How to Create an Ideal Crypto Portfolio

The process of balancing a portfolio of digital assets is similar to that of maintaining a traditional portfolio. Depending on your profile and investment approach, you can easily lower your overall risk. Simply spreading your investments across various cryptocurrencies is all that is required to get started.

There are advantages and disadvantages to both sides, therefore it's up for dispute how much you should diversify. However, variety in some degree is typically regarded as advantageous. By holding a variety of cryptocurrencies, including stablecoins, and frequently rebalancing your asset allocation, you can lower the risk of your investments.

You can manually enter your transactions in a spreadsheet or utilize a third-party portfolio tracker to make managing your portfolio easier. Some trackers allow you to connect them to your personal wallets and bitcoin exchanges, which streamlines the procedure.

Introduction

Buying your first bitcoin (BTC), ether (ETH), or other cryptocurrency is all it takes to get started investing in cryptocurrencies. While some investors favor purchasing and keeping the biggest cryptocurrencies, others choose to explore with alternative cryptocurrencies. But how do we go about doing this? By carefully considering your asset diversification and routinely balancing your cryptocurrency portfolio, you are more likely to succeed. There are various ways to do this depending on your level of risk tolerance. It's not difficult to balance your portfolio, and the results could actually be profitable.

What exactly is a cryptocurrency portfolio?

A collection of cryptocurrencies that a trader or investor owns is known as a crypto portfolio. Altcoins and cryptocurrency financial instruments are frequently included in portfolios together with other diverse assets. The only difference between it and a conventional investment portfolio is that you are only investing in one asset type. Using a spreadsheet, you can manually keep track of your cryptocurrency holdings and profits, or you can utilize specialist tools and software. An effective portfolio tracker can be useful. Trackers are necessary for day traders and other short-term investors, but they are also beneficial for HODLers and long-term investors.

What are diversification and asset allocation?

You should be conversant with the ideas of asset allocation and diversification while building an investment portfolio. Investing in several asset classes is referred to as asset allocation (e.g., cryptocurrencies, stocks, bonds, precious metals, cash, etc.). The dispersion of your investing funds among various assets or industries is known as diversification. You may, for instance, diversify your stock portfolio by making investments in several sectors, such as healthcare, energy, technology, and agriculture. These two methods lessen your overall risk.

In terms of asset classes, cryptocurrencies are one. However, you can diversify your holdings in a cryptocurrency portfolio by choosing goods, coins, and tokens with various objectives and applications. You might divide your portfolio, for instance, into 40% bitcoins, 30% stablecoins, 15% NFTs, and 15% altcoins.

Cryptocurrency portfolios: diversified vs. concentrated

The majority of counsel will advise you to diversify your cryptocurrency holdings. While diversifying your assets with your wealth is a common practice among investors, there are benefits and drawbacks. A diversified portfolio lowers overall risk and volatility, as we've already explained. Gains can counteract losses and keep your position steady. With each coin you own, your portfolio has a greater chance of profiting. Even though not every investment will succeed, with the right asset allocation and diversification, your chances of long-term success increase.

The closer your portfolio tracks the broader market, though, the more diversified it is. The majority of traders and investors want to outperform the market with bigger gains. A successful concentrated portfolio will outperform a portfolio with a high degree of diversification in terms of average returns. High earners can be balanced out by worse performing assets.

Additionally, it takes more work and study to manage a diverse portfolio. You need to know what you are buying in order to make wise investments. The likelihood of comprehending everything will decline with a huge portfolio. You could also need to use several wallets and exchanges to access your assets if your portfolio spans several blockchains. Your choice whether to diversify or not, however some diversity is usually advised.

Various cryptocurrency varieties

The most well-known cryptocurrency and largest in terms of market capitalization is bitcoin. But to lower overall risk, a well-balanced portfolio will contain a variety of different coins. Let's examine a few of them.

Coins for payment

It's difficult to find new coins these days that focus solely on payments. However, when cryptocurrencies first emerged, the majority of projects were mechanisms for value transfer. The most well-known example is Bitcoin, but there are many other cryptocurrencies including Litecoin (LTC), Ripple (XRP), and Bitcoin Cash (BCH). Prior to Ethereum and the invention of smart contracts, these coins were the initial generation of cryptocurrencies.

Stablecoins

A stablecoin makes an effort to follow an underlying asset, like fiat money or precious metal. For instance, BUSD pegs the US dollar with reserves that are set at a 1:1 ratio. The similar approach is used by PAX Gold (PAXG), except the coin is linked to the cost of one fine troy ounce of gold that is kept in reserves. Stablecoins live up to their name and provide stability, even though they may not always yield high returns.

