Understanding how to build a crypto portfolio is fundamental to investing success.
When it comes to crypto trading, investors can use different strategies to increase their returns. Some will only invest in BTC or other digital coins with a high market cap. Others will prefer buying altcoins or NFTs.
Regardless of the assets you plan to invest in, your portfolio must be diversified. This will reduce the risk of potential losses.
Building a crypto portfolio can be a challenging task. That’s why we created this guide in which we’ll help you create a balanced crypto portfolio.
What Is a Crypto Portfolio?
A crypto portfolio is a portfolio containing a collection of digital assets. As such, it represents a group of digital coins that investors hold and trade on trading platforms. Its value is equal to the total value of all digital assets inside it. Each crypto portfolio can contain different digital assets, from altcoins to non-fungible tokens.
No rule determines the exact number of digital assets that a crypto portfolio must have. However, studies show that it is ideal to own around 20 digital assets. Moreover, to reduce the risk of losing all assets, you should never invest more than 5% of your portfolio in cryptocurrencies.
Diversifying a Crypto Portfolio
To maximize their profits and reduce the risks, investors will need to diversify their crypto portfolios. To do this, they’ll need to invest in different types of crypto assets. A well-diversified portfolio will contain a combination of well-known digital coins, such as BTC and ETH, and altcoins with the potential for high returns.
Crypto coins and tokens are the most common types of digital assets you can invest in. What makes them a good investment are their use cases.
They can be used to pay fees and to vote on protocol changes for a certain project. Developers also use them to raise money for their crypto projects and within blockchain games.
The most popular types of tokens include utility tokens, governance tokens, gaming tokens, and NFTs.
That said, you can diversify your portfolio even further by investing in DeFi coins. The goal of DeFi coins is to decentralize traditional financial services.
And finally, a beginner crypto portfolio could also contain Web 3 crypto coins. These coins have numerous use cases, from paying fees on Web 3.0 networks to voting on Web3 protocol changes. Moreover, after Web 3.0 launches, their price could increase significantly, which makes them a good long-term investment.
Your portfolio should also contain coins with large, medium, and small market caps:
- Large-cap cryptocurrencies have a market capitalization of over $10 billion
- Mid-cap cryptocurrencies have a market cap between $1 and $10 billion
- Small-cap cryptocurrencies have a market cap below $1 billion
Why is it good to diversify your crypto portfolio? For several reasons.
Firstly, diversification will reduce your risk of losing money. For example, if you invest in multiple digital assets, and a particular coin performs poorly, it won’t have a big impact on your portfolio.
Diversifying your portfolio will also enable you to make better investment decisions. How so? Because you’ll learn how to recognize underperforming and overvalued assets.
Crypto Investment Strategies
In addition to diversifying their portfolios, investors also need to use a crypto portfolio strategy that suits them best. They can use long-term and short-term strategies.
The former refers to buying and selling digital assets within a short period — usually one year. This strategy is ideal for investors who want to make quick profits. On the other hand, a long-term trading strategy involves holding digital assets for a longer period to achieve higher profits.
The most effective short and long-term investment strategies include the following:
Yield farming is a long-term investment strategy that involves depositing cryptocurrencies into DeFi liquidity pools. The goal of yield farming is to provide staking rewards. These rewards usually come in the form of governance tokens. Yield farming also allows investors to earn passive income.
Hodling is another long-term strategy that involves holding digital assets for a long period to profit from their increase in value. Hodlers won’t sell their digital coins when their value drops. Instead, they’ll ignore short-term price fluctuations with the hope that their value will go up again.
Day trading is a short-term strategy that allows traders to profit from small price movements. On that note, day trading includes conducting multiple trades within one day. The goal of this strategy is to make small profits.
Arbitrage is a short-term trading strategy. It involves buying crypto coins on one platform at a lower price and selling them at a higher price on another crypto exchange.
How to Build a Cryptocurrency Portfolio
Now that you know what the best crypto portfolio allocation should look like and what investment strategies you can use, here’s how to build a crypto portfolio.
1. Understand Different Types of Cryptocurrencies
As mentioned before, you can invest in different types of digital assets. To balance your portfolio make sure to invest in both large and small-cap cryptocurrencies. Why? Because large-cap cryptocurrencies provide more stability. At the same time, small-cap tokens have the potential for high returns.
