Résumé
Balancing a cryptocurrency portfolio is not that different from balancing a traditional stock portfolio. You can easily reduce your overall risk based on your investment profile and strategy. To get started, all you need to do is diversify your investments between different cryptocurrencies.
The extent of diversification is open to debate, as there are pros and cons on both sides. However, it is generally accepted that some diversification is beneficial. You can reduce the risk of your investments by holding different cryptocurrencies (including stablecoins) and ensuring you rebalance your asset allocation regularly.
To make managing your portfolio easier, you can use a third-party portfolio tracker or manually record your transactions on a spreadsheet. Some tracking tools can be linked to your personal wallets and cryptocurrency exchanges, making the process more convenient.
Introduction
To start investing in cryptocurrencies, all you need to do is buy your first bitcoins (BTC), Ethers (ETH) or any other cryptocurrency. Although some investors prefer to buy and hold the largest cryptocurrencies, others choose to experiment with altcoins. But what is the best way to do it? You are more likely to succeed by thinking carefully about your asset allocation and balancing your cryptocurrency portfolio regularly. Depending on your risk tolerance, there are several ways to do this. Balancing your portfolio isn't difficult, and the results can literally pay off for you.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a collection of cryptocurrencies held by an investor or trader. Wallets typically contain different assets, including altcoins and cryptocurrency financial products. It's quite similar to a traditional investment portfolio, except you stick to a single asset class. You can track your cryptocurrency portfolio manually using a spreadsheet or use specialized tools and software to calculate the value of your funds and earnings. A good portfolio tracker can come in handy. Tracking tools are essential for day traders and other short-term traders, but they also provide value for long-term investors and HODLers.
What is asset allocation and diversification?
When creating an investment portfolio, you need to fully understand the concepts of asset allocation and diversification. Asset allocation refers to investing in different asset classes (e.g. cryptocurrencies, stocks, bonds, precious metals, cash, etc.). Diversification refers to the distribution of your investment funds among different assets or sectors. For example, you can diversify your stocks by investing in different sectors, such as agriculture, technology, energy and healthcare. Both of these strategies reduce your overall risk.
Technically, cryptocurrencies are a unique asset class. But in a cryptocurrency portfolio, you can diversify across products, currencies, and tokens that all have different purposes and use cases. For example, you could split your portfolio as follows: 40% Bitcoin, 30% stablecoins, 15% NFTs, and 15% altcoins. To learn more, see Asset Allocation and Diversification Explained.
Concentrated or diversified cryptocurrency portfolios
Most people will tell you that your cryptocurrency portfolio should be diversified. Although it is a standard for investors, there are pros and cons to spreading your capital across different assets. As we've already mentioned, a diversified portfolio reduces overall risk and volatility. Losses can be offset by gains and keep your position stable. Your portfolio also has more opportunities to make gains with each currency you own. Not all investments are winners, but with proper asset allocation and diversification, you are more likely to achieve long-term gains.
However, the more diversified your portfolio, the more it will follow the market as a whole. Most traders and investors seek to beat the market by making bigger gains. A highly diversified portfolio will produce higher average returns than a well-performing concentrated portfolio. The less performing assets will balance with the better performing ones.
Managing a diversified portfolio also requires more time and research. To invest healthily, you must understand what you are buying. With a large portfolio, the chances of understanding everything well decrease. If your wallet is spread across different blockchains, you may also need to use multiple wallets and exchanges to access your assets. The decision whether or not to diversify is yours, but some diversification is always recommended.
The different types of cryptocurrencies
Bitcoin is the most famous cryptocurrency and the largest in terms of capitalization. But a well-balanced portfolio will include a selection of different currencies to reduce overall risk. Let's review these.
Payment currencies
Today, it is difficult to find new currencies whose purpose is to be used to make payments. But if you go back to the birth of cryptocurrencies, most projects were value transfer systems. Bitcoin is the most well-known example, but we also have Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC), among others. These currencies are the first generation of cryptocurrencies that existed before Ethereum and the introduction of smart contracts.
Stablecoins
A stablecoin attempts to replicate an underlying asset, such as a fiat currency or precious metal. BUSD, for example, tracks the value of the US dollar through reserves with a 1:1 ratio to BUSD in circulation. PAX Gold (PAXG) uses the same system but ties the currency to the price of a troy ounce of fine gold held in reserve. Although stablecoins do not necessarily provide great returns, they remain stable, as their name suggests.
