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How to create a crypto portfolio?

How to create a crypto portfolio?

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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. 

Table of Contents

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. 

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There’s a reason we don’t all make millions in the crypto market, and the truth of it is that research shows that approximately 40 percent of Bitcoin holders have lost money on their investments. As you might have realized, financial markets are complex and unpredictable, with no formula that guarantees you will strike it rich or even make more money than you put in. As a result, private investors must carefully mitigate risk since investing success sometimes comes down to being in the right place at the right time.

Given the element of chance, it is critical not to be seduced by the newest trend and to pursue good performance. History has frequently demonstrated that one year’s top performer may be among the worst the following year.

Currently, crypto projects are abundant, and many do not provide any real value. So, of course, not all of them will be successful. Natural market selection will eventually select a few winners, and these will give tremendous profits. As a result, it’s critical to look at the larger picture, distribute your investment, and carefully select projects with solid teams and robust solutions. 

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“Zombie” Currencies

Many currencies have seen repeated price spikes before eventually falling back down. There are so many defunct cryptocurrencies that mentioning them all would take a lifetime. Various crypto projects launched ICOs (Initial Coin Offerings) during the last crypto bull run in 2017, and most crypto prices plummeted, with some falling by more than 80 percent. Many would-be zombie tokens are born due to market-wide collapses, such as those experienced in 2018. Some remain dead forever, never to rise again. Still, most cryptos weren’t made to drop 80 percent in a day but did because of their speculative nature. In addition, many of these cryptos serve no purpose and lose value quickly when starting to depreciate. 

An example of a defunct currency is BTCA, also known as Bitcoin Alpha. Bitcoin Alpha was an “anonymous” fork designed to deceive users into believing they were dealing with new tokens when it was just another failed attempt to establish an anonymous coin.

Pump and Dump schemes

A pump and dump goes as follows: The team behind the pump and dump buys a high-value cryptocurrency or token. When the team has purchased a sufficient amount of the crypto, it will receive a boost in popularity, either by marketing through influencers, Telegram groups, or Facebook pages. Smaller cryptocurrencies are suitable for pump and dump schemes. Pumps and dumps are commonly associated with the chart of a cryptocurrency or token. The prices are relatively low at the start of the pump and dump, followed by a fixed price increase and a slight drop. 

How can I properly diversify my crypto portfolio?

Diversification is a fundamental investment idea that helps lower a portfolio’s risk. However, managing risk in this expanding, turbulent market is critical to preserving your bottom line when developing a cryptocurrency portfolio.

There are many ways to diversify your portfolio. Sometimes, even having a few different cryptocurrencies can be a great way to diversify yourself in a volatile market. With speculative assets like crypto, you’d prefer your money spread across another crypto.

One exciting way to diversify yourself can be to invest in various businesses. The banking industry has been the most accepting of cryptocurrency. Decentralized finance, or Defi, enables users to effortlessly perform digital transactions without needing a third party, such as a bank, using a peer-to-peer blockchain network. Defi entails not just transmitting Bitcoin, but also lending and investing in crypto. In addition, cryptocurrency usage in video games has taken off, with an increasing number of gamers selling virtual goods in a worldwide virtual marketplace.

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What is asset allocation?

The process of determining where to put money to work in the market is known as asset allocation. It seeks to balance risk and return by allocating assets in a portfolio based on individual preferences, risk tolerance, and investment horizon. The three major asset classes are: equities, fixed income, and cash and equivalents. In addition, you should have distinct degrees of risk and return, and they will perform differently over time.

The importance of a portfolio tracker

Most intermediate and skilled crypto traders hold funds across numerous blockchains and use many wallets for different purposes. Owning crypto over several platforms might make tracking your crypto net worth difficult. A crypto portfolio tracker can let you follow your gains in real-time, even across various networks and wallets. In addition, a portfolio tracker can give you valuable insight into how your investments are spread over different kinds of cryptocurrencies, allowing you to re-assess your asset allocation.

Portfolio trackers are a vital tool for casual and experienced cryptocurrency investors since they enable you to monitor price fluctuations at all hours of the day and track your investments over time. In addition, if you keep your Bitcoin in a hardware wallet for security, a portfolio tracker is the easiest method to keep track of the value of your investments.

The blockchain’s decentralized structure makes it extremely difficult to identify and trace Bitcoin and other cryptocurrencies. It’s also challenging to determine who owns which wallet, and once a Bitcoin transaction has begun, it’s tough to recover the funds.

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A blockchain’s decentralized structure makes it even more important to select a tracker that prioritizes security. Because many cryptocurrency portfolio trackers connect to exchanges or your bank account, securing your coins and money is vital. A single breach or data leak might expose your wallet, so seek security measures such as two-factor authentication and multi-layer encryption.

How to build a crypto portfolio

It pays to conduct your research before putting together a crypto portfolio, especially if you want to create the most acceptable crypto portfolio for your unique goals and risk tolerance. The following are some of the things you should consider when building your portfolio.

