One word that can be used to describe the crypto market is “Volatile” This volatility is why cryptocurrencies are risky investments, investing in the wrong crypto assets could result in significant losses, whereas investing in the right ones could yield substantial profits.
Investing in crypto is as easy as buying your first Bitcoin or any other cryptocurrency but to become a successful crypto investor you need to have a great crypto portfolio. Whatever your strategy may be, a good portfolio minimizes your exposure to risks(depending on your risk appetite) and opens you to profits.
However, building a successful crypto portfolio is not an easy task, especially with the volatile nature of the cryptocurrency market and there is no guaranteed way to do this, what this article aims to achieve is to open your eyes to various options and suggestions which you can use as a guide in making your crypto portfolio better.
This article will be laced with examples for beginners ($1,000), intermediate ($10,000) and advanced ($100,000) crypto investors.
What Is A Crypto Portfolio?
A crypto portfolio refers to a collection of cryptocurrencies or crypto assets owned by a hedge fund, company, or individual. For example, let’s say you have only Bitcoin and Solana in your wallet then what makes up your crypto portfolio is Bitcoin and Solana.
It is advisable to fortify your portfolio with diversification and quality, a well-diversified portfolio filled with quality crypto projects can make all the difference and make your crypto investment journey worthwhile.
Now your risk tolerance or risk appetite is the amount of risk you are willing and able to take, this is reflected in your allocation, which is the amount of money you are willing to spend on each coin or token in your portfolio, choosing an appropriate cryptocurrency portfolio allocation is crucial for maximizing returns and minimizing risk.
Let’s go deeper.
Diversification and Allocation
Diversification involves avoiding the risk of concentrating all investments in a single crypto asset or token, commonly known as ‘putting all your eggs into one basket,’ by spreading capital across a variety of cryptocurrencies. This for the most part reduces your exposure to risk which is very important due to the nature of the crypto market.
Diversifying your portfolio gives birth to the question – how many tokens should I invest in? Well, the extent to which you diversify is entirely subjective and with respect to the size of your capital or your investment goals but some diversification is beneficial.
After putting in the hours to scout for coins to invest in, the weight each coin holds should determine the amount of capital you invest in them. Most investors allocate more money to market leaders like Bitcoin and Ethereum as they experience the least amount of price swings.
When diversifying your portfolio watch out for coins or tokens that correlate i.e tokens whose price action usually moves the same way as having too many of these types of coins affect the effectiveness of this strategy.
Remember you are spreading your money across different coins to reduce risk. It will be pointless if the coins in your portfolio all move in the same direction that way it would be better to just invest in one.
Let’s highlight some of the ways you can diversify your portfolio:
1. Diversifying By Market Cap
Under this criterion cryptocurrencies can be divided into three major categories:
- Large-Cap: Cryptocurrencies with a market capitalization exceeding $10 billion are commonly categorized as large-cap cryptocurrencies. These digital assets are often perceived as more stable investments in comparison to mid and small-cap crypto tokens, as they tend to exhibit lower levels of volatility. Notable examples of large-cap cryptocurrencies include Bitcoin and Ethereum
- Mid-Cap: Cryptocurrencies with market capitalizations ranging from $1 billion to $10 billion are typically classified as mid-cap cryptocurrencies. These digital assets are known to be more volatile compared to large-cap cryptos, but they also carry higher growth potential.
- Low-Cap: The market capitalization of these type of coins are less than $1 billion, and the volatility of these coins are very high. They are often considered risky investments, as they are prone to dramatic price fluctuations.
2. Diversifying By Use Case
This method of diversifying suggests that you consider adding different types of tokens with different use cases to your portfolio.It is important to note the use case of a coin, hence it is important to look at Tokenomics before investing. Some use cases include:
- Store Of Value Assets: These are assets that appreciate over time they do not depreciate due to reasons like limited supply and they might even benefit from inflation unlike fiat (e.g US dollar) which loses value due to inflation.
This is the number one reason why Bitcoin usually takes a large chunk of most investors’ portfolios, the way Bitcoin was programmed makes it a store of value there is only a limited number of Bitcoin that can ever be mined and there is also Bitcoin halving which reduces the amount of Bitcoin miners get by half every four years.
This coupled with the high rate of adoption and high market cap is the reason why most people consider Bitcoin a store of value.
- Payment Coins: Most of these coins need no introduction as most people see them as the first generation of cryptocurrencies e.g Bitcoin, Litecoin, Bitcoin Cash, etc their primary use case was for settling payments.
- Stablecoins: These are coins whose values are pegged or tied to a fiat currency such as the US dollar, commodities like gold, or financial instruments.
I see these coins as the savior of crypto traders and investors, during bear markets when prices are falling investors can quickly swap or sell their holdings to stablecoins thereby saving their capital. Some examples are USDT(Tether) and USDC.
- Utility Token: These are tokens on a smart contracts blockchain that acts as the key to a service or product. They can be used to pay transaction fees when interacting with decentralized applications (DApps) built on that particular blockchain or ecosystem.
Many projects issue their own utility tokens to raise funds in a coin offering. The token’s value should theoretically have a direct link to its utility’s value. BNB and Ethereum are both utility tokens.
- Security Token: Picture traditional securities like stocks and bonds but on the blockchain this means they fall under regulation by regulatory authorities e.g MAS in Singapore or SEC in the USA and must meet their guidelines before issuance, to be very clear security tokens are the digital form of traditional investments like stocks, bonds, or other securitized assets.
