Similar to all traditional investment classes, crypto investments can also be adjusted via standard rules of diversification and asset allocation. While you can start your journey as a crypto investor by just buying BTC or ETH, is it really the best way to go about it? Most market experts recommend spreading out your investments among different digital coins to mitigate the overall risks.
In this article, we have explored how you can build a crypto portfolio with well-balanced allocations and to what degree diversification can be advantageous as it has its cons too.
What is a well-balanced crypto portfolio?
A well-balanced crypto portfolio contains a diverse collection of coins marked with different growth potentials, risk levels, and use cases. When drafting such a crypto inventory, you will have to efficiently (not equally) distribute the funds among multiple types of cryptocurrencies as per YOUR goals & disposition. Hypothetically, a well-balanced portfolio may accommodate 30% Bitcoin, 25% Ethereum, 20% stablecoins, 15% altcoins, 10% NFTs, and so on.
Moreover, though it’s not our topic of discussion here – also remember to strike a balance between your crypto investments and other asset holdings like ETFs, or stocks. Considering the high-risk nature of digital coins, try maintaining the ratio of cryptocurrencies near 5% to 10% of your overall portfolio at maximum.
How to create a well-balanced crypto portfolio – A step-by-step guide
Although there is no universal formula for creating a well-balanced portfolio, here are a few ideas and suggestions to help you build one that suits your individual needs.
1. Do careful market research about your crypto investments
Even before you think about dipping your toes in the crypto sphere, you must holistically examine different crypto projects to filter out the most promising ones.
You are investing your hard-earned money, so do your own research and educate yourself about the complexities of the crypto market beforehand. Do not solely rely on others’ advice because it’s not their money that’s involved.
That said, while this mantra of “research about your investments” may seem a cliché that you hear everywhere, this reiteration just shows how important it is. The more you know about your investments, the better equipped you will be to make informed decisions and avoid potential pitfalls in the market.
2. Categorize your portfolio between low, medium, and high-risk cryptos
If you are looking to build long-term wealth, it is better to divide your portfolio into three sections: low-risk, medium-risk, and high-risk coins. For this, you must assess different cryptos and determine which ones are riskier than others. For instance, while Bitcoin’s volatility is no joke, it is still considered a more stable investment than many coins with no solid foundation.
On the contrary, if you are looking to acquire large gains spontaneously, you may want to focus on one segment of high-potential, emerging cryptos. Keep in mind that this approach requires a high tolerance for risk.
3. Prioritize the industry leaders like Bitcoin and Ethereum
In the crypto space, there comes Bitcoin, Ethereum, and then the remaining others. One of the safest options to create a well-balanced crypto portfolio is to buy these largest-cap coins along with other market leaders. This is because these top-ranked cryptos offer relatively more stability due to their wide adoption and solid base, but that is not to say that they aren’t volatile.
4. Focus on different types of coins
Interestingly, not all cryptocurrencies have a similar nature as they assimilate unique use cases and operational designs. When deciding asset allocations for your crypto investment, consider the different types of cryptocurrencies:
- Payment coins: Bitcoin is the primary example of payment coins – which are used exclusively for transferring value. These types of cryptos mostly originated during the nascent period of digital currencies. Some other examples include Litecoin and Bitcoin Cash.
- Stablecoins: Though stable coins cannot surge in value due to their peg with one unit of fiat, they can provide you the necessary liquidity/safe cushion to move your crypto in and out during periods of high market volatility.
- Governance tokens: Governance tokens give the holders voting rights or governing power in relation to the relevant crypto projects. Their value is tied to the performance of their underlying platform. Many DeFi and metaverse projects include these types of coins.
- Utility tokens: Utility tokens serve a specific purpose in the concerned crypto ecosystem. They can be used to pay lower transaction fees on that particular platform or staked for earning higher yields. Binance Coin (BNB) is an example of this category.
- Smart contract tokens: With the developments in the blockchain space, many smart contract projects have emerged along with their unique tokens. Ethereum, Avalanche, and Cardano are some of the prominent smart contract platforms with their particular coins.
5. Rebalance your portfolio periodically
To maintain a well-balanced crypto portfolio, it is important to regularly review and rebalance your assets as per the changing market conditions. Consider buying some coins while selling others corresponding to the fluctuations in their prices.
Pros and cons of a well-balanced crypto portfolio – Diversified vs concentrated portfolio
The most obvious advantage of a well-balanced portfolio is that it has fewer risks involved. While it will have both losing and winning assets, the main goal here is to balance out these losses and gains, so that you’re more likely to make gains over the long run.
However, things do not always play out this much ideally; even more so in the crypto investment arena where all major-cap coins generally move in tandem. So, having a diversified portfolio can be beneficial in a bullish market but not during bear cycles. In a down market, it may not perform as well as some of the best-performing concentrated investments.
Further, to build a well-balanced portfolio, you will have to spend time researching assets. And even after compiling a diversified index, you will need to have a thorough understanding of all your holdings to proficiently manage them.
Putting all this together, ultimately it depends on you whether you want to diversify your crypto investment or not, and if yes, to what extent. However, it is worth noting that most professionals recommend adopting “some level of diversification.”