Firstly, you should monitor current cryptocurrency prices. CoinMarketCap is a beautiful place to examine what cryptocurrencies are available and their trading prices. In addition, you should research these cryptocurrencies and do due diligence. Some crypto platforms issue white papers or other research studies, such as the Bitcoin white paper published in 2008, which sparked the crypto revolution. These studies frequently clarify how a cryptocurrency operates, what it intends to achieve, and a roadmap for the currency.

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Secondly, consider how people will implement this new currency after or during research. What determines the value of a specific cryptocurrency? A currency that ultimately has no actual application may be less valuable in the future than a currency based on innovation or the development of new systems or technology. In addition, currencies with no genuine application often suffer the steepest drops in market value.

Moreover, it would help to stay updated on Bitcoin news and events when invested. Even among the most established currencies, such as Bitcoin, things may change quickly, and the news cycle can impact valuations and cause some volatility. Keeping up to date might help investors make educated judgments regarding trading cryptocurrency.

Consider setting stop-losses for your investments. Because the cryptocurrency market can be unpredictable, it’s a good idea to put certain safeguards in place, such as stop-loss orders. Stop-losses are orders to sell an asset if it falls below a specific price. Setting stop losses on cryptocurrencies may help safeguard investors from suffering a significant loss in the value of their crypto holdings if prices fall. This way, you’re building a well-diversified portfolio that also limits the amount of risk you’re taking. 

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Rating:

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Regulated By:

FCA, CySEC, ASIC, FMA, FSA, FSCA

CySEC (EU), FCA (UK), ASIC (Australia)

BaFin, FCA

Demo Account:

✔ Free

✔ Free

✔ Free

Live Account:

$100

$200

0

Spreads From:

Variable from 0.5 bps

Variable from 1.0 bps in EUR/USD

Variable from 0.4 bps

Selection Of Instruments:

2000+

1000+

17.000+ (FX, Stocks, CFDs, Commodities and more)

Support:

24/7

24/7

24/7

Payout:

1 – 3 Days

1 – 3 Days

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79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

This article on Medium shows a model portfolio that might be what you’re looking for when setting your portfolio up for diversification.

  • BTC (35%) — Core: Major currency, Tier 1 asset 
  • ETH (35%) — Core: Major currency, Tier1 asset 
  • XRP (10%) — Tier 2 asset: Platform for Remittance, Diversification 
  • ZEC (5%) — Anonymous/Privacy, ZKPs w/ important use case 
  • EOS (10%) — Protocol Coin: Building on top of Ether, big market opportunity, a long-term wait of 1–2 years 
  • IOTA (5%) — Protocol Coin: Building for the IoT, big market opportunity, long-term wait 1–2 years 

The Medium post argues that having 3-9 cryptocurrencies in your portfolio can optimize the balance between risk and return. In addition, by diversifying your portfolio correctly, you automatically decrease the amount of risk you’re taking with your investments.

Still, keep in mind for your portfolio that this is only a model portfolio based on an opinion. However, considering all the points mentioned in this article, we are sure you’ll find different outcomes and different cryptocurrencies to be part of your portfolio.

Investing in different crypto-connected asset classes

Digital investments are part of different asset classes, giving investors yet another way to diversify. The most common crypto asset classes to hold are Bitcoin and Ethereum. Another asset class we wrote about is utility tokens, which give users the right to use a product on a particular platform. These utility tokens are becoming increasingly popular among companies since they use them to sell products or help engage customers in events. Some examples of utility tokens include Basic Attention Token (BAT), Golem Token (GLM), and Filecoin (FIL). 

Another asset class you could invest in is non-fungible tokens (NFT), which are yet another class of digital investments. NFTs are a digital representation of ownership. NFTs have penetrated the mainstream via digital art, creating a new outlet for artists to showcase their work to audiences. In addition, investors can now also buy videos or buy pictures of sports players. Beyond art, NFTs can represent unique digital ownership of many things, such as real estate, collectibles, and individual identities.

The key takeaways from building your crypto portfolio

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As an individual investor, you should not undervalue the importance of having a budget before investing in crypto. It is essential to use money you can lose for investments. When you run out of options to repay debt, liquidity concerns may compel you to sell your assets.

The main problem remains that crypto isn’t regulated, which is also considered its greatest strength. However, few novice investors are told about the risks of investing in cryptocurrencies due to a lack of regulation. Nevertheless, investing money in cryptocurrencies does put your money at risk, and diversifying and building the right portfolio can help you mitigate your risk and significantly increase gains. 

Our biggest tip is that you should look at the significance of the problem the crypto is trying to solve. Cryptocurrencies are speculative, and the truth is that many coins don’t serve a purpose yet, or never will. Therefore, you must ensure you make correct decisions based on the available information rather than hoping for things to work out. 

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