What's in Your Crypto Portfolio?
Building a Cryptocurrency Portfolio
Every crypto investor or crypto trader has opinions on how a well-balanced cryptocurrency portfolio should be allocated. Even with varying insights and bias, adhering to some general investment guidelines is good practice as it increases your probability of reaping the benefits of a high-performing portfolio. Building a cryptocurrency-based investment portfolio might seem intimidating, but following some basic principles can make the process much less daunting. No matter your crypto and blockchain expertise level, there's a solution for your crypto investment strategy. Let’s examine some aspects of vetting your portfolio strategy.
Do Your Research
It's not enough to know or even like a company’s token prospect because you read a Twitter thread about the next potential 50x opportunity, and a few famous people (or your buddies) are shilling it. It would help if you were confident that the company's value could increase over time. So how do you value a cryptocurrency company when most traditional finance metrics are inapplicable?
Price is a start, but you need to factor in token supply to figure out market capitalization. Pinning down price and supply will let you measure a particular project against other cryptocurrencies. Often, understanding market capitalization will allow you to realize it is unlikely that your new favorite coin will not reach $15.00 or rocket to a 76,000% gain.
The list of research metrics is extensive. Even so, some of the "proponents" will have you believe this is possible, which oddly would give this rocket ship token a 545 billion market cap. Next is understanding what the token supply entails, which could include token lock periods, distribution breakdown to holders, buybacks, etc.
Timing of the token disbursement and identification of the token structure (inflationary or deflationary) can allow the formation of an investment thesis to begin. Also, beware of that 387% annual staking return. It is impressive until you realize the company is releasing 5,000,000,000 more tokens just after your purchase, which will drive the price down by about 99.99%.
Conducting research alone can be extremely time intensive. Vetting a prospective token can take days to make sure due diligence is complete, and that bias has been mitigated. Subscribing to or following trusted research outlets, and joining discord or other web-based crypto communities, are prudent avenues to keep you informed of current trends.
Risk Tolerance
It is no secret that cryptocurrencies are volatile. By simply reviewing the past performance of the crypto market, one would find many crypto tokens that had short-lived success currently cease to exist. Those tokens were risky and likely provided some impressive gains to a few, while liquidating most. On the other hand, the returns from the stalwarts of space, such as Bitcoin (BTC) and Ethereum (ETH), seem to have less significant appreciation in the shorter time intervals, but they have provided impressive gains over the long haul. Add to the increased network adoption and user base within BTC and ETH ecosystems, and the two tokens might be the most risk-off play in the space. So if you are looking to make a profit in a relatively short time frame, your risk tolerance for new and flashy projects such as “alt coins” (possibly meme coins) will most likely increase along with the chance of liquidation. Looking for low-risk allocations will likely lead you to BTC and ETH, along with allocations to stablecoins to provide liquidity, reserves, and on-ramps and off-ramps when needed.
A Diversified Crypto Portfolio
Diversification is the act of exposing your portfolio to various assets to reduce your risk. While diversification lends itself to reduced risk tolerance, it's essential to understand the blockchain space as a whole and what investments in cryptocurrencies ultimately entail. For instance, if you were to purchase the Helium Token (HNT), this would be a play in the infrastructure sector of the blockchain space. On the other hand, investing in Doge is more of a pure speculation on future uses or a hype cycle. Allocating capital to multiple sectors is a good bet as the space will mature, and the use cases of particular tokens will begin to take center stage.
Diversification is best achieved through the following:
Increasing # of cryptocurrencies held
Exposing yourself to multiple sectors of the blockchain space
Investing in competing projects
For reference, here are two crypto portfolio examples:
Examining the chart just above we can see that there is quite a bit of diversification in this portfolio. This could be a strategy that pays in the end however this could be the case of too much diversification with your cryptocurrency portfolio. At some point, an investor will reach the number of invested tokens where the benefit of risk reduction from each new addition of a token is smaller than the increase in expected gains. Thus, there's no incremental benefit to adding a token. It would be better to sell or pair down lower-conviction ideas/trends and or replace them with tokens that are already allocated.
A Balanced Crypto Portfolio
Just as risk and diversification are intrinsically tied to building a cryptocurrency portfolio, rebalancing will play an equally important function in maintaining a well-performing portfolio. The blockchain space develops and evolves quickly since many cryptocurrency projects can pivot frequently.
One of the prominent examples is that of Luna. Many noteworthy investors held large allocations of this coin (now Terra Luna Classic LUNC) and were liquidated within 24-48 hours. Before the liquidation, this token was not deemed a meme coin or a super high risk (at least by most). If one had acted quickly enough during this event, the damage would have been minimal, and moving tokens into stablecoins would have mitigated significant losses.
There are also occurrences in the cryptocurrency market where we can observe one coin gaining more ground over another and may want to rebalance into this favorable position. Very few investments in cryptocurrency will allow you to buy in and hold for a long duration without either getting liquidated or losing out on other more profitable crypto investments. Finally, rebalancing can naturally occur through reinvestment of paid-out profits or rewards from particular cryptocurrencies.
Like traditional investments, you can often enact a DRIP, but consider moving those profits to stablecoins or other crypto investments that are on your radar.
Track Your Crypto Portfolio
Tracking your cryptocurrency portfolio can assist with performance goals when used in moderation. However, it can be a double-edged sword and cause an unhealthy obsession with monitoring it too frequently. There are many ways to monitor your holdings, with utilizing a crypto portfolio app being the most straightforward option. A crypto portfolio tracker requires an investor to manually input their holdings, and exchanges into the app.
The advantage of using an app is that it keeps you from interacting directly with your investments inside a platform or exchange, which is good practice as self-custodial and security are paramount within cryptocurrency investments. Holding assets on a cryptocurrency exchange often provides a decent snapshot of your assets and performance. The downside to utilizing an exchange as a tracker is that it requires you to log into the exchange when you may not want to. Also, the exchanges may only provide a partial snapshot of your holdings if your cryptocurrency investments are dispersed across multiple platforms and wallets.
Finally, you can always build your tracker from a Google Sheet or excel page that links to current prices. Tracking your assets in Google Sheets will also allow you to track all trades you have executed if you so choose to enter them. If you rebalance or trade often, tracking your performance of these moves is good practice to ensure you are not damaging your portfolio returns.
Utilizing a Crypto Portfolio Manager
Now that we have addressed the baseline nuances of building a crypto portfolio, the main takeaway from cryptocurrency investing is: do your research! Researching and assessing your capabilities and/or deficiencies of knowledge and bias is crucial. Being honest about your depth of knowledge regarding investments and strategies will generally keep you on track toward a successful investing career. In essence, know your limits.
While the blockchain space is exciting, it can be intimidating, and you can be in for quite an emotional rollercoaster ride. Self-custody and active management of your assets is only for some. If you're interested in being utterly hands-off with your portfolio management, you can outsource the task to a full-service investment portfolio manager. Utilizing managed expertise is a great solution to deleverage your risk of the unknown. Best of all, you can maintain the ability to verify that your investments are secure and transparent. Due to the time commitment to research cryptocurrency investments, it only makes sense that high-stakes decisions be left to seasoned professionals within the blockchain space. They can build a quality-managed cryptocurrency portfolio based on hundreds of hours of research, allowing you to invest your time in other avenues and endeavors of life.