The cryptocurrency market is volatile, so having something in your wallet that holds its value is helpful. If the stablecoin is linked to something outside the crypto ecosystem, a decline in the crypto market should not affect it. If you want to exit a position linked to a project or token, you can easily exchange it for a dollar-backed stablecoin, such as BUSD, to preserve your gains. Converting to fiat is a much longer process than exchanging for stablecoins.
Tokens financiers
Just like traditional securities, a financial token can represent many things. These can be shares in a company, bonds issued by a project or even voting rights. Securities have effectively been digitized and placed on the blockchain, meaning they fall under mostly the same regulations. For this reason, financial tokens are under the jurisdiction of local regulators and must undergo a legal process before issuance.
Utility tokens
A utility token serves as a key to a service or product. For example, BNB and ETH are both utility tokens. You can, among other things, use them to pay transaction fees when you interact with decentralized applications (DApps). Many projects issue their own utility tokens to raise funds as part of a token offering. The value of the token should theoretically have a direct link with the value of its utility.
Governance tokens
By holding a governance token, you can receive voting rights on a project and even a share of the revenue. You will most likely find these tokens on decentralized finance (DeFi) platforms like PancakeSwap, Uniswap or SushiSwap. As with utility tokens, the value of a governance token is directly linked to the success of the underlying project.
Crypto financial products
A portfolio should not just consist of holding different currencies. Crypto financial products can also help diversify your portfolio even further. Think of it a bit like investing in government bonds, ETFs or mutual funds rather than just holding stocks. There is a massive amount of products you can invest in across different blockchains and DApps.
If you are new to this, Binance offers a variety of financial products. To view them, log in to your Binance account and navigate to the [Finance] section. All of these products have different levels of risk. So make sure you understand their operating mechanisms before taking risks.
How to build a balanced crypto portfolio
Every investor or trader will have their own ideas on what constitutes a balanced crypto portfolio. But there are some general rules to consider:
1. Split your portfolio between high, medium and low risk investments and assign them appropriate weightings. A portfolio containing a large portion of high-risk investments is certainly not balanced. It may have the chance to offer you bigger gains but can also result in huge losses. Your risk profile will determine what is best for you, but there should be some mix.
2. Consider holding a few stablecoins to help add liquidity to your portfolio. Stablecoins are key to many DeFi platforms and can help you quickly and easily lock in gains or exit a position.
3. Rebalance your portfolio if necessary. The cryptocurrency market is very volatile and your decisions must change depending on the situation.
4. Allocate new capital strategically to avoid overweighting one sector in your portfolio. If you've made big gains with a currency recently, it may be tempting to pump in more money. Don't let greed take over, and think about the best place to put your money.
5. Do your own research. You really can't do better than this classic advice. You're investing your own money, so don't rely solely on the advice of others. For tips on how to spot potential scams, check out 5 Classic Crypto Scams and How to Avoid Them.
6. Only trade capital you can afford to lose. Your portfolio is not properly balanced if you feel stressed about it. Your positions should not cause you serious consequences in case things go wrong.
Crypto portfolio tracker
A portfolio tracker is a program or service that allows you to track the movements of your assets. You can see how your current allocation stacks up against your long-term goals and track your progress. Here are some examples you can consider:
CoinMarketCap
CoinMarketCap is an extremely popular price tracking tool that has developed its own portfolio tracking feature. The portfolio tracker is available free for computers and mobile devices. To use wallet tracking, you must add your funds manually, as it does not connect to your wallet or exchange. It is also possible to add the prices you purchased at to track your winnings accurately.
CoinGecko
CoinGecko is primarily known for its cryptocurrency price tracking, but it also has a portfolio tracking option. It is free to use and available on your browser or mobile device. If you already use CoinGecko regularly, the follow-up is worth it.
Blockfolio
If you want the ability to trade while managing your portfolio, Blockfolio is a good option. The company has been around since 2014 and is well known in the crypto space. However, their solution only exists for mobile devices, so it does not offer the same cryptocurrency trading experience as on desktop.
Delta
Delta is a mobile application that allows you to simultaneously view your cryptocurrency portfolio and your traditional investments. It can connect to 20 exchanges and a variety of wallets, including Binance. There is a free version and a paid version, but it is not possible to trade from the app.
To conclude
Much of the cryptocurrency market depends on the health of Bitcoin. But that's no reason not to balance your portfolio. Diverse crypto investments can offset some of the losses that occur during a Bitcoin crash, so it always helps to apply some diversification. Remember that balancing your portfolio doesn't just mean owning multiple currencies. A little strategy will go a long way in creating a portfolio that fits your risk tolerance.