This article is for informational purposes only. The information is not meant to be and does not represent financial, investing, trading, or other types of advice or recommendations.
You probably landed on this page after some initial interest you expressed for cryptocurrencies. You've probably already seen how far cryptocurrencies, and blockchain technology in general, are set to go. It's also possible that you've heard about the huge profits that some cryptocurrency investors have achieved to date. No wonder—Bitcoin's meteoric rises and falls last year, as well as the subsequent media storm, has attracted a slew of newcomers drawn by their gnawing FOMO.
It’s only natural that you want to know what the fuss is all about. What is more, all this news probably made you interested in setting up your own cryptocurrency portfolio.
In any case, when it comes to establishing your own cryptocurrency portfolio, recognizing the risk involved in various cryptocurrency investments is critical. The composition of your crypto portfolio, in terms of any asset, will be determined by your personal risk preferences. Do you want to invest some of your hard-earned money in a somewhat stable asset that will provide consistent returns over time? Or are you seeking a quick profit and are willing to take a chance on losing some of your money?
Considering the significant volatility associated with virtually all blockchain investments, you probably have a high-risk tolerance if you're considering cryptocurrencies at all. However, inside the crypto-space, assets have a wide range of unpredictability and, as a result, risk.
Getting started with your crypto portfolio
The idea of balancing a crypto portfolio is similar to that of balancing a regular portfolio. Depending on your profile and investing plan, you may simply minimize your total risk. Simply spreading your assets across several cryptocurrencies is all it takes to get started.
Buying your first bitcoin (BTC), ether (ETH), or any other cryptocurrency can be the first step to getting started with crypto investments. Although some investors choose to acquire and keep the most popular cryptocurrencies, others prefer to try their hand at altcoins.
But, what's the most efficient method to go about it? You'll have a better chance of succeeding if you properly consider your asset allocation and rebalance your crypto portfolio on a regular basis. There are a few options depending on your risk tolerance. It's not difficult to balance your portfolio, and the benefits may be substantial.
The amount to which you diversify is debatable since both sides have advantages and disadvantages. Diversification, on the other hand, is widely acknowledged to be good. Holding a variety of crypto assets and rebalancing your asset allocation on a regular basis might help you decrease the risk of your investments.
You may use a third-party portfolio tracker or manually record your transactions on a spreadsheet to make monitoring your portfolio easier. Some trackers may be connected to your own wallets and bitcoin exchanges to make the process easier.
What is a crypto portfolio?
Cryptocurrency is a type of digital money that may be used to conduct financial transactions involving individuals or businesses without the assistance of a bank or any third party. Units are often referred to as tokens or coins, while the word "altcoin" is also frequently used.
The cryptocurrencies are kept in your wallet, which you can access with private (for checking what’s in it) or public (needed to transact from the wallet) keys. You can purchase cryptocurrencies on online crypto exchanges. You only need to link your bank account and complete a certain verification procedure. This looks a lot like the process you go through when creating an account to trade stocks or other assets.
Your crypto portfolio is the group of cryptocurrencies you’ve purchased. Your crypto portfolio can include various cryptocurrency financial products. You can see it as a regular investment portfolio with only one asset type.
In order to keep track of what you own and how you earn from it, you can create your spreadsheet or use a crypto portfolio tracker. However, for a beginner, this is a rather complex and confusing process. Trackers are great for day traders, but long-term investors have to approach this challenge in a more strategic manner.
What are some different types of cryptocurrencies/related investments?
A well-balanced portfolio will comprise a variety of coins and investments to decrease overall risk. Let's take a look at a few of them.
A non-fungible token (NFT) is a one-of-a-kind identifier that may be used to assign and prove ownership of digital assets cryptographically. An NFT is basically a digital asset that ties ownership to unique physical or digital things, such as pieces of art, real estate, music, or movies.
NFTs are regarded as collectibles in today's world. They're purchased and sold over the internet and serve as digital evidence of ownership for any particular object.
NFTs vs. cryptocurrencies
NFTs are securely stored on a blockchain, the same technology that underpins cryptocurrencies, ensuring that each asset is unique. It may also be more difficult to modify or counterfeit NFTs thanks to the technology.
Cryptocurrencies are designed to function as currencies by holding value or allowing you to purchase and sell items. Cryptocurrency tokens are fungible, like conventional currencies such as the dollar. NFTs produce one-of-a-kind tokens that may be used to demonstrate ownership and transfer rights to digital assets.
Cryptocurrencies were initially meant to serve as means for value transfer. Before Ethereum and the advent of smart contracts, these coins were the initial generation of cryptocurrencies. Bitcoin is the most famous one, followed by Ripple (XRP), Bitcoin Cash (BCH), Litecoin (LTC), and many others.