For example, you can invest in two cryptocurrencies with high market caps, like BTC and ETH, and two altcoins that have the potential for high returns, like Bitcoin Minetrix and Meme Kombat.
Next, focus on tokens that have multiple use cases, such as DeFi coins and governance tokens. You can also include stablecoins because they will provide more liquidity. And finally, you can include non-fungible tokens as well as tokens that use different consensus mechanisms.
2. Select a Crypto Investment Strategy
Select the coins that will suit your investment strategy. For example, investing in coins with large market caps is more suitable for long-term investors. On the other hand, altcoins are more fitting for short-term investors since their prices often fluctuate.
BTC is most suitable for traders who use dollar-cost averaging, hodling, and micro-investing strategies. The same goes for Ethereum — however, this coin is also fit for value investors.
At the same time, DeFi projects are ideal for traders who are into value and growth investing. And finally, stablecoins are a good fit for traders who want to build passive income streams.
3. Decide on the Initial Investment Amount
Once you’ve decided which coins and tokens to include in your crypto portfolio, it’s time to determine your starting investment amount. You should never invest more than you can afford to lose. As a general rule, invest only 5% of your portfolio in digital assets. This will help reduce the risk of losing your entire investment.
If you are a beginner, investing 60% of your funds in BTC and 40% in ETH is the safest option. On the other hand, professional traders can invest 50% in BTC, 40% in ETH, and 10% in altcoins.
4. Determine Your Investment Goals and Risk Tolerance
Investing in digital assets comes with risks since the crypto market is very volatile. This is why you should determine your investment goals in advance. This will help you decide which digital assets to buy and how much money to allocate to each token. For example, long-term investments are less volatile compared to short-term investments.
Your investment goals must be based on your financial situation and investing strategy. That said, ask yourself what you want to achieve by investing in cryptocurrencies — quick earnings or passive income. How long do you plan to hold your tokens, etc. By establishing your investment goals, you’ll make more informed decisions.
5. Choose a Crypto Wallet
The last step in building a crypto portfolio is setting up a crypto wallet. You’ll use your crypto wallet to store and trade your digital assets Crypto wallets can come in different forms. You can choose a hardware, software, or paper wallet.
Hardware wallets will store your coins off-chain, while software wallets will keep your assets on-chain. Although paper wallets are a good option for long-term investments, they are the least convenient. The best crypto wallets are user-friendly and compatible with multiple cryptocurrencies. They also utilize strict security measures, such as two-factor authentication.
You can set up multiple wallets. For example, you can use hardware wallets for long-term and software wallets for short-term investments.
Manage Your Crypto Portfolio
After building your crypto portfolio, you’ll need to know how to manage it. You can do this by applying the following principles:
Make sure that your crypto portfolio includes various types of digital assets — altcoins, NFTs, and DeFi tokens. This will help you reduce the risk of losing all your investments.
Tracking your investments is very important, especially if your portfolio includes more than 20 digital assets. By tracking your investments you’ll be able to adapt your trading strategy based on the current market trends.
To do this, you’ll need to use portfolio trackers. Portfolio trackers are digital tools that will allow you to see how your digital assets perform. They provide features such as real-time price data and asset distribution. You can use them to track both cryptocurrencies and other digital assets, such as NFTs.
To use a portfolio tracker, you’ll need to link your exchange account or wallet with the tracker. Some portfolio trackers use the manual approach, while others offer automatic integrations.
You can optimize your crypto portfolio by rebalancing it. Rebalancing refers to the sale of assets whose value has increased and the allocation of these funds to other coins. For example, if the value of a certain altcoin increases by 200%, you should sell it.
However, you should not withdraw the profits from its sale. Instead, you should invest them in another coin whose price is relatively stable, such as BTC and ETH.
Keeping up to Date
Stay up to date with the latest crypto trends and regulatory developments so that you can adjust your portfolio accordingly and make informed trading decisions.
Knowing how to build a crypto portfolio can be challenging since there are more than 23,000 cryptocurrencies that you can invest in. That’s why it’s important to follow crypto trends to keep up with price movements. To reduce the risk of losing all your investments, make sure to diversify your portfolio. On that note, invest in both large and small-cap coins, as well as other digital assets, such as NFTs.
You should also build a portfolio that will suit your trading strategies and financial goals.