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How to create a crypto portfolio?

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How to create a crypto portfolio?

Authored by: J. Froentjes
Last updated: 20 July 2022

As the cryptocurrency market grows, using some of the same investing basics that most people employ with stocks and other investments is critical. In addition, diversification is a vital component of investing to minimize your total risk-adjusted return. When considering cryptocurrencies, we believe it is critical to create an evaluation framework and then use it to construct a portfolio. Even for people who are not willing to delve entirely into crypto, it can be a significant investment in terms of diversification. However, crypto is considered a high-risk investment and investors should handle it carefully. Moreover, an investor must remember that crypto can fall as hard as it goes up, making it even more important to invest correctly.

The impact of the crypto crash

With a recent 66 percent fall in Bitcoin, investors might be scared of committing to cryptocurrency. Many people have argued that crypto was a hedge against the stock market, which turns out to be incorrect. However, no one knows where the market will go in the upcoming months. That Bitcoin fell significantly over the last months means nothing for its intrinsic value. A popular way of thinking is that it doesn’t matter if prices go up or down since the market moves based on emotion in the short term and fundamental growth in the long term. Therefore, it’s essential to look at the future of crypto and assess whether there is still growth and additional application for cryptocurrencies.

For many novice crypto investors, there is a good chance that this is the first time they have become subject to significant and steep drops in terms of the value of their crypto. However, investing in any asset comes with risk, some more than the others, but risk is still present.

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Most assets have a detailed history of a downturn, and many are now far above in price from where they fell. For example, the COVID-19 crash in March 2020 caused mass hysteria, dropping a whopping 12 percent in just one day. However, that same year, the market had recovered again by September. As an investor, you should remember that current events are no guarantee of something happening in the future. However, in many cases, history seems to repeat itself.

I want to diversify my crypto portfolio.

The truth is that many people reading this article will already own some crypto, and they might be looking for ways to decrease risk considering the recent market downturn. According to surveys, 56 percent of American adults, or around 145 million people, say they currently own or have previously owned some form of cryptocurrency.

To spread your money, you’ll have to diversify. Diversification is a fundamental investment element that helps lower a portfolio’s risk. When it comes to developing a cryptocurrency portfolio, risk management is critical to preserving your bottom line in this burgeoning, volatile industry. If you want to be exposed to the crypto industry’s innovation, investing in a single cryptocurrency, such as market leader Bitcoin, may not be enough. Instead, it would be best to consider investing in several digital assets. Investing in several assets will allow you to profit from overall crypto market growth. Diversification tactics to achieve your investment goals will preserve your money and expose you to additional crypto assets in the long run.

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Using market capitalization as an indicator of risk

Market capitalization, often known as market cap, allows investors to assess the relative size of one firm to another. Because it reflects the total interest in crypto, market capitalization considers its open market value and the market’s view of its prospects. Investors can calculate market caps by multiplying a price by the total amount of crypto purchased.

Lower market cap crypto is typically new crypto that serves niche markets or developing industries. You can regard small caps as more aggressive and hazardous as an investor. Small market cap cryptos may be more vulnerable to economic slumps since riskier investments are the first to be sold during challenging times. However, crypto fanatics have repeatedly said that the price of crypto moves independently from the stock market. If there is no worry of stock market crashes, there is still a chance they are exposed to the high competition and uncertainty that characterize untested, emerging markets.

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Micro-cap companies (penny stocks) are similar to crypto that was just founded. However, with these low-cap cryptos, the upward potential is equivalent to the downside potential. Therefore, they do not provide the safest investment, and crypto investors should conduct extensive research before getting into such a position.

Criteria for Investment

When investing, creating a framework for evaluating potential assets is critical. Investing in cryptocurrency is similar to investing in other asset classes. If you want your crypto assets to perform well over the years, they must perform well in the following areas. First, you should consider whether Crypto serves a functional purpose to the world. Most vrypto serves the purpose of becoming a means of payment in the future, but, speaking honestly, only a handful could get to that point.

Additionally, some blockchain-based crypto is made for purposes other than monetary exchange. A token issued as part of an initial coin offering (ICO) that represents a stake in a blockchain or decentralized finance (Defi) initiative is one example. Tokens are connected to the value of firms or projects, also known as security tokens, similar to stocks. Other tokens have a specific use case or function. Storj tokens, which allow people to transfer files over a decentralized network, or Namecoin, which provides a decentralized Domain Name System (DNS) service for internet addresses, are two examples.

Secondly, there is no denying that crypto remains somewhat of a speculative asset, which classifies as a high-risk/high-reward investment. Important to note here is that the size of the community makes a difference in terms of investment attractiveness. Moreover, a committed community will do everything in their power to make the coin work, which helps prevent steep drops, unlike with smaller coins.

In addition, crypto should solve problems. Of course, we are all aware of the purpose of crypto, which is to create a monetary system independent of government interference. However, some crypto aims to solve particular problems, like Namecoin.

Finally, it would be best to look at the significance of the problem the crypto is trying to solve. Looking at the importance means determining the total market expectation for that market. Then, you should ask yourself whether this crypto will serve a purpose in a market that will continue to grow over the years.

What kind of investments should I avoid?

When reading investing documents, or the essential information PDFs, you will frequently come across the disclaimer that ‘past performance is no guarantee of future success.’ While this may appear to be a conventional escape clause introduced by attorneys, it serves as a vital reminder that nothing in the world of finance is certain. The problem remains that crypto isn’t regulated, and not enough novice investors are told about the risks of investing in cryptocurrencies.