To be a successful cryptocurrency investor, you need to have a good cryptocurrency portfolio. Whatever your strategy, a good portfolio will minimize your risk exposure (in accordance with your risk appetite) and open up profit opportunities.
However, building a successful cryptocurrency portfolio is not easy, especially with the high volatility of the cryptocurrency market, and there is no way to guarantee this. In this article, we will show you how to build a cryptocurrency investment portfolio by diversifying in the most EFFECTIVE way, helping to minimize risks and increase your chances of having many potential investments.
How to build the best cryptocurrency portfolio
How to diversify your cryptocurrency portfolio
Cryptocurrency investing requires portfolio diversification. This helps minimize risks due to the volatility of the cryptocurrency market. However, there is no way to guarantee complete elimination of risk. Thorough research, project evaluation, and risk management are important for success in cryptocurrency investing.
To diversify your investment portfolio, your cryptocurrency allocation will depend on your capital size and personal investment goals. Here are the things you should keep in mind:
Allocate more funds to top crypto assets like Bitcoin and Ethereum, as they are typically less volatile in price.
When diversifying your portfolio, be careful with coins that are highly correlated with each other. This means that these coins tend to move in price together (e.g. same ecosystem, same sector). The goal is to allocate funds across different currencies to minimize risk. If all the coins in the portfolio move in the same direction, diversification becomes meaningless. In that case, it's best to just invest in a single coin.
Here are the best ways to help you diversify your investment portfolio:
Diversify by market capitalization
According to this criterion, cryptocurrencies can be divided into three main types:
Large Cap: These are cryptocurrencies with a market capitalization exceeding $10 billion. These digital assets are considered more stable than mid- and smaller-cap cryptocurrencies, due to their tendency to have lower price volatility. Examples for large-cap cryptocurrencies are Bitcoin and Ethereum.
Mid-cap: These are cryptocurrencies with a market capitalization between $1 billion and $10 billion. These digital assets typically have higher volatility than large-cap cryptocurrencies, but also offer higher growth potential.
Low capitalization: These are cryptocurrencies with a market capitalization of less than $1 billion and are highly volatile. They are often considered risky investments, as they have the potential for wild price fluctuations (however, they also offer the opportunity for high returns).
Diversify by use case
This diversification approach suggests that you should consider using different types of tokens in your portfolio. This requires you to consider Tokenomics before investing. Here are some use cases:
Store-of-value assets: These are assets that appreciate over time and do not lose value like fiat currency. For example, Bitcoin is considered a store of value because of its limited supply and halving event.
Payment money: Electronic currencies such as Bitcoin, Litecoin, Bitcoin Cash are mainly used to pay for transactions.
Stablecoin: This is a type of currency whose value is fixed or tied to fiat money such as USD or gold. Stablecoins can be a safe bet in bearish markets, as you can convert other assets to stablecoins.
Utility tokens: These are tokens on the smart contract blockchain, used as keys to a service or product. They can be used to pay transaction fees when interacting with decentralized applications (DApps) on the blockchain.
Security Token: Represents traditional securities such as stocks and bonds on the blockchain, subject to regulation by regulators.
Governance Token: Used to vote on the direction and development of the protocol. Governance token holders have the right to participate in project operating decisions.
In addition, there are other types of tokens such as NFTs (Non-fungible tokens) and privacy coins. Some coins can have multiple use cases, for example being both governance and utility tokens, which can also be used for staking and yield farming.
Diversify by industry/field
The underlying technology that cryptocurrencies use is blockchain, and Ethereum has taken this technology to the next level with the development of smart contracts. This allows for agreements to be made without the need for a third party and creates an environment favorable for building decentralized applications (dApps) on its platform. Blockchain has opened the gates for adoption in many different industries. For example, decentralized finance (DeFi) is a rapidly growing industry that relies on blockchain and eliminates dependence on third parties.
Besides Ethereum, there are many other blockchains that focus on security, scalability, and performance. Each of these blockchains has its own built-in protocol and may have its own native tokens. This creates diversification across industries and sectors, and if you invest in the industries that are at the forefront of the next cryptocurrency rally, you will have an advantage.
Here are some notable fields, industries, and trends that you can refer to:
DeFi: Decentralized Finance
DEX: Decentralized exchange
Web3, SocialFi, NFTfi...
Layer-1, Layer-2, Omnichain...
Gamefi, Metaverse, XtoEarn...
This shows the potential of blockchain technology for application in many different fields and opens up many diverse investment opportunities.
Things to keep in mind when building a quality cryptocurrency investment portfolio
Researching coins to invest in is an important part of building a cryptocurrency portfolio. Here are some suggestions and questions to sift through projects when looking for investment options:
Market tolerance: Is the coin able to withstand periods of continuous market decline?
Total market value: Calculate the total market value of the coin (total supply * current price) to see if there is an inflation risk as the project unlocks more coins in the future.
Motivation of the project team: Consider the project development team, do they have enough motivation to continue building the project? Observe social, public information, and the team's reaction to failure, as well as their roadmap.
Suitable for the next price increase: Is the project's story suitable for the next market price increase? Are there any special factors that can boost the value growth of that coin?
Position in the ecosystem: Does the coin have a leadership position in a particular field? Is there industry-leading recognition and positioning?
In development and use: Is the project being developed and applied in practice? Is there an increase in the use and adoption of the coin's technology?
Of course, more detailed research and evaluation needs to be done, including both technical and fundamental analysis.
Crypto portfolio example ($1,000 to $100,000)
Newbie Directory ($1000)
This is a safe cryptocurrency investment portfolio, slightly tilted towards BTC and ETH – the two leading cryptocurrencies in the market. It includes 3 large-cap coins (BTC, ETH, BNB), and 3 mid-cap coins (FIL, UNI, ATOM). There are no low-cap coins, as this category should limit the risk level.
Mid-range category ($10000)
Here, we will add two more projects to our STX and AR portfolio.
Premium Portfolio ($100,000)
This portfolio is a bit more aggressive with 50% in market leaders and further diversification into web3 gaming and social media.
summary
Combining building a cryptocurrency portfolio with a periodic buying strategy (Dollar-Cost Averaging - DCA) is a smart approach. DCA helps mitigate the risk of buying at the wrong time by allocating purchases of small or equal amounts of crypto assets periodically.
In addition, it is very important to stay up to date with the latest news and trends about coins and markets. The cryptocurrency market often fluctuates strongly and quickly, so updating information will help you better understand the projects you are investing in and be able to make decisions based on the latest information.
Finally, the most important thing is to always continue to appraise and evaluate a project thoroughly before deciding to invest. This ensures that you clearly understand the project, its potential and associated risks before making an investment decision.
Wishing you success in building your cryptocurrency investment portfolio and always achieving the results you aim for!
Synthetic Aliniex
