How to create a cryptocurrency portfolio?

Main

• A cryptocurrency portfolio is a set of digital assets in which an investor keeps funds. It may include various digital assets: Bitcoin, Ethereum, stablecoins, NFTs, DeFi financial products.
• In a diversified portfolio, losses on its various components can be offset by the dynamics of growing assets. This makes it possible to maintain a stable position in the long term.
• To create a well-balanced portfolio, you should carefully analyze the various coins, paying attention to many factors.

What is a cryptocurrency portfolio?

A cryptocurrency portfolio is a collection of digital assets at the disposal of an investor or trader. It can include bitcoin, altcoins, NFTs, and various financial products such as DeFi indices.

The essential difference between a traditional portfolio and a crypto-focused one is that the investor keeps the latter in a non-custodial or exchange wallet.

Cryptocurrencies and tokens can be purchased on centralized trading platforms like Binance, P2P marketplaces, and OTC platforms. The ability to buy digital assets for fiat is provided in many wallets, including MetaMask and Exodus.

What is asset allocation and diversification?

Before creating a portfolio, you should be familiar with concepts such as asset allocation And diversification.

Asset allocation involves investing in various classes of financial instruments (cryptocurrencies, stocks, bonds, precious metals, etc.).

Portfolio example:

• 40% – shares;
• 30% — bonds;
• 20% – crypto assets;
• 10% – fiat currencies.

Diversification involves allocating funds across different assets or industries. For example, in the context of stocks, you can invest in a number of sectors: agriculture, technology, energy or healthcare.

Both approaches are designed to reduce investment risks and portfolio volatility. Their essence can be characterized by the saying “Don’t put all your eggs in one basket.”

Strictly speaking, digital currencies are a single asset class. However, a crypto portfolio can contain coins and tokens intended for completely different use cases.

Portfolio example:

• 40% – bitcoin;
• 30% – stablecoins;
• 15% – NFTs;
• 15% – altcoins.

Allocation of funds is an important factor determining the profitability of an investment portfolio. The concept is based on the fact that different assets behave differently in changing market and economic conditions.

Since the returns of different financial instruments and their classes do not always correlate with each other, diversification reduces the overall risk.

When compiling a cryptocurrency portfolio, one should take into account the specifics of the market, where many coins show a close statistical relationship with bitcoin.

But sometimes some altcoins show low or even negative correlation with bitcoin. Hence, careful investors can take advantage of this when compiling and reviewing crypto portfolios.

What are the main asset allocation strategies?

Patient investors can choose the option strategic distribution. It involves the creation of a set of assets, which provides the optimal balance between the expected risk and profitability in the long term.

This approach is implemented regardless of the current market conditions – the distribution of assets is maintained even with a significant change in market conditions.

Option dynamic distribution assets is in many ways similar to the strategic one. In this case, the portfolio is also long-term oriented and focused on the optimal balance between return and risk. However, the ratio of assets in it may change under the influence of market conditions.

At tactical distribution the investor takes a more proactive approach. For example, trying to focus on financial instruments and sectors with the greatest growth potential. Such strategies involve more frequent trading and rebalancing. At the same time, investors can fully enter and exit assets depending on market conditions.

In a diversified portfolio, losses on its various components can be offset by the dynamics of growing assets. This makes it possible to maintain a stable position in the long term.

The more diversified a portfolio is, the better it can match the dynamics of the market as a whole. Sometimes more concentrated portfolios containing just a few well-selected assets can perform better.

Managing a diversified portfolio requires more time, effort, and research—each component requires a thorough risk and outlook analysis.

If the components of the crypto portfolio are based on different blockchains, it may be necessary to use multiple wallets and/or exchanges.

How to create a well-balanced crypto portfolio?

Each market participant has its own risk appetite, individual perceptions of a well-balanced portfolio and asset selection preferences.

