How to Build and Manage a Smart Cryptocurrency Portfolio
Cryptocurrencies are a fairly new asset class that has disrupted the financial market in different ways. With bitcoin leading the way as the best performing asset of the decade, investors are rearranging their portfolios to include cryptocurrencies.
But it’s not all rosy with cryptocurrencies as the market is highly volatile and largely unregulated. If you want good results, you must do due diligence by building a smart cryptocurrency portfolio that can withstand the pressure of the market.
Here are a few steps to consider when building your cryptocurrency portfolio:
- Understand the basics of cryptocurrencies and blockchain technology
- In-depth research
- Risk management
- Diversify your portfolio
- Choose a proper weighting strategy
- Utilize order types
- Stay updated with crypto news
- Employ the use of an online cryptocurrency portfolio tracker
Read on to get a detailed understanding of these steps.
What is a Cryptocurrency Portfolio
A cryptocurrency portfolio is a collection of crypto assets investments owned by a person. This type of portfolio generally consists of bitcoin, altcoins, and other crypto products. They are somewhat like traditional financial portfolios but with only one asset class.
Most traders and investors utilise portfolio trackers to ensure they know the overall performance of their portfolios.
Why You Need to Build A Smart Cryptocurrency Portfolio
There are over 7,000 cryptocurrencies in the market and with their high volatility rate, it’s quite overwhelming when choosing the particular coins to include in your portfolio.
Implementing different strategies in your portfolio is one thing but managing it over time requires smart decision making especially with the increased innovations and unpredictability of the crypto market. To ensure you are set for long-term success, you’ll need to build a portfolio that aligns with your strategy and risk tolerance.
A major requirement for all crypto investors is a system for tracking the health of their investments to ensure they make timely decisions.
How to Build a Smart Cryptocurrency Portfolio
Although every investor has their own idea on how to build a smart cryptocurrency portfolio, these metrics are worth considering if your portfolio must be successful:
Understand the Basics of Cryptocurrencies and Blockchain Technology
No matter the size of your investment, it’s crucial to understand how cryptocurrencies and blockchain technology work.
Cryptocurrencies are still a new asset class and they function differently from traditional stocks. Take time to research and learn about other cryptocurrencies apart from the popular bitcoin, ether, and doge. Understand the value they offer and their distinction from other currencies in the market. Coinmarketcap and Coingecko provide insights on most cryptocurrencies in the market, their trading price, and historical trends.
Additionally, it’s necessary to understand blockchain technology and its related terms — wallets, private keys, public keys, DeFi, NFTs, etc. By knowing the basics of cryptocurrencies and blockchain technology, you’ll be able to make wise choices regarding the currencies to build your portfolio around.
In-depth Research
Every smart cryptocurrency portfolio is preceded by thorough research. Before including a currency in your portfolio, you should meticulously study its whitepaper as it contains everything there is to know about a cryptocurrency — the team behind it, the unique value it provides, tokenomics and roadmap.
Consider researching the members of the team — their past activities and how they engage with their community. Check to see the utility of the coin and what gives it value. If it doesn’t provide good utility then it may not hold its value long-term. Some teams may promise outrageous visions in their whitepaper stating a currency can solve all the problems in the crypto space. Be wary of such coins as the unregulated nature of cryptocurrencies makes it a subject for bad actors to conduct scams. Other coins with good utility may have poor technical features like the consensus model or hash algorithm it uses. Furthermore, research about the market presence and sentiments surrounding a coin before investing in it.
In essence, the success of your portfolio is as good as the research you made.
Risk Management
Your ability to manage risks will determine if your investment in cryptocurrencies will pay off. Although cryptocurrencies are generally risky investments, some currencies show low volatility compared to others. — large-cap coins usually have low volatility, mid-cap show medium volatility, while small-cap has high volatility.