Since the bitcoin market is unstable, it helps to have investments in your portfolio that maintain their worth. Stablecoins shouldn't be impacted by a decline in the cryptocurrency market if they are pegged to external entities. To protect your gains, you can quickly transfer tokens out of a project into a stablecoin backed by dollars like BUSD. Trading for a stablecoin takes much less time than converting to fiat.

Tokens for security

A security token can stand in for a variety of items, just like conventional securities. It could be ownership in a business, a bond issued for a particular undertaking, or even voting rights. Securities now essentially fall under the same laws as other financial instruments because they have been digitalized and placed on the blockchain. Because of this, security tokens are under the purview of regional regulators and must go through a legal procedure before being issued.

Utility tokens

The key to a service or item is a utility token. For instance, utility tokens like BNB and ETH both have them. You can use them, among other things, to pay transaction costs when working with decentralized applications (DApps). In order to raise money through a coin offering, several projects create their own utility tokens. The value of the utility should, in theory, be directly proportional to the value of the token.

Tokens for governing

You can gain voting rights and even a cut of the profits by owning a governance token. These tokens are most likely to be found on platforms for decentralized finance (DeFi), such as PancakeSwap, Uniswap, or SushiSwap. A governance token's value is closely correlated with the success of the underlying project, much like utility tokens are.

Financial cryptocurrency goods

A portfolio need not merely be made up of owning several coins. Financial cryptocurrency products can also aid in further diversifying your portfolio. Consider it similar to holding mutual funds, ETFs, or government bonds as opposed to merely holding stock. You can invest in a huge variety of products on several blockchains and DApps.

How to create a balanced cryptocurrency portfolio

Each trader or investor will have their own opinions about what makes a portfolio of cryptocurrencies well-balanced. But there are some general guidelines to remember:

1. Assign the necessary weights to your portfolio's investments at high, medium, and low risk. A portfolio with a sizable percentage of high-risk investments is undoubtedly unbalanced. It may have the potential to give you greater gains but it also may result in significant losses. What is best for you will depend on your risk profile, but there should be a balance.
2. If you want your portfolio to have more liquidity, think about keeping some stablecoins. Many DeFi platforms rely on stablecoins, which can be used to swiftly and inexpensively lock in gains or exit a position.
3. If necessary, rebalance your portfolio. The cryptocurrency market is quite erratic, therefore you should base your choices on the circumstances at the time.
4. Strategically allocate new funds to prevent favoring any one sector of your portfolio over another. It can be tempting to add additional money if you've recently achieved significant gains from one coin. Don't let greed get in the way, and consider where the money may be spent more wisely.
5. Make independent research. You really can't go wrong with this timeless bit of counsel. Don't rely only on recommendations from others as you are investing your own money.
6. Do not invest more money than you can afford to lose. If your portfolio causes you stress, it isn't balanced properly. If something goes horribly wrong, your positions shouldn't have any serious repercussions for you.

Crypto portfolio trackers

A tool or service called a portfolio tracker enables you to follow the fluctuations of your holdings. You can monitor your progress and compare your current allocation to your long-term objectives. Here are a few instances you might want to think about:

CoinMarketCap

A very well-liked price tracker called CoinMarketCap has created its own portfolio tool. Both desktop and mobile users can access the portfolio tracker without charge. The portfolio tracker does not connect to your wallet or exchange, therefore you must manually enter your assets in order to utilize it. To precisely track your gains, you can also choose to include the prices at which you made your purchases.

CoinGecko

Although it features a portfolio option, CoinGecko is primarily recognized for its bitcoin price tracking. Both your browser and a mobile device can access it for free. If you currently use CoinGecko frequently, the tracker is worthwhile to test as well.

Delta

You may view both your regular assets and your cryptocurrency portfolio at once with the Delta mobile app. It has the ability to connect to 20 exchanges and numerous wallets, including Binance. Both a free and premium version are available, however trading is not possible within the program.

Closing remarks

The state of Bitcoin has a significant impact on the cryptocurrency market. However, there is no excuse for not balancing your portfolio. Diversification is usually a good idea because it might reduce your risk of losing money in the event of a Bitcoin crash. Do not forget that keeping multiple coins is only one aspect of maintaining portfolio balance. A little amount of forethought will go a long way toward building a portfolio that is appropriate for your risk tolerance.