How To Build A Balanced Crypto Portfolio?

One thing you cannot avoid in the crypto space is the market’s volatility. A high season is followed by a low season, and so on. So, if you are a beginner, you’re more likely to have only one asset or have your focus on one single cryptocurrency. As a result, the performance of your single asset depends on the market sentiment and constant rise and fall due to the developer and the community around your asset.

However, having more than one crypto asset (that is, creating a portfolio) is beneficial because an increase in the price of one cryptocurrency does not always imply an increase in the price of others; similarly, a decrease in the price of one crypto asset does not mean a decrease in the price of others. This means that a difference in the price of one asset has little effect on your invested capital.

So, if you put $1000 into a single asset, say bitcoin, and the price of bitcoin falls since you bought it, your capital will fall. However, if you invest the same $1000 in five different assets (Bitcoin, Ethereum, Solana, Doge, and Binance coin), you can avoid a sharp drop in your capital because a drop in one asset does not always mean a drop in the others.

This means that a rise in the value of one asset will compensate for a drop in the value of another asset, ensuring that your capital remains stable.

Cryptocurrency investing is similar to investing in any other traditional asset class. As a result, having a framework to evaluate potential investments is critical if you want your digital currency investments to succeed. In addition, having a cryptocurrency portfolio is essential for successfully diversifying your investment and tracking its growth over time.

So, how do you begin with a crypto portfolio? How do you determine which assets to include in your portfolio? Don’t be concerned if this appears to be a lot; we’ve broken it down into simple, easy-to-understand bits so you can start your investment journey with your portfolio.

What is a Crypto Portfolio?

A cryptocurrency portfolio is a collection of coins that you own. Portfolios typically include various assets, including altcoins and crypto financial products. By combining and diversifying your cryptocurrency and token investments, you hope to improve your risk-adjusted returns. However, the value of your portfolio is entirely determined by the current market price of all the cryptocurrencies you own.

Conversely, if you’re new to cryptocurrency investing, you are more likely to start with just one asset in your portfolio, notably Bitcoin. But as you start investing in more cryptocurrencies, gather more information, and monitor crypto projects, your portfolio will become more diverse.

Diversifying your assets allows you to lower your risks while increasing your potential profits by spreading your money across various assets. In fact, diversification is you spreading your risk across your asset, lowering your chances of losing everything, and keeping your emotions in check. Its main goal is to reduce the possibility of total capital loss. This is a reasonably standard risk management strategy.

Risks to Consider when Building a Portfolio (Investment Objective)

Risk Management With Your Balanced Crypto Portfolio

An essential aspect of having a well-balanced crypto portfolio is knowing how long the financial return will last and the risk involved. Building a portfolio is similar to managing a project at work. Each phase of the project must have a distinct goal. Ideally, with having a balanced portfolio, you should always aim for the long-term duration with a low-risk appetite.

However, there are three risk levels to consider:

Low Risk

Low risk and good long-term growth prospects. Bitcoin and Ethereum are unarguably good picks in this category.

Most assets in the top 10 are considered low risk because of their market capitalization. Also, stablecoin is an example of a low-risk objective, as they are critical to preserving capital.

Therefore, they are essential in the portfolio to take advantage of the market when the need arises.

Medium Risk

They have an interesting risk-reward balance because they are not yet in the top 10 and thus have room to grow, but they are also developed enough to avoid becoming irrelevant.

This category includes protocols that provide infrastructure services to blockchain networks and alternative layer 1 smart contract platforms.

High Risk

This category always promises the highest risk-reward balance as your hopes of generating exponential returns of 10 to 100 times your initial investment.

This is a broad category, given many cryptocurrencies are available today. Investigating and discovering the best opportunities by market niche is an excellent way to navigate this nearly infinite universe.

Different Cryptocurrencies for your Portfolio:

There are a variety of assets in which you could put your money, and it is essential to know the kind of cryptocurrency and its core importance.

Cryptocurrency for Payment

In its first usage, blockchain technology was used to create Bitcoin as a new type of currency that people can use for peer-to-peer transactions and payments. Bitcoin, Litecoin, and Ripple are examples of so-called first-generation currencies with the ultimate goal of facilitating payments between people.

Before Ethereum and smart contracts, these coins were the first generation of cryptocurrencies.

Stablecoin

Stablecoins are cryptocurrencies whose prices are tied to an underlying external asset, such as fiat currency like USD or gold. These cryptocurrencies are intended to reduce volatility and increase market stability.

