Brief content
Balancing a cryptocurrency portfolio is similar to balancing a traditional portfolio. You can easily reduce your overall risk according to your profile and investment strategy. All it takes to get started is to simply diversify your investments between different cryptocurrencies.
The extent of your diversification is debatable, as both sides have their pros and cons. However, it is generally accepted that some diversification is beneficial. You can reduce the risk of your investment by holding various cryptoassets (including stablecoins) and rebalancing your asset allocation regularly.
To simplify your portfolio management, you can use a third-party portfolio tracker or manually record your transactions in a spreadsheet. Some trackers can be tied to your personal wallets and cryptocurrency exchanges, which will make the process more convenient.
Introduction
Getting started investing in cryptocurrency is as easy as buying your first Bitcoin (BTC), Ether (ETH) or any other cryptocurrency. While some investors prefer to buy and hold the biggest cryptocurrencies, others prefer to experiment with altcoins. But what is the best way to do this? You have a better chance of success if you carefully consider your asset allocation and rebalance your crypto portfolio regularly. Depending on your risk tolerance, there are several ways to do this. Balancing your portfolio is easy, and the results can literally pay off.
What is a crypto portfolio?
A crypto portfolio is a collection of cryptocurrencies owned by an investor or trader. Portfolios usually contain many different assets, including altcoins and crypto-financial products. It's very similar to a traditional investment portfolio, except you stick to one asset class. You can track your crypto portfolio manually with a spreadsheet or use specialized tools and software to calculate your holdings and profits. A good portfolio tracker can come in handy. Trackers are essential for day traders and other short-term traders, but they also represent value for long-term investors and holders.
What is asset allocation and diversification?
When creating an investment portfolio, you should be familiar with the concepts of asset allocation and diversification. Asset allocation refers to investing in different asset classes (eg, cryptocurrencies, stocks, bonds, precious metals, cash, etc.). Diversification refers to spreading your investment funds across different assets or sectors. For example, you can diversify your holdings by investing in different industries such as agriculture, technology, energy and healthcare. Both of these strategies reduce overall risk.
Technically, cryptocurrencies are a single asset class. But in a cryptocurrency portfolio, you can diversify into products, coins, and tokens that represent different purposes and uses. For example, you can allocate 40% Bitcoin, 30% stablecoins, 15% NFTs and 15% altcoins to your portfolio. For further study of the topic, read the article Explanation of asset allocation and diversification.
Concentrated and diversified crypto portfolios
The opinion that the crypto portfolio should be diversified is the most common. While this is the standard for investors, there are pros and cons to allocating your capital across different assets. As we mentioned, a diversified portfolio reduces overall risk and volatility. Losses can be compensated with profit and maintain the stability of your position. Your portfolio also has more opportunities to profit from each of your coins. Not all investments will be profitable, but with proper asset allocation and diversification, you have a better chance of profiting in the long run.
However, the more diversified your portfolio is, the more accurately it will track the market as a whole. Most traders and investors strive to overcome the laws of the market and achieve great profits. A highly diversified portfolio will produce higher average returns than a successful concentrated portfolio. Usually, high performance is balanced by less efficient assets.
Managing a diversified portfolio also requires more time and research. To invest wisely, you must understand what you are buying. The larger the portfolio, the more difficult it is to understand its work. If your portfolio consists of different blockchains, you may also need to use multiple wallets and exchanges to access your assets. Whether or not to diversify is up to you, but some diversification is always recommended.
Different types of cryptocurrencies
Bitcoin is the most famous cryptocurrency with the largest market capitalization. But a well-balanced portfolio will include a mix of different coins to reduce overall risk. Let's go through some of them.
Payment coins
Currently, it is difficult to find new coins that are mainly related to payments. But if you go back to the emergence of cryptocurrencies, most of the projects were value transfer systems. Bitcoin is the most famous example, but we also have Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC), etc. These coins are the first generation of cryptocurrencies that existed before Ethereum and the advent of smart contracts.
Stablecoins
A stablecoin attempts to track an underlying asset such as a fiat currency or a precious metal. BUSD, for example, is pegged to the US dollar at a ratio of 1:1. PAX Gold (PAXG) uses the same system, but pegs the coin to the price of one troy ounce of gold held in reserves. Although stablecoins do not necessarily bring a lot of profit, they live up to their name and provide stability.
