How-To: Building a Well-Balanced Crypto Portfolio
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Starting to invest in cryptocurrencies is as simple as buying your first bitcoin (btc), ether (eth) or any other cryptocurrency. some investors prefer to buy and hold the most popular cryptocurrencies, others prefer to experiment with altcoins. So how do you get the best results? You will have a better chance of success if you think carefully about your asset allocation strategy and take stock of your cryptocurrency portfolio on a regular basis.
Reading: Bitcoin portfolio balance
what is a cryptocurrency wallet?
A cryptocurrency portfolio is a collection of cryptocurrencies owned by an investor or trader. wallets typically contain many different assets, including altcoins and crypto financial products. They are similar to traditional investment portfolios, except that you own one class of assets. You can keep track of a crypto portfolio manually using a spreadsheet or using specialized tools and software to calculate assets and returns. a portfolio tracker is better for these purposes. Trackers are extremely useful for day traders and other short-term traders, but are also valuable to long-term investors.
what is diversification and asset allocation?
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When building an investment portfolio, it is important to become familiar with the concepts of asset allocation and diversification. asset allocation means investing in different asset classes (eg cryptocurrencies, stocks, bonds, precious metals, cash, etc.). Diversification is the allocation of investment funds to different assets or sectors. For example, you can diversify your stocks by investing in different sectors such as agriculture, technology, energy, and health care. both strategies help reduce overall risk.
Cryptocurrencies are a single asset class. But in a cryptocurrency wallet, you can diversify products, coins, and tokens that are used in different ways and for different purposes. so for example you can accumulate 40% bitcoins, 30% stablecoins, 15% nft and 15% altcoins in your wallet.
different types of cryptocurrencies
bitcoin is the best known cryptocurrency and the largest by market capitalization. but a well-balanced portfolio should include a variety of currencies to reduce overall risk. let’s take a closer look at some of them.
payment currencies. it is quite difficult to find new payment currencies nowadays. When cryptocurrencies were first conceived, most of these projects were conceived solely as money transfer systems. Bitcoin is the best known of them, although it can also be named Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC). These coins, which existed before ethereum and the introduction of smart contracts, were the first generation of cryptocurrencies.
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stablecoin stablecoin tracks an underlying asset: a fiat currency or a precious metal. busd coins, for example, are backed by the us. uu. dollar in a ratio of 1:1. pax gold (paxg) works on the same principle, but fixes the currency at the price of one troy ounce of gold in reserves.
Like traditional securities, security tokens can represent many things: shares in a company, a project bond, voting rights, and more. security tokens are digitized and placed on a blockchain, which means they work under the same rules as other tokens.
Utility tokens are used as a key to a service or product. for example, bnb and eth are utility tokens. many projects are issuing their own utility tokens to raise funds by placing coins. management token with a management token, you can have a say in the project and even a share of the revenue. these tokens can be found on decentralized finance (defi) platforms: pancakeswap, uniswap or sushiswap. the value of a management token, like a utility token, is directly dependent on the success of the underlying project. concentrated and diversified crypto portfolios the most common opinion is that a crypto portfolio should be diversified. this is the standard for investors. however, allocating capital to different assets has its pros and cons. As we said, a diversified portfolio helps reduce overall risk and volatility. losses can be offset by profits and thus keep your positions stable. a wallet also allows you to make a profit on each coin. Not all investments will be profitable, but with proper asset allocation and diversification, your chances of making a profit will increase in the long run. The more diversified your portfolio is, the more accurately it will track the market as a whole. Most of the traders and investors strive to overcome the laws of the market and make huge profits. Highly diversified portfolios produce high returns more often than concentrated portfolios. typically high performance is balanced by less efficient assets. Managing a diversified portfolio takes a lot of time and careful study. To invest wisely, you must be clear about what you are buying. the larger the wallet, the more difficult it is to figure out how it works. If your wallet is full of assets from different blockchains, you will need to use multiple wallets and exchanges to access them. The decision to diversify or not is up to you, but at least a small amount of diversification is always recommended. how to create a well balanced crypto portfolio every investor or trader has their own idea of what a well balanced crypto portfolio should be. however, there are general rules to follow:
- Divide the investments in your portfolio by risk levels: high, medium and low. Determine your weight accordingly. a portfolio with a large portion of high-risk investments is definitely not balanced. Such investments can lead to huge profits and huge losses. your risk profile will help you figure out what works best for you, but it’s always best to create some diversity in your portfolio.
- stablecoins can provide liquidity to your portfolio. they are key to many defi platforms and can help you make a profit or get out of a position quickly and easily.
- you can rebalance your portfolio if necessary. The cryptocurrency market is very volatile and decisions have to be made depending on the current situation.
- allocate new capital strategically to avoid overloading one area of your portfolio. When you make big profits from a coin, you may be tempted to invest more money, but don’t get carried away with the feeling of greed and think carefully about each step.
- do your own research on all available information; this advice will always be relevant. you invest your own money, so don’t rely solely on the opinion of strangers.
- Invest as much as you are willing to lose. if you’re worried about your portfolio, it’s probably not well balanced. try to secure positions that prevent you from incurring serious losses if things go wrong.
conclusion the cryptocurrency market depends a lot on the state of bitcoin, but you should not neglect the importance of balancing your portfolio. investments in different cryptocurrencies can offset the losses associated with a bitcoin crash, so diversification is very important. Remember that portfolio balance is not just about holding different currencies. a solid strategy is an important tool in building a portfolio that satisfies your risk appetite.