It’s often said that diversifying your crypto portfolio is the best approach. But what is a crypto portfolio?
Put simply, it describes a collection of cryptocurrency held by someone. Why is it believed that this collection should be as diverse as possible? Let’s take a look.
Diversifying a portfolio involves holding several different crypto assets to maximise profit and reduce risk. A well-diversified portfolio contains assets that perform differently, and can give the best possible returns.
Since the value of a cryptocurrencies fluctuates, many choose to spread their funds across a wide range of assets to minimise the loss that could happen during a market downturn.
Say the value of Bitcoin (BTC) declined by 50%, for example, the loss would be significantly worse for someone who only held BTC than for someone who held multiple cryptocurrencies.
A diversified crypto portfolio can allow people to take advantage of multiple tokens that are performing well, all at the same time.
Now that we understand why people diversify their crypto portfolios, the next question is how they do it.
The main factor to look at is the different types of cryptocurrencies out there. Here are a few examples:
- Store of value assets – Bitcoin (BTC)
- Payment coins – Bitcoin Cash (BCH), XRP (XRP) and Litecoin (LTC)
- Stablecoins – Dai (DAI), USD coin (USDC) and PAX Gold (PAXG)
- Smart contract tokens – Ethereum (ETH), Ada (ADA) and Chainlink (LINK)
- DeFi tokens – Aave (AAVE) and Compound (COMP)
- Governance tokens – Uniswap (UNI) and SushiSwap (SUSHI)
- Non-fungible tokens – Decentraland (MANA) and Chiliz ($CHZ)
When it comes to choosing cryptocurrencies, thorough research is essential. Some projects publish whitepapers or research reports to provide details on how the project works, the technology behind it and the problem it aims to solve. You can find out more about crypto whitepapers in this blog.
It’s also possible to diversify by industry. This involves looking into cryptocurrencies that provide usable solutions to certain industries. This can help reduce the negative effects on crypto, which are brought about by crypto-unfriendly regulations and events.
Diversifying across regions is also a popular approach, as it can help protect against regulatory risk, as well as give additional means of balancing out a portfolio, even during an uncertain market period.
Finally, there’s timing to consider. Simply put, this involves setting aside certain amounts of money at specific times. Many people choose to buy new cryptocurrencies when prices are low and then sell their assets when they increase.
Once a portfolio is diversified, it’s important to know how to manage it. Here are a few examples:
Dollar-cost averaging (DCA) – involves putting in equal sums of money at regular intervals, regardless of the asset’s price or what’s happening in the market.
Crypto portfolio trackers – a software that reads a wallet’s data and displays all the relevant information in a dashboard. This is particularly useful for those using several different wallets, platforms and exchanges.
Strategic exit plan – this involves leaving the crypto market after selling off assets and taking the maximum profit. Much like with entering the crypto market, many people develop a plan as to when it’s necessary to leave.
Next is the importance of risk management. In crypto, this is the ability to predict and control possible losses from an unsuccessful transaction. Here are some examples of developing a good risk management strategy:
Stop losses and take profit targets – stop losses limit potential losses in the event that a trade doesn’t perform well. On the other hand, determining a take profit target will lock in any earnings made if a trade goes your way.
Position sizing – the simple rule of not risking a full trading account on any one trade, as doing so will likely reduce the capital drastically if a single trade doesn’t work out favourably.
Risk/reward ratio – this helps to determine the return that can be made against the risk.
DISCLAIMER – this article is for educational purposes only and should not be taken as financial advice.
Now that 2022 is here, it’s the perfect time to check in on your crypto portfolio. What are your plans for the new year?
- Buy more BTC
- Buy more altcoins
- Buy more stablecoins
- All of the above