And yet there are general rules that should be considered when investing in various coins:

• investment objects should be classified according to the degree of risk. If highly volatile and low-liquid assets prevail, such a portfolio cannot be called balanced. Perhaps, at some phase of the market, a few coins from the “collection” will show high profitability, there is also a significant risk of a deep drawdown. Thus, thoughtful diversification is highly desirable.
• it is advisable to include a few stablecoins in the portfolio to reduce overall volatility. “Stable coins” are preferable for fixing profits, as well as for buying sagging assets “on the bottom”.
• periodically, rebalancing should be done, buying up coins that have fallen in price and selling those that have risen in price significantly in order to return the components of the portfolio to their original proportions.
• capital should be allocated in such a way as to avoid a significant predominance of any one asset or class. If one of the coins showed “x”, there may be a temptation to invest more in it. Do not allow FOMO make adjustments to your chosen strategy.
• do your own research. You are investing your own money, so do not blindly rely on other people’s advice.
• invest a “comfortable” amount that you can afford to lose. High volatility and potential losses should not cause serious consequences for you.

Bitcoin is the first and most famous cryptocurrency. K33 Research compared the performance of investments in digital gold and in the top 100 altcoins by market capitalization.

According to their findings, bitcoins purchased for $1,009 in January 2015 would be worth almost $50,000 in June 2023. Altcoins purchased for the same amount would be valued at ~$6,650.

And yet, analysts do not exclude the possibility of investors choosing “winning tokens” that can outperform bitcoin investments in terms of profitability. Also, K33 Research emphasized the importance of choosing the right moment to sell the coins that have risen in price in order to fix profits.

When choosing portfolio tokens, you should pay attention to the following factors:

• on-chain activity;
• market capitalization;
• current price, historical data on the course dynamics;
• the amount of coins in circulation;
• the maximum offer of the token;
• the rate and nature of the issue;
• developer activity on GitHub;
• community activity, etc.

It is also important to study the background of the project team and its roadmap.

To reduce the risk of a portfolio, you can increase the share of bitcoin and other relatively safe assets in it.

What are the types of crypto assets?

There are a lot of crypto assets created. The popular tracker CoinMarketCap tracks the main metrics for ~26,000 coins and classifies them into 188 segments: meme tokens, gambling, Play-to-Earn, NFT collections, etc.

On the CoinGecko platform, the range of categories is somewhat smaller – 103. By default, segments are sorted in descending order of market capitalization.

However, there is a more general classification:

1. Payment systems. This category includes the first generation of crypto assets, many of which predated Ethereum: Bitcoin, XRP, Litecoin, Bitcoin Cash, Litecoin, etc.
2. stablecoins. Coins like USDT, USDC and DAI do not show high returns. However, such assets stabilize the portfolio in volatile conditions, reducing its drawdown during periods of market correction. If you need to exit any project, the easiest way is to convert the funds to stablecoins.
3. Utility tokens. Example: BNB. This coin is used to pay for transactions in the applications of the BNB Chain ecosystem, as well as to save on trading fees when interacting with the Binance centralized exchange. Another example is the LINK token of the Chainlink platform. It is necessary to pay for the work of oracles and serves as an economic incentive for node operators. LINK is also used to improve the accuracy of data processing and maintain the stability of contracts on the network.
4. Governance Tokens. Possession of such assets gives the right to vote on key issues of project development, and in some cases, the opportunity to receive part of the income. Examples: CAKE by PancakeSwap, UNI by Uniswap, SUSHI by SushiSwap. As is the case with utility tokens, the value of such coins depends on the success of the protocol associated with them.
5. Financial products based on crypto assets. Such tools make it possible to achieve a high degree of portfolio diversification in a few clicks, and in some cases, maximize profitability. For example, the decentralized Metaverse Index (MVI) is based on 10 popular GameFi tokens. The Nested service allows you to create and copy crypto portfolios of other market participants in a couple of clicks, just like on the eToro social trading platform.