Having a crypto portfolio is a good way to diversify your investments and generate passive income. However, it’s not a beginner-friendly investment, and those interested need to understand the basics of what a crypto portfolio is and how to invest in cryptocurrencies to avoid risks and financial losses.
What Is A Crypto Portfolio?
A crypto portfolio is a type of investment portfolio with only one asset class: cryptocurrencies. There are no other assets in the portfolio (like stocks, bonds, or real estate).
Investors can select any cryptocurrency they want, and the assets are located in a crypto wallet or investment account. The portfolio is the broad overview of all the cryptocurrency investments, where investors can track performance and keep their cryptos organized.
The Role Of A Crypto Portfolio
A crypto portfolio has several roles:
- Tracking held cryptos: It provides information on all the coins at a glance.
- Measuring performance: Allows investors to easily see how well or poorly their investments are performing.
- Staying balanced: A diverse portfolio can reduce risk should one of the crypto investments perform poorly.
Diversified and Concentrated Portfolios
There are two main types of crypto portfolios. Investors can opt to either build a diversified or concentrated portfolio. Each of these strategies has benefits and downsides that investors must be aware of.
A diversified portfolio:
- Holds various cryptocurrencies or digital assets across protocols and sectors.
- Mitigates the risk for investors.
- Fortifies against crypto market volatility. If the value of one asset drops, unaffected assets will offset losses.
- Less likely to go up or down in terms of performance, as it mirrors market trends. When one coin drops, another may rise, having a minimal impact on the portfolio’s overall performance.
- Provides a good balance for beginner investors.
A concentrated portfolio:
- Holds fewer assets than a diversified portfolio, giving the investor more exposure to these cryptos.
- Generates higher returns if assets perform strongly; however can also result in bigger losses.
- Better for experienced investors who know how to pick the best-performing cryptos.
- Comes with a higher risk as this portfolio is more susceptible to market volatility.
Building A Balanced Portfolio
Beginners can build a balanced portfolio by knowing which cryptos to invest in, diversifying their portfolios just the right amount, and managing their risks.
Choosing The Right Cryptocurrencies
There are two main cryptocurrencies that beginners should consider: Bitcoin and Ethereum. Knowing which crypto to invest in can make a big difference to how your portfolio performs, as many high-value and well-performing cryptocurrencies are on the up (source: https://99bitcoins.com/kr/cryptocurrency/best-crypto-to-buy/).
Bitcoin is one of the most well-known cryptocurrencies, often called “digital gold”. It launched in 2009 and operates on a decentralized network without a central authority. The primary use of Bitcoin is as a store of value and medium of exchange. It has proven to be relatively stable compared to smaller cryptos, and is considered a good option for beginners because of its long track record and ongoing market dominance.
Ethereum launched in 2015 and is the second-largest crypto by market cap. It’s not just a digital currency, though; it is an ecosystem that allows for smart contracts and decentralized applications (dApps). It has a wider use case, including decentralized finance (DeFi) and NFTs. Although Ethereum is considered more volatile than Bitcoin, it does have strong growth potential.
Stablecoins are also a good option to consider, especially for risk-averse investors. These cryptocurrencies are pegged to fiat currencies, making them less volatile than traditional cryptos. Examples include Tether, Binance USD, and USD Coin. Although stablecoins don’t offer the same growth as Bitcoin and Ethereum, they reduce the volatility of a portfolio.
Diversifying
Diversifying your portfolio is a great way to find balance, however it should only be done to a certain extent. Adding too many crypto assets means that you will simply be mirroring the market, which won’t benefit you in any way.
Here are three ways to diversify to create a balanced portfolio:
- Invest in cryptos with varying risk profiles: Investments should be spread across both large- and small-cap cryptocurrencies. A lower market cap will have a higher risk, but also potentially higher gains.
- Picking a good amount of assets: There’s no right number of cryptos to add to the portfolio, however, investors must ensure that they can keep updated on the movements and news of all their assets. If it’s tough to stay in the loop, then there might be too many cryptocurrencies in the portfolio.
- Allocate across different sectors or protocols: Investors should select cryptocurrencies with different use cases and across different sectors or protocols in an attempt to diversify while managing risk. If one sector is failing, another may help to offset any losses. For example, if the DeFi sector is struggling, then having Bitcoin in your portfolio will stabilize your overall investments.
Risk Management
All investments are risky, and even a balanced, diverse portfolio will be exposed to risks. Here are ways in which to manage your risks appropriately:
- Only invest as much as you’re willing to lose.
- Set an investment budget and adhere to it.
- Use a stop-loss order if you’re actively trading.
- Use secure wallets to protect assets.
- Stay informed about the latest news and updates.
- Don’t make decisions when emotional.
Final Thoughts
Building a cryptocurrency portfolio is a good way to diversify investments and explore financial opportunities, but it requires strategic planning and risk management.
By understanding what a crypto portfolio is and the different investment strategies involved, how to select cryptocurrencies, and how to manage risks, beginner investors can create a balanced portfolio for long-term financial gains.
Keep in mind that diversification is important, but over-diversifying will reduce gains and mirror market trends. The crypto space is exciting and can offer lucrative rewards, but investors would invest smartly and maintain a disciplined approach to see results.