A stablecoin is a type of cryptocurrency that aims to provide price stability by backing itself with a reserve asset. Stablecoins have gained popularity since they seek to combine both quick transmission and security or privacy of cryptocurrency payments, as well as the stable values of fiat currencies.
The dollar is the benchmark asset for the most majority of the dozens of stablecoins now in existence. Several are also linked to other fiat currencies issued by governments, such as the Euro and Yen. For example, BUSD is linked to the US dollar at a 1:1 ratio. The price of stablecoins is relatively stable, unlike the price of Bitcoin and Ethereum, which often witness meteoric rises and falls.
How to know if an asset is “security”? Use the Howey test:
“A contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party…”
A security token is a digital asset whose value is derived from a tradable external asset. As a result, these tokens are governed by federal securities regulations. Failure to comply with these laws might have serious repercussions, including fines and the possible derailment of a project's progress.
Security tokens, on the other hand, can be used for a wide range of purposes providing the company adheres to all legal standards. The capacity to provide tokens as a digital representation of shares of a company's equity is the most promising of these characteristics.
Security tokens include:
- Asset-based tokens, trading tokens instead of the assets, where assets can be company shares, real estate, etc.
- Equity tokens, giving the owners ownership rights.
The Merriam-Webster dictionary has the following definition for utility tokens:
“A digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency.”
To generate capital via a coin offering, several projects have developed their own utility tokens. The token's worth should ideally be proportional to its utility.
When a tech firm creates a digital product or service before launching an initial coin offering (ICO) they start offering utility tokens during the ICO. Investors can purchase these tokens and use them to make payments on the company's platform.
For example, an Uber token may be used as a payment method in an Uber vehicle. However, if you want to buy something else with the Uber token, you'd have to first swap it for fiat money or a crypto-coin.
Security tokens vs. utility tokens
When you own a utility token, you can use it to purchase products or services within a company’s platform. At the same time, when you own a security token, it’s like owning stocks in that company, and you earn/lose as the company earns and loses.
In the US, security tokens are exposed to more regulatory oversight from the US Securities and Exchange Commission than utility tokens and require full SEC clearance to be offered in issuances to non-accredited investors or exchanged on secondary markets. One of the reasons for their slow growth and acceptance is regulatory barriers.
Developers build governance tokens to allow token holders to help influence the future of a system. Governance token holders have the ability to influence project choices such as submitting and voting on new feature ideas, as well as modifying the governance structure itself.
These currencies are most likely to be found on decentralized finance (DeFi) platforms such as PancakeSwap, Uniswap, and SushiSwap. The value of a governance token is also directly proportional to the performance of the underlying enterprise.
What are the most important cryptocurrencies?
There are lots of different varieties of cryptocurrencies available today, each with its own set of features and functions. These are some common characteristics for all of them:
- Unlike banks, cryptocurrency is not issued and regulated by a central body.
- A distributed ledger (blockchain) and peer-to-peer review are used to build them.
- Cryptography is a sophisticated computer code that encrypts cryptocurrencies.
Estimates of the many varieties of cryptocurrency you may trade as of September 2021 range from around 6,000 to over 10,000 coins, with a total market valuation of almost $2 trillion. If you want to find out more about experts’ predictions on cryptocurrencies, check out this article by NexdAdvisor.
These are the 10 most important cryptocurrencies other than Bitcoin, according to Investopedia:
- Ethereum (ETH)
- Litecoin (LTC)
- Cardano (ADA)
- Polkadot (DOT)
- Bitcoin Cash (BCH)
- Stellar (XLM)
- Chainlink (LINK)
- Binance Coin (BNB)
- Tether (USDT)
- Monero (XMR)
Bitcoin, which employs open-source code and a censorship-resistant design, is the basis for the bulk of cryptocurrencies worldwide. This implies that anyone may copy the code and modify it to make their own new currency. It also suggests that anyone may join or interact in its network.
Asset allocation and diversification
If you're interested in any type of investment, diversifying your portfolio is critical for mitigating single exposure risks. It implies you must invest in a variety of assets in such a manner that the growth of others would offset any probable depreciation of some of them, and you will still make a profit in the end.
Finding the right mix of assets to meet your goals may take some effort, but should always be a priority for anyone looking to build a well-balanced portfolio. In most situations, it basically comes down to your risk tolerance: The greater the proportion of high-risk assets in your portfolio, the greater the potential profits or losses. Still, a well-constructed portfolio is an excellent method to protect one's assets against total loss.
