Ask any investor who is into shares and assets, and they will tell you how important it is to build a well-balanced portfolio. Then why should it be any different with a Cryptocurrency portfolio? A crypto portfolio has to be well balanced to reduce risks and increase the chances of earning a good profit.
Well, it may sound complicated, but it is not in reality. When you start investing in cryptocurrencies, you will understand how volatile this market is and how drastic the growth can be for some cryptocurrencies. Therefore, it is best to diversify the portfolio to avoid excess loss.
Wondering why one must diversify their portfolio? If you have invested in a Cryptocurrency that is doing really well and is earning you a good profit, why take money out of it and invest in another currency?
Well, the Cryptocurrency market is highly volatile and fluctuates drastically. One day you may be earning much more than the profit you anticipated; the next day, it could all plummet.
When you have more than one Cryptocurrency as a part of your portfolio, the loss can be mitigated. When one currency drops drastically, not all your money will be lost. You will still be invested in other currencies which could be stable or even make a profit.
How To Start?
Here are a few steps to help you out:
Know Your Options
The very first step to building a Cryptocurrency diversified portfolio is to know about the various cryptocurrencies available on the market. Everyone is aware of Bitcoins, but this is one coin out of thousands. There is a wide range of options to choose from.
Some of your top options are:
- Cardano (ADA)
- BNB – Binance Coin
- Polkadot (DOT)
- USD Coin (USDC)
Your options don’t stop with just crypto coins. You have altcoins as well as tokens to consider. Altcoins are non–Bitcoin currencies like the ones mentioned above. Tokens, on the other hand, are programmable assets within a blockchain itself.
Understand the risk factor and decide how high of a risk you are willing to take with your money. You need to decide on a risk tolerance level and choose your currencies accordingly.
For this, you first need to categorize the currencies. You need to split them into high, low, and medium risk categories. Then decide how much you want to invest in each category. Now, choose the currencies from each of these categories. Finally, decide how much you want to invest in each currency.
Ensure you do not diversify too much. Going too thin on any investment is not a good portfolio either. It will not only reduce the risk but will reduce your earning capacity as well.
Now, when you want to diversify your portfolio, you need not necessarily invest in multiple Altcoins and tokens. You just need “not” to invest in one single currency. You need to invest in two or more currencies to ensure you have a variety of currencies in your portfolio.
For example – Your Cryptocurrency portfolio can have 50% of Bitcoins, 25% of Altcoins, 20% of stable coins, and 5% tokens.
The idea behind such diversification is: if Bitcoins take a big hit one day, you do not need to be buried in the loss. Your Altcoins or other tokens could do well and keep your portfolio positive.
It is not enough if you just diversify your investments and sit back. You will have to review your Cryptocurrency portfolio regularly. You will have to make changes based on the market movement. The ratio of your diversification might have to be adjusted to ensure you do not incur a heavy loss.
When you keep a watch over your portfolio and review it regularly, not only will you be offsetting your losses, but you will also learn more about the market and how it moves.
In order to find the right diversification, you need to have sound knowledge about the Cryptocurrency market or find someone who does. If you are not keen on a broker to help you out, you can use a crypto portfolio tracker that can help you understand the status of your entire portfolio in one glance.
Managing a diversified portfolio will not require just knowledge. It requires constant effort and can be very time-consuming too. You may also have to use multiple wallets to buy on different blockchains.
Yes, sounds complicated, but once the standard routines will be in place, it will be worth it. A diversified portfolio is any day safer than a concentrated portfolio.
Even if you have a manager managing your Cryptocurrency portfolio, try to include as well some stable coins as a part of your portfolio. This can provide you the much-needed liquidity. You can lock in or exit a position without any second thoughts.
When a particular Cryptocurrency does extremely well and is earning you big profits, do not get tempted. It is very easy to consider removing your money from other investments and investing them all into the Cryptocurrency that just earned you a big profit.
Always remember why you diversified your portfolio in the first place. Make changes in the holdings if needed. Never get tempted to invest all your money in some currency just because it earned you a very good profit.
Know What You Can Lose
Understand how much you afford to lose. Invest only what you can lose, without affecting you personally. The Cryptocurrency market is highly volatile, and there are scenarios where money is lost forever. If you cannot afford to lose that money, do not invest in Cryptocurrencies.
Yes, you need to understand Bitcoins well. The performance of other Altcoins depends on how the Bitcoins move. The Cryptocurrency market is heavily dependent on the movement of Bitcoins. Understanding them can help you diversify your portfolio better.
Last but not least, research the market well. When you research the currencies you are invested in, you will understand better what is your next move. You can have a manager to manage your portfolio; nevertheless, if you do not understand this market, you may not be able to direct your manager regarding your own investments.
What You Should Know
Bitcoins are the king of cryptocurrencies. Other Altcoins do not survive as long as Bitcoins.
Bitcoins hold ground and survive the high fluctuations, while other coins do not. Keeping this in mind, you need to invest carefully. It would be best if you choose the best options to always take advantage of the market fluctuations.
How To Diversify
Now that you know how to start your portfolio diversification, let’s take a look at how you can actually build a well-balanced Cryptocurrency portfolio.
Since they influence the movements of the entire Cryptocurrency market, you need to invest heavily in them. A profit in Bitcoin can earn you very good returns. However, ensure it is less than half your portfolio. This way, even if you were to lose all Bitcoins-related investments, you still have more than half your portfolio to mitigate the loss.
Bitcoins will succeed in the long run, despite the huge percentage of climbs and falls. It may be volatile and slow, but it is sure. So having this as the major investment in your portfolio can be a good idea.
- Smart Contract
There is something called smart contracts on the crypto market. These are programs on the blockchains. They are executed when certain predetermined conditions are met. So, having this in your portfolio can be a smart move.
This is the next dominant Cryptocurrency. This has a long life and is doing well, right behind Bitcoins’ value. So, it is a wise decision to invest more in this than the other Altcoins. It has survived so far and is keeping up with Bitcoin.
You can do your own research or ask your manager and invest the rest in other Altcoins, tokens, etc. Split the remaining percentage almost equally between these Altcoins. This can balance your portfolio very well. Try to invest in at least 3 more varieties.
So, now you have built a well-balanced Cryptocurrency portfolio. What next?
You wait and watch. See how the market movements impact your portfolio. You can use a crypto portfolio tracker to help you understand it better. You will have to make changes once in a few days to ensure the diversified portfolio remains balanced. If you feel one of the Altcoins is not doing as well as expected, you can withdraw from them and invest in another coin.
As cryptocurrencies are highly volatile, it is essential to have a Cryptocurrency diversified portfolio. This can be done on your own or with external help. No matter how you do it, it ensures you are in touch with the market and helps you make the necessary investments to avoid huge losses.
As long as your portfolio is well balanced, you will not suffer a great loss. The good performance of other cryptocurrencies should ideally offset your loss.