SUMMARY
Balancing a crypto portfolio is not much different from balancing a traditional portfolio. It's easy to reduce your overall risk based on your investment profile and strategy. All you need to get started is to diversify your investments between different cryptocurrencies.
The degree of diversification is subject to debate, since there are pros and cons in one direction or the other. However, it is widely accepted that some diversification is beneficial. One can reduce the risk of their investments by holding different cryptoassets (including stablecoins), and making sure to rebalance the asset allocation regularly.
To make your portfolio management easier, you can use external portfolio trackers, or manually record your transactions in a spreadsheet. Some trackers can link to your personal wallets and cryptocurrency exchanges, making the process more convenient.
Introduction
Taking your first steps into cryptocurrency investing is as easy as buying your first bitcoin (BTC), ether (ETH), or any cryptocurrency. While some investors prefer to buy and hold major cryptocurrencies, others choose to experiment with altcoins. But what is the best way to do it? You are more likely to be successful if you carefully study your asset allocation and balance your cryptocurrency portfolio regularly. Depending on your risk tolerance, there are several ways to do this. Balancing your portfolio is not difficult, and the results can more than make up for it.
What is a cryptocurrency portfolio?
A crypto portfolio is a collection of cryptocurrencies, owned by an investor or trader. Portfolios typically contain a set of different assets, including altcoins and crypto-financial products. This is quite similar to a traditional investment portfolio, except for the fact that you are limited to a single asset class. You can monitor your cryptocurrency portfolio manually with a spreadsheet, or use specialized tools and software to calculate your funds and profits. A good portfolio tracker can be very useful. Trackers are essential for day traders and other short-term traders, but are also valuable for long-term investors and HODLers.
What is asset allocation and diversification?
When creating an investment portfolio, you should be familiar with the concepts "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 between different assets or sectors. For example, you could diversify your stock portfolio by investing in different industries, such as agriculture, technology, energy and healthcare. Both strategies reduce your overall risk.
Technically, cryptocurrencies constitute a single asset category. But in a cryptocurrency portfolio, one can diversify among different products, coins and tokens that present different objectives and use cases. For example, you could allocate 40% to your portfolio in bitcoin, 30% in stablecoins, 15% in NFTs, and 15% in altcoins.
Concentrated Portfolios vs. diversified portfolios
Most advice will be along the lines that your portfolio should be diversified. Although it is a standard for investors, distributing your capital between different assets has pros and cons. As we have already mentioned before, a diversified portfolio reduces overall risk and volatility. Losses can be offset by profits, thus keeping your position stable. Your portfolio will have more opportunities to make profits with each coin you own. Not every investment will be a winner, but with proper asset allocation and diversification, you are more likely to reap benefits in the long term.
However, the more diversified your portfolio is, the more closely it will emulate the overall market. Most traders and investors try to beat the market by making bigger profits. A highly diversified portfolio will lead to greater average returns than a successful concentrated portfolio. Poorer-performing assets can offset the big winners.
Managing a diversified portfolio also requires more time and research. To invest responsibly, you should understand what you are buying. With a large portfolio, the chances of understanding everything correctly decrease. If your portfolio spans different blockchains, you may need to use multiple wallets and exchanges to access your assets. The decision to diversify or not is yours, but some degree of diversification is always recommended.
Different types of cryptocurrencies
Bitcoin is the most famous cryptocurrency and the largest by market capitalization. But a well-balanced portfolio will include a selection of different currencies to reduce overall risk. Let's then review some of them.
Payment currencies
Nowadays, it is difficult to find new currencies that primarily deal with payments. But if we go back to the birth of cryptocurrencies, most projects were systems for the transfer of value. Bitcoin is the best-known example, but we also have Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC), among others. These coins were the first generation of cryptocurrencies that appeared before Ethereum and the introduction of smart contracts.
Stablecoins
A stablecoin tries to replicate the value of an underlying asset, such as a fiat currency or precious metal. BUSD, for example, is anchored to the US dollar by reserves at a 1:1 ratio. PAX Gold (PAXG) uses the same system, but ties the currency to the price of one troy ounce of fine gold held in reserves. Although stablecoins don't necessarily offer great returns, they live up to their name and provide stability.