Bitcoin alone is a typical example of turbulence. However, cryptocurrency does not only refer to Bitcoin. Ethereum, Ripple, DAI—to name just a few—and plenty of other important crypto assets are also available. If you just buy only one cryptocurrency and it crashes, there isn't much you can do but accept it. However, if one crypto-asset in your portfolio falls in value, having others that are not correlated with each other might help you avoid losing money in the long run.
In a cryptocurrency portfolio, you may diversify among products, currencies, and tokens with varying aims and uses. For example, you can choose to include, stablecoins, and NFTs in your portfolio.
The more crypto-assets you have, particularly those that are considered blue chips in their respective fields like Bitcoin and Ethereum, the better off your portfolio will be in terms of minimizing crypto risk. You may invest in stablecoins, which provide greater interest rates owing to market demand, in addition to more traditional cryptocurrencies.
How to build your crypto portfolio?
Everything starts with research
You've probably heard of Bitcoin and Ethereum if you've been reading a bit about cryptocurrencies. This information base, on the other hand, merely scrapes the surface of what may be as complicated as you want it to be.
Getting acquainted with the market and learning about the main and developing currencies, as well as their various market sectors, may assist you in constructing a robust portfolio to weather the coming storms, while still capturing the huge value potential. We understand how complex and difficult this can look, so we want to grow our blog as a database where you’ll be able to find everything you need.
When you've chosen several crypto options, look to see if the project has produced a whitepaper, which generally includes a roadmap and tokenomics for the coin as well as information on the team behind it. They also explain how cryptocurrency works and break down the various core competencies.
The crypto sector often faces dramatic price changes. However, don’t let this scare you off. The crypto sector is also a new market, with new opportunities, and early adopters have the chance to capture significant gains. To safeguard your financial future, be on the right track through study and analysis.
Pick cryptocurrencies to invest in
It's critical to choose the proper cryptos for your portfolio before you start growing it. Once you’ve performed your research, focus on a few essential aspects while evaluating a coin's investing potential.
Here are some things you should pay attention to when performing your research:
- Risk tolerance
- Market capitalization (market cap)
- Coin utility
- Marketing activities
- Their target market and how they contribute
- Previous success of team members
- Positive or negative news coverage
- Community around the cryptocurrency
- Funding and investors
Now, we’ll take a look at the most important ones.
Your risk tolerance is determined by a variety of factors, including your personality profile, career, financial objectives, maturity, free time, etc. A young, single man would probably have a higher risk tolerance and would invest money in promising coins. However, a middle-aged man with a family probably has a lower risk tolerance and should mostly invest in stablecoins. Having moderate risk tolerance means distributing your money through different types of coins to make sure you don’t gamble with all of it.
Bitcoin could be the most stable one of the over 2,300 cryptocurrencies on the market (except for stablecoins). Investing in BTC is considered a safe investment in terms of cryptocurrencies since it is the oldest cryptocurrency on the market and it keeps reaching all-time-high value. Diversifying your investments is a good way to spread your risk. You may need to invest in one or more stablecoins (which may be used to generate a yield) to diversify your investment portfolio.
Market capitalization (market cap)
The entire monetary worth of all the shares of a company's stock is called market cap. In cryptocurrency, all the coins that have been mined make the market cap. The market cap of a cryptocurrency is derived by multiplying the total number of coins mined by the current price of a single coin.
Market capitalization is used by investors to present a more entire picture and compare the worth of cryptocurrencies. It might show a cryptocurrency's development potential and if it is safe to buy in comparison to others as a crucial metric.
What does this mean?
Hypothetically, if one cryptocurrency has 300,000 coins mined with each coin being worth $0.50, its market cap would be $600,000. Another cryptocurrency can have 400,000 coins mined, with a value of $1 for each coin, which means its market cap is $400,000. Although a unit of the second cryptocurrency is worth more than the first one, the first cryptocurrency has a bigger value.
Fully diluted market cap
Calculating what is known as the fully diluted market cap is another way to get an idea of a cryptocurrency's possible future worth. The overall worth of the crypto at today's price if the whole future supply of coins were in circulation is defined as a fully diluted market capitalization.
As of August 2021, 18.77 million Bitcoins had been mined, leaving around 2.3 million to enter circulation. This means that we can calculate the fully diluted market cap like this:
21 million x current price of 1 BTC
Cryptocurrencies are divided into three groups based on their market capitalization:
- The market capitalization of large-cap cryptocurrencies, such as Bitcoin and Ethereum, exceeds $10 billion. Because they have a proven track record of growth and generally have more liquidity, investors perceive them to be lower-risk investments. This means they can tolerate a bigger volume of individuals getting cashed out without the price being significantly damaged.
