sell. By having a plan, you’ll increase your chances of success and avoid making impulsive decisions that could end up costing you.
What is your risk tolerance?
For some investors, this volatility is part of the appeal. They see it as an opportunity to make quick and profitable investments. However, for others, the volatility is too great, and they prefer to invest in more stable assets.
So, how do you determine your risk tolerance when investing in cryptocurrencies?
The first step is to assess your overall investment goals. For example, are you looking to make a quick profit, or are you aiming to build long-term wealth? If you’re only interested in making a quick profit, you’re likely to have higher risk tolerance. This is because you’ll be more willing to accept short-term losses to make a gain.
On the other hand, if you’re focused on long-term wealth, you’ll likely have lower risk tolerance. This is because you’ll be more conservative with your investments, only choosing to put your money into digital currencies that you believe have a strong chance of growing in value over time.
Once you’ve assessed your investment goals, you can start to look at different cryptocurrencies and assess their risks. Some digital currencies are much riskier than others. For example, although Bitcoin experiences price swings, it is still considered a more sound investment than a meme cryptocurrency like Shiba Inu, for example.
Mix crypto assets
Diversifying your holdings across a variety of different coins and tokens may minimize your risk and maximize your potential for ROI. There are a few different ways to approach building a cryptocurrency portfolio.
One popular method is to allocate your holdings based on risk tolerance. For example, you may choose to put 70% of your funds into less volatile, established coins like Bitcoin and Ethereum, and the remaining 30% into more speculative altcoins.
Another approach is to diversify across different types of cryptocurrency assets. For example, you may choose to put 50% of your funds into coins, 25% into tokens, and 25% into ICOs. This approach exposes you to various projects and allows you to take advantage of different opportunities in the space. If you’re just starting out, be sure to read up on the different types of cryptocurrencies.
Regardless of your approach, it’s important to remember that cryptocurrency is a volatile asset class, and you should always invest cautiously. By diversifying your portfolio and only investing what you can afford to lose, you can minimize your risk and position yourself for success in the digital currency space.
Regularly rebalance your portfolio
Volatility is one of the key reasons why rebalancing your portfolio is so important when investing in cryptocurrencies. Just as with any other asset class, you need to periodically rebalance your holdings in order to stay diversified and protect yourself from big losses. For example, if you had invested $10,000 in Bitcoin at the beginning of 2017, your investment would be worth over $100,000 today.
However, had you not rebalance your portfolio, you would be 100% invested in Bitcoin and be sitting on a huge loss if the price dropped by even a fraction of its current value. By periodically rebalancing your crypto portfolio, you can stay diversified and protect yourself from these losses.
So, even though it may be painful to sell your Bitcoin when it’s skyrocketing, it’s important to remember that rebalancing is one of the key tenets of successful investing.
Invest only the money you are willing to lose
The biggest benefit of a well-balanced crypto portfolio is that there’s less risk. When you have a diverse portfolio, you’re not tied to the success or failure of any single cryptocurrency. You also have better odds of investing in the most successful cryptocurrencies.
We often see certain cryptocurrencies go through periods where they significantly outperform the rest of the market. The more cryptocurrencies you have in your portfolio, the more likely it is that you’ll be invested in those outliers and can share in their gains.
While it’s good to have a well-balanced portfolio, it’s also time-consuming, which is the main drawback. Finding the right cryptocurrencies, deciding on asset allocation, and rebalancing your portfolio all take time. And, since the market is so volatile, a diversified crypto portfolio DOES NOT guarantee success. To avoid serious financial loss, make sure to invest only the money you are comfortable to lose and on assets you have researched.