- Governance Tokens: These are cryptocurrencies that can be used to vote by token holders on the direction and development of the protocol, the primary purpose of governance tokens is to decentralize decision-making and to give holders a say in how the project is run.
Most decentralized finance (DeFi) tokens are governance tokens; some examples are Avae, Uniswap and Compound.
Other types of tokens include Non-Fungible Tokens(NFTs), privacy coins, etc. Now it is usual to see cryptocurrencies that have numerous use cases or that overlap in use cases, for example, the native token of a protocol can be used to pay transaction fees and for voting. Tokens can also be used for staking, yield farming, etc.
3. Diversifying By Industry
The underlying technology that cryptocurrencies run on is the blockchain, Ethereum revolutionized this technology with the advent of smart contracts which facilitates the execution of agreements without a third party and allows dApps (decentralized applications) to be built on its platform.
This opened the floodgates of Blockchain right now it can be used across different industries. You might have probably heard of decentralized finance (DeFi) that’s taking the finance industry and putting it on the blockchain eliminating third parties.
Apart from Ethereum there are numerous blockchains which focus on security, scalability, and efficiency.
All of these blockchains with what they offer and support are what make up Web3. So each of these blockchains has protocols built on them and these protocols may have native tokens.
This makes diversifying across industries a good idea as you will be in a very good position if some of the industries you are invested in lead the next crypto rally.
4. Diversifying By Region or Location
Crypto investors can also diversify based on location as this measure will protect your investments from regulatory uncertainties so that If one region or country experiences unfavorable regulatory developments, it will have a limited impact on your overall portfolio. Moreover, some countries are more open to crypto adoption than others.
By diversifying your portfolio by location, you can take advantage of diverse market opportunities. For example, some regions may have a more mature and established crypto ecosystem with higher adoption rates, while other regions may be emerging markets with significant growth potential.
Building Your Crypto Portfolio With Quality
This part involves researching for tokens to invest in, keeping up with your investments, and managing your portfolio.
To me, this is the most important part of building a better crypto portfolio so after all the tips I will give 3 examples: beginner portfolio ($1000), intermediate ($10,000), and advanced ($100,000).
When scouting for tokens to invest in, here are some suggested questions to help you filter through projects.
- Can the token withstand a prolonged bear market?
- How big is the token’s FDV (Fully Diluted Valuation) compared to competitors?
- Is the project team still motivated to build? (Socials, publications, how they react to setbacks, roadmaps)
- Is the project’s narrative fit for the next bull run?
- Is it ecosystem leader?
- Has it been growing in adoption and/or usage?
These factors collectively contribute to the success of the project. A higher TVL indicates that more capital is locked into DeFi protocols, allowing participants to enjoy greater benefits and returns.
You can also check for investors and how much they are investing in the protocol by investors I mean VCs(Venture capitalists).
Portfolio examples ($1,000 to $100,000)
Let’s build some crypto portfolios, please note that every project here is just an example and not financial advice.
|Filecoin (FIL)||Decentralized web||10%||$100|
This is a Balanced portfolio that is slightly skewed to market leaders BTC and ETH, consisting of 3 large-cap tokens (BTC, ETH, and BNB) and 3 mid-cap tokens (FIL, UNI, and ATOM), with no low-cap tokens due to how risky they are.
The portfolio is also diversified across industries with DEX, CEX, Layer 1, and Decentralized web service provider Filecoin.
Filecoin has reached its FDV i.e. its maximum supply is in circulation, and BNB is less than 25% away from also reaching its maximum supply.
My risk appetite is the reason why I allocated 10% and not less since I am highly invested in large and mid-cap projects.
|Filecoin (FIL)||Decentralized web||5%||$1,000|
|Stack (STX)||Bitcoin Layer||5%||$500|
Here I added two more projects to my portfolio STX and AR.
Stacks is bringing more use cases to Bitcoin, now imagine if Bitcoin can be used for DApps and Smart contracts which may open over $500 Billion in market cap.
Remember what we said about token use cases well STX could be used for something called Stacking which brings yields.
see more about Stacks HERE
Arweave is like a hard drive on the blockchain. They offer storage services, and both STX and AR are slightly mid-cap tokens because their market cap is slightly above $1 billion indicating that they are the riskiest investments in my hypothetical portfolio.
|Filecoin (FIL)||Decentralized web||10%||$10,000|
|Stack (STX)||Bitcoin Layer||2.5%||$2,500|
This portfolio is slightly more aggressive with 50% in market leaders and furtherly diversified into web3 gaming and social media, I also kept 7.5% in stablecoin in case I come across other quality projects to invest in.
MASK acts as a bridge between web3 and the internet it allows users to send encrypted messages on Twitter and Facebook ensuring privacy.
While GALA are game developers both new additions are low-cap tokens because their market tokens are both under $1 billion.
You will notice that even with more capital my portfolio is just a portfolio of 10 tokens. This is because keeping up with tokens is not as easy as it sounds, you have to put in hours so I only have the capacity to actively keep up with ten quality tokens.
Consider dollar-cost averaging (DCA). It involves buying equal or small amounts of the crypto asset at regular intervals the investor may choose to invest a fixed amount weekly, monthly or on a quarterly basis.
You should always keep up with the latest news, trends, and updates on the tokens you have invested in and on the market in general.
A good place to start is our free newsletter that brings market news and insights straight to your email.
Most importantly, DYOR (Do Your Own Research) you really can’t beat this classic advice, always endeavor to do your due diligence before making any investment in crypto.
[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]
Featured Image Credit: Chain Debrief
This article was written by Godwin Okhaifo and edited by Yusoff Kim