- Mid-cap cryptocurrencies have a market capitalization ranging from $1 billion to $10 billion, and they are typically thought to have greater untapped investment opportunities but also more risk.
- Small-cap cryptocurrencies have a market capitalization of less than $1 billion and are the most vulnerable to market mood changes.
This basically refers to how useful the particular coin is overall. Bitcoin, for example, aims to overcome the issues of the centralized banking system by allowing payments to be made directly, quickly, cheaply, globally, and securely. It’s mostly used as a store of value “digital gold.” The BTC blockchain is very secure but also very slow, so not ideal for everyday transactions. However, it’s completely fine for value transfer every now and then, for example, in international transactions.
Ethereum is a platform for developing and deploying decentralized applications, and it has the potential to transform many industries. If a coin was developed to support a big goal or strategy, it also means it has great potential.
There are various technologies cryptocurrencies can be based on, including public or private blockchain, Proof-of-Work (POW) or Proof-of-Stake (POS), etc. Examine the fundamental technology's benefits and drawbacks to get a sense of the problems it confronts or may face in the near future. Check to see if the team is working to solve these obstacles. For example, Ethereum will use sharding to address the scalability issue that plagues many popular blockchains, while The Lightning Network (a "layer 2" payment protocol that runs on top of a blockchain-based cryptocurrency like Bitcoin or Litecoin.) is Bitcoin's solution to this problem.
Allocate your assets
Divide your portfolio into three categories: high-risk, medium-risk, and low-risk assets, with suitable weightings for each. A portfolio with a significant share of high-risk assets is unbalanced. It has the potential to give you larger gains, but it also has the potential to lead you to lose a lot of money. What's best for you depends on your risk profile, but there should be a balance.
Rebalance portfolio when needed
Even among the most well-known currencies, such as Bitcoin, things may change quickly, and the mainstream press can have an impact on prices. Staying educated can help investors make better purchasing and selling decisions in the future.
Strategically allocate new assets to prevent over-investing in a single part of your portfolio. It's attractive to put more money into a coin if you've just earned large gains from it. Don't let hunger for more money get in the way. Instead, consider where the funds may be better spent.
Invest the amount you're ready to lose
If you're concerned about your portfolio, it's not balanced properly. In the event that something goes horribly wrong, your choices should not have severe implications for you. That’s why you should only invest the amount you’re ready to lose, especially because crypto is a highly volatile asset at this time.
Crypto portfolio trackers
A crypto portfolio tracker is a digital tool that enables you to track how your crypto investments are moving. You can manage your assets by following their values and comparing them to your long-term goal. These are some of the most popular crypto portfolio trackers:
CoinMarketCap is a well-known price tracker with a built-in portfolio option. Because the portfolio tracker doesn't have the option to link to your wallet or exchange, you must enter your assets yourself. You can also enter the prices at which you purchased to precisely track how your earnings.
CoinGecko is most popular for tracking cryptocurrency prices, but it also includes a portfolio option. It may be accessed via your computer or mobile device and it's free of charge.
Delta is a smartphone app that lets you examine both your crypto and conventional assets at the same time. It can link to 20 different exchanges as well as a variety of wallets. There is a free and a premium version. However, trading is not possible within the program.
What share should crypto have in your entire portfolio?
The dramatic decline in Bitcoin's value in May is a clear example of the dangers of crypto investment. Cryptocurrency is a very risky investment, prone to large fluctuations in short periods of time.
Even so, more and more investors are interested in learning about cryptocurrency. Some of the most well-known financial gurus are beginning to discuss and think about cryptocurrency more. Tori Dunlap of Her First $100K recently told NextAdvisor that she still advises individuals to err on the side of caution and stick to the 5% rule, which means they shouldn't put more than 5% of their portfolio into riskier assets like crypto.
Moreover, Erik Finman, the boy who used a $1,000 gift from his grandmother to buy his first bitcoin and is now a millionaire, recommends investors to “invest 10% of your income into the top cryptocurrencies, especially bitcoin.”
According to an article by CryptoManiaks, bitcoin should account for 5% to 30% of your whole investing capital, where 5% is very safe, while 30% is quite risky. The recommendation is that the most optimal investment would be between 15% and 30%.
In the end, the choice is yours. And, while market variables play a role, personal considerations such as risk tolerance and the amount of money you can afford to lose also play a significant role.
Bitcoin's health affects a large portion of the cryptocurrency industry. However, there's no reason not to have a well-balanced portfolio. Diverse crypto investments can help mitigate some of the losses that come with a Bitcoin fall, so diversification is always a good idea. Remember that balancing your portfolio entails more than just owning various coins. A little planning will go a long way toward constructing a portfolio that is appropriate for your risk tolerance.