The cryptocurrency market is volatile, so having something in your portfolio that preserves its value is helpful. If the stablecoin is anchored to something external to the crypto ecosystem, a drop in the cryptocurrency market should not affect it. If you want to withdraw funds from a coin or project, you can quickly transfer them to a dollar-backed stablecoin like BUSD to safeguard your profits. Converting funds to fiat is a much longer process than exchanging them for a stablecoin.
Security tokens
As with traditional securities, a security token can represent many things. They could be shares in a company, a bond issued by a project, or even voting rights. The securities have effectively been digitized and placed on the blockchain, meaning they are largely subject to the same regulations. For this reason, security tokens are immersed in the jurisdictions of local regulators and must go through a legal process before issuance.
Utility tokens
A utility token acts as a key element of a service or product. For example, BNB and ETH are both utility tokens. Among other things, you can use it to pay transaction fees when interacting with decentralized applications (DApps). Many projects issue their own utility tokens to raise funds in a "coin offering." The value of the token should theoretically present a direct link to its useful value.
Government Tokens
As a governance token holder, you will receive voting power in a project and even a share of the revenue. You will most likely come across these tokens on decentralized finance (DeFi) platforms such as PancakeSwap, Uniswap or SushiSwap. As with utility tokens, the value of a governance token is directly tied to the success of the underlying project.
Crypto-financial products
A portfolio not only involves "holding" different currencies. Crypto-financial products can also help diversify your portfolio even further. You can think of it as investing in government bonds, ETFs, or mutual funds, instead of just holding stocks. There is a huge number of products you can invest in, across different blockchains and DApps.
How to create a well-balanced crypto portfolio
Each investor or trader will have their own ideas regarding what makes up a well-balanced portfolio. However, there are some general rules worth keeping in mind:
1. Divide your portfolio between high, medium and low risk investments, and establish appropriate weights. A portfolio containing a large proportion of high-risk investments will definitely not be balanced. Since it will have the possibility of offering you greater profits, but it could also cause you large losses. Your risk profile will determine what is best for you, although there should be some degree of mix.
2. Consider holding some stablecoins to help provide liquidity to your portfolio. Stablecoins are the key element of many DeFi platforms, and can help you quickly and easily make profits or close a position.
3. Rebalance your portfolio if necessary. The crypto market is very volatile, and your decisions should change based on the current situation.
4. Allocate new capital strategically to avoid overweighting one area of your portfolio. If you've recently generated big profits from a coin, it may be tempting to pump in more money. Don't let greed get in the way, and think about the best place to put your money.
5. Conduct your own research. You really can't beat this classic advice. You are going to invest your own money, so don't rely solely on the advice of others.
6. Invest only those you are willing to lose. If your portfolio causes you stress, that means it is not properly balanced. Your positions should not lead to serious consequences if things go horribly wrong.
Cryptocurrency Portfolio Trackers
A portfolio tracker is a program or service that allows you to monitor the movements of your funds. You will be able to see how your current positions behave in relation to your long-term goals, and monitor your progress. These are some examples that may interest you:
CoinMarketCap
CoinMarketCap is a hugely popular price tracker that has developed its own portfolio feature. The portfolio tracker is available free for desktop and mobile devices. To use the portfolio tracker, you will have to manually add your funds as it does not connect to your wallet or exchange. There is also the option to add purchase prices to monitor your profits accurately.
CoinGecko
CoinGecko is primarily known for its cryptocurrency price monitoring, but it also has a portfolio option. It is free to use and is available in your browser or mobile device. If you are already a regular CoinGecko user, it is worth trying their tracker as well.
Block folio
If you want to be able to trade while managing your portfolio, Blockfolio is a good option. The company was launched in 2014 and is well known in the crypto sector. However, it only works for mobile devices, so it doesn't offer the same desktop cryptocurrency trading experience.
Delta
Delta is a mobile application that allows you to view your cryptocurrency portfolio and traditional investments simultaneously. It can connect with 20 exchanges and a variety of wallets, including Binance. There is both a free and paid version, but it is not possible to trade within the app.
In conclusion
Much of the cryptocurrency market depends on the health of Bitcoin. But that's not a reason not to balance your portfolio. A variety of crypto investments can offset losses from a Bitcoin crash, so it always pays to have some diversification. Remember, balancing your portfolio is much more than simply “holding” multiple currencies. A little strategy will go a long way toward creating a portfolio suited to your risk tolerance.