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How to Build and Diversify Your Ideal Crypto Portfolio


Crypto portfolio allocation is crucial to survival over the longer term. You are betting on the future when trading a cryptocurrency or investing in it. The future is uncertain, so your returns can be as well. However, diversifying your allocations can help limit some of the dangers. Cryptocurrency Portfolio Allocation is the same thing as diversifying your portfolio in any other asset, and it is a way to diversify your holdings to avoid massive drawdowns. Remember that cryptocurrency is a relatively new field, so volatility will undoubtedly be a significant concern. By diversifying, you can mitigate some of the inherent risks.

Why Diversify Your Crypto Portfolio?

The most apparent reason to diversify your crypto portfolio is to protect yourself. You could face financial ruin rather quickly if you have 100% of your trading capital invested in one coin. However, if you have a handful of coins, while some drop, others may rise. This helps mitigate many dangers of investing in a new asset. Crypto allocation is one of the most important things you can do over the long term as far as mitigating risk via diversification. 

What Types of Cryptocurrency Should I Have in my Portfolio?

Now that you understand a bit about cryptocurrency asset allocation, the next question is what kinds of cryptocurrency you should have in your portfolio. The following groups of cryptocurrencies make up most of what you will be dealing with, and each has its unique feature. Understanding what they do and their risk profile will go a long way toward success. 

Golem is another utility token used to create an economic system allowing individuals to rent computing power. While these are great ideas, the question becomes whether or not the network gains traction. 

At best, a utility token should be a tiny part of your portfolio because you are relying on a business or network to continue being profitable. As we are still in the early stages of crypto adoption, almost all companies should be considered risky at best.

Central Bank Digital Currencies (CBDC)

Be aware that various central banks worldwide are studying the possibility of using Central Bank Digital Currencies. These are not quite the same thing as crypto and, unfortunately, will more likely than not be used to track individuals. There is a massive uproar about these, but it seems that it is only a matter of time before they appear. 

Stablecoins Large-Cap Tokens
Steady Price, pegged to currency Price fluctuates, many holders Fluctuation of price can be extreme.
Low risk. Moderate risk High risk
High APY (staking.) Moderate APY (staking). Very High APY (staking).

Building a well-balanced crypto portfolio

Building a well-balanced portfolio is one of the most important things you can do for the longevity of your trading account. Simply going “all in” into a coin is dangerous and a great way to lose money. That being said, you need to understand what type of investor you are and then build the appropriate portfolio to match your needs.

5 Ways to Allocate Crypto in your Investment Portfolio with Crypto Portfolio Examples

the potential ways that you can build a portfolio are unlimited. The following 5 are a good “Birdseye view” of what you can do. By understanding your risk tolerance type, you can use these setups as a general guideline.

Conclusion

When investing in anything, portfolio allocation is crucial. Crypto is not going to be any different, as there are different volatility profiles with each market. The Bitcoin market is much less volatile than it used to be, but there are still other coins that can move 10% in a day quite frequently. Because of this, the prudent investor will have little exposure to assets that will do well in volatile situations where people are willing to throw money at the market. That same investor will also recognize that there are times when markets behave out of a place of fear, and therefore some of these riskier assets will perform poorly. This is where the “slower moving” and more stable investments perform better, at the very least losing less.

For example, in times of extreme greed, it may make sense to own cryptos like Chiliz, Dogecoin, or other smaller market cap coins. If the risk appetite changes to risk aversion, it is times like this where Tether might be an excellent place to “hide out.” It’s also possible that Bitcoin may see a bit of a “safety bid” amid that scenario.

Over the longer term, investors with more stable returns tend to fare better. This is because it’s easier to deal with drawdowns steadily and stably than to see sudden spikes in volatility wipe out vast parts of your portfolio.

FAQ: Frequently Asked Questions

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