Adding stablecoins to your portfolio will not result in significant returns, but it will help protect you from large losses during market downturns.

Because the cryptocurrency market is volatile, having something that holds its value in your portfolio is beneficial. For example, to protect your earnings, you can quickly transfer tokens out of a currency into a dollar-backed stablecoin like USDT or BUSD. While stablecoins do not always provide high returns, they deliver on their promise of stability.

Utility Tokens

As the name implies, these tokens have some utility and can be used within specific ecosystems.

For example, you could use them to pay for a service on a specific platform or cover transaction fees on cryptocurrency exchanges. BNB and ETH, for example, are both utility tokens. In addition, you can use them to pay transaction fees when interacting with decentralized applications, among other things (DApps).

Security Token

Security tokens are digital assets that represent ownership interests in a blockchain project.

For example, these tokens represent equity in a company, voting rights, and corporate bonds by digitally validating ownership rights. As a result, security tokens fall under the jurisdiction of local regulators and must go through a legal process before being issued.

Governance Token

Governance tokens are intended to secure your voting rights on blockchains while also generating revenue from the platform in some cases. They are most commonly used in various DeFi projects and DAOs.

Their true worth is determined and directly related to the overall success of the underlying project for which they are issued. These tokens are likely to be found on decentralized finance (DeFi) platforms such as PancakeSwap, Uniswap, or SushiSwap.

Ways to Manage your Crypto Portfolio:

Dollar-Cost Averaging

Dollar-cost averaging (DCA) is a strategy for reducing the impact of volatility on your overall investment by dividing your investments into fixed periodic investments. Because DCA is a long-term investment strategy, the low effect of volatility and price averaging allows your cryptocurrency portfolio to grow more positively and sustainably over time.

As a result, it is considered a low-risk method of managing your portfolio. For example, if your yearly goal is to invest $1,500 in Bitcoin, you would make a monthly contribution of around $125. The market’s volatility is not taken into account. In a bearish market, DCA can be a good investment strategy.

Portfolio Tracker

A portfolio tracker is an application that allows you to track the price changes of the assets in your portfolio. They enable you to keep track of your investments and track your progress. You can track your progress and see how your current allocation compares to your long-term goals.

Here is a list of the most popular and effective trackers available;

  1. CoinMarketCap: CoinMarketCap is a well-known price tracker that has its portfolio feature. You can use it on both desktop and mobile devices, and you can add the cryptocurrencies you buy and the exact prices and amounts.
  2. FTX: It allows you to see profit and loss for your portfolio held on other exchanges and track prices for over 10,000 cryptocurrencies simultaneously. Furthermore, FTX enables you to trade when managing your portfolio. However, because it is only available on mobile, it does not provide the same desktop crypto trading experience.
  3. CoinGecko is another popular data aggregator well-known for its cryptocurrency price tracking. It includes a cryptocurrency portfolio tracker and provides real-time data on the prices of currencies. In addition, it has desktop and mobile versions and price alerts and widgets that are useful.

Strategic Exit Plan

When you make the right decision about an asset and your trades are profitable, the feeling of having made the right decision can be overwhelming. At this point, knowing when to slow down is critical; as the saying goes, all good things must come to an end. This means that nothing lasts forever, and everything and everyone are transient.

Yes, planning your exit strategy before entering the market can be a compelling investment and portfolio management strategy. When a trade is executed successfully and profits are booked, investors feel good, happy, and motivated about their decisions.

However, the lack of an exit strategy frequently leads to holding your positions for an extended period, which can mean incurring losses. Situations like this can be detrimental to your crypto portfolio management.

Final Takeaway

The crypto market is rapidly expanding while still having a small-capitalization speaks high of the investment potential. However, it is critical to have a solid plan for how much money you want to invest and in which assets. The old adage about not putting all of your eggs in one basket applies to having a crypto portfolio. You don’t want to lose all of your eggs if the basket falls.

Another good strategy to consider for long-term growth and stability is balancing and diversifying your crypto portfolio.

Crypto portfolio trackers can be used to keep track of the daily value, volume, and market capitalization of assets in your portfolio. If you don’t want to invest all of your money at once, you can gradually use dollar-cost averaging to build your portfolio. Nonetheless, you must conduct research by reading up on the fundamentals of a cryptocurrency’s native token and keeping up with the updates.

WHAT’S MORE?

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