The level of your risk tolerance will determine the type of currencies in your portfolio. A pointer to your risk tolerance level involves your age, psychology, financial goals, time available, etc. Your portfolio should be spread across high, medium, and low-risk assets to balance your risk to reward ratio.
Diversify Your Portfolio
Building your portfolio with just one or two cryptocurrencies is not ideal to achieve success. The crypto market is highly unstable especially in a bear market, hence leaving all your eggs in one basket can result in a huge loss.
A smart portfolio should be strategically distributed across currencies in the different market niches to ensure growth without much risk exposure.
The cryptocurrency market can be subdivided into five categories:
Payment currencies — Bitcoin, Dogecoin, Stellar, etc.
Infrastructure currencies — Ethereum, Solana, Polkadot, Cardano, etc.
Financial Ccurrencies — Aave, Compound, Augur, DYDX, etc.
Stable currencies — Tether, Dai, Binance USD, etc.
Service currencies — Chainlink, Filecoin, Siacoin, etc.
Media and Entertainment currencies — Basic attention token, FUNtoken, DMarket, etc.
Selecting from the different categories above enables your portfolio to consist of currencies that have a low correlation with each other. To further diversify your portfolio, you can include crypto assets like NFTs.
Choose a Proper Weighting Strategy
After choosing a list of currencies to invest in, you should consider the percentage of funds allocated to each of them. Most investors allocate funds evenly across all assets, others use market capitalization and trading volume. For example, a portfolio might be split into 50% high capped, 30% mid-cap, and 20% low cap.
When you make profits, consider allocating new capital strategically to avoid overweighting a part of your portfolio. Also, ensure to give a fair amount to stable coins to provide liquidity for your portfolio. This helps you to easily capitalise on new opportunities or exit positions.
Your weighting strategy should be revisited occasionally as changes occur in the market.
Utilize Order Types
Most crypto exchanges provide different order types to enable their users to have multiple options when making decisions. Effectively utilizing them will help mitigate the impact of a volatile market on your portfolio.
For example, using a stop-loss order helps you automatically sell an asset once it drops below a fixed price. While a limit order can automatically help you take profit.
However, these orders may not always work in your favour as most coins tend to move in an unpredictable manner. Understanding the different order types in an exchange and how they work is critical for both long and short-term success as you may not always have the time to frequently check on your portfolio.
Stay Updated With Crypto News
Real-time knowledge of all happenings in the crypto space is essential for quality decision making regarding your portfolio. In a market that’s partly driven by sentiments, it’s practically impossible to build a strong portfolio without being aware of the changes that occur daily. The crypto market has shifted a countless number of times due to positive or negative news with a popular example being the tweets of Elon Musk.
While having access to the latest news is very important, some news channels peddle fake or exaggerated information. Hence, using a news source like ……. for an unbiased and comprehensive insight of the market should be a top priority.
Employ the Use of an Online Cryptocurrency Portfolio Tracker
Lastly, every portfolio needs an online portfolio tracker to stay smart.
Your portfolio might consist of cryptocurrencies from several market sectors on different wallets and exchanges. Monitoring all these assets manually can be a challenging task as it will require you to login into different accounts and navigate several exchanges. You might miss out on several opportunities and even incur avoidable losses. To better manage your portfolio, a portfolio tracker is the final piece of your toolbox.
Cryptocurrency portfolio trackers are tools that help you know the overall performance of your crypto assets and how they align with your financial goals. With a portfolio tracker, you can monitor all your crypto assets from one platform, have access to real-time data and sync all your wallets and exchanges.
Additionally, a portfolio tracker shows the distribution of your assets across the crypto market and shifts that happen over time. This enables you to rebalance your portfolio if need be. Achee is a good example of a portfolio tracker that allows you to track cryptocurrencies and several other assets from one platform.
Conclusion
Building a smart cryptocurrency portfolio is necessary for every crypto investor. Using the metrics listed here, you’ll be at the top of your game, making smart decisions and acquiring more wins than losses.