The cryptocurrency market is volatile, so it's good to have something in your portfolio that retains its value. If a stablecoin is tied to an asset outside the crypto-ecosystem, a fall in the cryptocurrency market should not affect it. If you want to withdraw tokens from a coin or project, you can quickly transfer them to a dollar-backed stablecoin such as BUSD to protect your profits. Converting to fiat is a much longer process than trading a stablecoin.
Security tokens
As with traditional securities, a security token can represent many things. This can be the company's equity capital, a bond issued by the project, or even voting rights. The securities have effectively been digitized and placed on the blockchain, meaning they are essentially subject to the same rules. For this reason, security tokens are under the jurisdiction of local regulators and must go through a legal process before being issued.
Utility tokens
A utility token acts as a key to a service or product. For example, BNB and ETH are utility tokens. Among other things, you can use them to pay transaction fees when interacting with decentralized applications (DApps). Many projects issue native utility tokens for fundraising during coin offerings. Theoretically, the value of the token should have a direct relationship with the value of its utility.
Management tokens
By holding the control token, you can get voting rights in the project and even a share of the revenue. You will most likely find these tokens on decentralized finance (DeFi) platforms such as PancakeSwap, Uniswap, or SushiSwap. Like utility tokens, the value of the management token is directly related to the success of the underlying project.
Financial crypto products
The portfolio does not necessarily have to consist only of different coins. Financial crypto products can also help further diversify your portfolio. Think of it like investing in government bonds, ETFs, or mutual funds, not just like owning stocks. There are a huge number of products that you can invest in through various blockchains and DApps.
If you are new to the topic, Binance offers a variety of financial products. To check them, log into your Binance account and go to the [Finances] section. All of these products have different levels of risk, so make sure you understand how they work before taking the risk.
How to create a balanced crypto portfolio
Every investor or trader will have their own ideas about what a well-balanced crypto portfolio should look like. But there are some general rules to consider:
1. Divide your portfolio into high-, medium-, and low-risk investments and assign them appropriate weights. A portfolio that contains a large portion of high-risk investments is definitely not balanced. This can bring you great profits, but it can also lead to huge losses. Your risk profile will help you understand what works best for you, but it's always better to create some diversity in your portfolio.
2. Consider holding stablecoins to ensure liquidity in your portfolio. Stablecoins are key to many DeFi platforms and can help you lock in profits or exit positions quickly and easily.
3. If necessary, change the balance of your portfolio. The cryptocurrency market is very volatile and your decisions should change depending on the current situation.
4. Allocate new capital strategically to avoid overloading any one area of your portfolio. If you have recently made a bigger profit on a single coin, you may be tempted to invest more money. Don't let greed get in the way and think about where you should invest your money.
5. Do your own research. You really can't ignore this classic tip. You are investing your own money, so don't rely solely on the advice of others. For tips on spotting potential scams, please see 5 Common Cryptocurrency Scams and How to Avoid Them.
6. Invest only what you can afford to lose. Your portfolio is not balanced properly if you are stressed about it. Your positions should not cause you serious consequences if things go wrong.
Crypto portfolio trackers
A portfolio tracker is an application or service that allows you to track the movement of your assets. This allows you to understand how your current allocation relates to your long-term goals and helps you track your progress. Here are some examples you can consider:
CoinMarketCap
CoinMarketCap is an extremely popular price tracker that has its own portfolio feature. Portfolio Tracker is available for free on desktop and mobile devices. To use the portfolio tracker, you need to add your assets manually as it cannot connect to your wallet or exchange account. There is also the option to add asset purchase prices to accurately track your profits.
CoinGecko
The CoinGecko tracker is known as a cryptocurrency price tracker, but it also provides portfolio tracking. It's free to use and available in your browser or on your mobile device. If you are already a regular user of CoinGecko, the tracker is also worth a try.
Block folio
If you need to trade and manage your portfolio at the same time, Blockfolio is a great option. The company has been around since 2014 and is well known in the crypto space. However, the tracker is mobile-only, so it doesn't offer the same cryptocurrency trading experience on desktop computers.
Delta
Delta is a mobile application that allows you to simultaneously view your crypto portfolio and traditional investments. It can connect to 20 exchanges and various wallets, including Binance. There is both a free and a paid version, but you cannot make in-app purchases.
Final thoughts
The cryptocurrency market largely depends on the state of Bitcoin. But this is no reason not to balance your portfolio. A variety of cryptocurrency investments can offset some of the losses associated with the Bitcoin crash, so it's always worth diversifying. Remember that balancing your portfolio is more than just storing a few coins. A well-thought-out strategy is an important tool in building a portfolio that matches your risk appetite.