How to Build a Diversified Crypto Portfolio
If you are wondering how to build a diversified portfolio, you most likely have already prepared a budget that you want to invest in cryptocurrencies and make money in the process. However, before answering the question — of how to build, let’s stop for a second and figure out why your crypto portfolio must be diversified.
Here is a simple example that can happen to any crypto investor — yesterday, you bought a promising altcoin, which should rise above heaven. Then, you wake up in the morning, and its price is zero. Suddenly the project no longer exists along with your money. If you were to build a diversified portfolio, you would invest 5% of your deposit on a risky trade. In this case, it’s just another loss followed by success. After all, you remember one of the rules of investing that experts tell you repeatedly —- invest only those funds you can lose without harming your life. However, imagine what if you were to invest your entire deposit hoping to snatch the jackpot; the consequences would have been regrettable.
Diversification in a nutshell
Everyone has heard the catchphrase: Don’t put all your eggs in one basket. It perfectly captures the essence of diversification and the best crypto portfolio.
The basic principle of creating a diversified portfolio, and crypto portfolio, in particular, is to choose assets whose returns do not depend on each other and do not tend to move in the same direction (and to about the same extent). According to classic portfolio theory, formulated in 1952 by Nobel laureate Harry Markowitz in economics, if certain conditions positively affect one asset’s return, the same conditions can lead to the opposite dynamics of another asset. Thus, with the correct asset allocation, if part of your portfolio is unprofitable, the rest will likely grow or not fall as much.
You might say, “wait for a second, but cryptocurrencies are one type of asset,” and you would be right.
Building a crypto portfolio in which all coins will be completely independent is impossible. Moreover, cryptocurrencies are highly correlated with each other. This means that if bitcoin and Ethereum fall, other assets often follow.
There is such a term as the dominance index. It’s the ratio of the Bitcoin capitalization to the entire crypto market’s capitalization. The higher this figure, the stronger the fall and rise of the BTC price affect other coins, making them repeat the pattern. At the time of this writing, it is about 43%, which is 5% less than in June 2022.
The main disadvantage of diversified crypto portfolio
The main disadvantage of diversification is that it limits the profitability of your portfolio. While a balanced crypto portfolio reduces investment risk, you should remember that it also reduces the return on your investments. This is because the profits generated by your high-performing assets will be diminished by the losses incurred by other uncorrelated assets. On the other hand, this is one of the advantages.
Advantages of smart crypto portfolio allocation
The main benefit of a diverse crypto portfolio is limiting extreme results. If some asset falls to 0, others may not lose as much or even rise, which protects you from severe losses.
Adding assets with a negative or weak correlation to Bitcoin allows you to expand your investment opportunities. For example, if you only trade Bitcoin and Etherium, a general market stagnation will affect your entire crypto portfolio. In addition, intelligent crypto portfolio management allows you to be in the black when an alt-season comes. Of course, alt-season is challenging to predict like other events in the volatile market. Still, your crypto portfolio will be prepared for it in advance.
You can confidently invest part of your crypto portfolio in potentially profitable but risky assets in which you would not invest all of your money. To create the best crypto portfolio, sometimes you need to take risks and invest in promising projects because high risk and high profits always go hand in hand.
Recommendations on how to build a best long term crypto portfolio
Unfortunately, there is no perfect formula for the crypto portfolio allocation for all occasions. However, some recommendations can help you get closer to your best crypto portfolio.
#1 Add coins of different functionality to your crypto portfolio
What does this mean? There is a wide range of crypto projects on the market now, which gives more opportunities to create the best long-term crypto portfolio, minimizing risks.
- Transactional cryptocurrencies that are used as a means of payment. For example, Bitcoin or Litecoin.
- Smart contract coins: like Ethereum or Polkadot, which enable blockchain technology to develop decentralized applications (Defi), run smart contracts on their platforms, and for peer-to-peer payments.
- Service tokens that are used on a particular platform to access its services, such as LEASH and BONE tokens in the decentralized ShibaSwap exchange.
- Stablecoins that are tied to traditional currencies and assets and thus have a stable exchange rate. These include Tether, BUSD, and others.
#2 Build your crypto portfolio based on cryptocurrencies of different capitalization
As we said earlier, there is no perfect formula for crypto portfolio allocation. Still, there is always room for the good old classics:
- 70% – Bitcoin
- 15% – large capitalization cryptocurrencies
- 10% – mid-cap cryptocurrencies
- 5% – small capitalization cryptocurrencies
This approach to crypto portfolio allocation will protect you from losses on hype tokens that have just appeared. According to this scheme, no more than 5% of your money is invested in risky projects. This ensures you won’t lose all your money on scam tokens as the SQUID token. The token was based on the “Squid Game” series that lost all of its value after its creators withdrew all invested funds. It is a clear example of why reliable cryptocurrencies like Bitcoin and Ethereum should be at least 50% of your crypto portfolio.
#3 Build your crypto portfolio step by step
We don’t recommend investing your entire investment budget in one sitting. It is better to stretch crypto portfolio allocation over a long period. For example, you have $1,000 to build a crypto portfolio. Instead of investing all the money at once, do it in stages. Let it be $50-$100 a month. This approach will reduce volatility risks and help you choose a more effective strategy depending on the market vector. Even if the purchased coin suddenly goes up and you invested $20 instead of $500, don’t be upset; you are already in the black. Believe us, the high-volatile market will provide you with hundreds of opportunities. It’s better to always keep in mind that the price can go against your expectations. Building a crypto portfolio is a process that doesn’t like to rush.
#4 Use crypto portfolio trackers
A crypto portfolio is much more capricious than traditional assets and requires constant attention. High volatility forces investors to follow the price as closely as an avid fisherman follows the float. If your crypto portfolio counts 50-100 assets, you won’t be able to keep track of them manually.
Nowadays, most reputable crypto platforms are equipped with rich functionality to keep track of price movements in the market. Therefore, we advise you to explore all features of the crypto portfolio tracker on the platform where you trade and use them regularly. Moreover, the crypto portfolio tracker has a mobile app and is always at your fingertips.
Features like alerts when the price reaches a certain level and stop loss orders allow you to be in the right place at the right time and avoid unnecessary losses. Use technology to make investing profitable and safe.
Some people rely on apps that use artificial intelligence to predict price direction. It’s up to you whether or not you trust your crypto portfolio to a machine.
#5 Learn from a small crypto portfolio
For a crypto portfolio to start bringing you a stable income, don’t try to choose assets at random; also, don’t blindly believe forecasts made by experts. You have to learn to understand the market’s psychology and analyze your losing trades — this is another reason you should use a crypto portfolio tracker. The best way is to start with a small crypto portfolio. When you see that you consistently make the right decisions, increase your investment budget.
We hope you now know how to diversify your crypto portfolio and, most importantly, why it is necessary. The tips described in this article may seem obvious at first glance. However, you probably realized many of them yourself when you were thinking about building your crypto portfolio. So use them as a foundation to develop you as a successful investor and create the best crypto portfolio. Good luck.