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Crypto Traders' Guide: How to build and diversify a Cryptocurrency portfolio

Crypto Traders' Guide: How to build and diversify a Cryptocurrency portfolio

Many cryptocurrency investors simply hold a single crypto asset, such as Bitcoin. However, this strategy could be ineffective if you want to raise profits. Any investor looking to construct the ideal cryptocurrency portfolio for themselves should keep in mind that, despite its growing popularity, cryptocurrency remains a highly volatile investment.

Katharine Tate
Crypto
Sep 13, 2021

Table of Contents

Many cryptocurrency investors simply hold a single crypto asset, such as Bitcoin. However, this strategy could be ineffective if you want to raise profits. Any investor looking to construct the ideal cryptocurrency portfolio for themselves should keep in mind that, despite its growing popularity, cryptocurrency remains a highly volatile investment.

In cryptocurrency investment, there are several different strategies and methods that you can consider to generate revenues—and among these is diversification. It is a technique in which you invest in various assets, some of which have a high-risk profile and others that have a low-risk profile. Diversifying your cryptocurrency portfolio potentially gives you well-balanced management of your virtual money. Although this strategy may be the best suit for some investors, it is also far from being perfect.

Every crypto investor has particular expectations regarding the digital assets to include in their portfolio, and this requires one to learn as much as possible to more likely succeed in their financial goal(s). In this article, we will go over building a well-balanced cryptocurrency portfolio. Let’s see what other factors should you consider while doing this strategy!

What is a Cryptocurrency portfolio?

An investor's or trader's crypto portfolio is a collection of cryptocurrencies. Portfolios generally include a wide range of assets, such as Bitcoin, altcoins and crypto financial products. With the help of having a crypto portfolio, an investor or trader can track each coin’s performance and provide you with analytical tools.

Why is having a Cryptocurrency portfolio important?

When it comes to investing in cryptocurrency, having a crypto portfolio is a must. It helps you to determine where and how your money will be invested. But the next step will always be choosing between investing in only one asset or diversifying your portfolio.

To help you decide, it is generally advised to not put all your eggs in one basket. The same concept applies to building your crypto portfolio. If the basket collapses, all of your eggs may shatter, and you would be out of everything. That is why portfolio diversity also matters.

What are the different types of cryptocurrencies?

The most well-known cryptocurrency is Bitcoin, which has the largest market capitalisation. However, to decrease overall risk, a well-balanced portfolio will comprise a variety of coins. Here are some:

  • Stable coins – can be linked to a currency, like the US dollar, or the price of a commodity, like gold. Stable coins, although not always providing high yields, do give stability.
  • Payment coins – it is difficult to discover new currencies that are mostly used for payments these days. However, when cryptocurrencies were first developed, the majority of projects were just platforms for transferring value. The most well-known example is Bitcoin (BTC), although additional examples include Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC).
  • Security tokens – can be used to represent a variety of things. It might be stock in a firm, a project's bond, or even voting rights.
  • Utility tokens – serves as a security token for a service or product. The value of the token should ideally be proportional to the value of its usefulness.
  • Governance tokens – these tokens are most likely to be found in decentralised finance (DeFi) networks. You can get voting power on a project and even a piece of the earnings if you own a governance token.

According to CoinMarketCap, the following are the ten top-performing cryptocurrencies by market capitalisation as of July 2021:

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Tether (USDT)
  • Binance Coin (BNB)
  • Cardano (ADA)
  • XRP (XRP)
  • Dogecoin (DOGE)
  • USD Coin (USDC)
  • Polkadot (DOT)
  • Binance USD (BUSD)

Get started: How to build a well-balanced Cryptocurrency Portfolio?

  • Understand the fundamentals in the crypto world. To begin, you should learn and apply the fundamental ideas of digital assets and blockchain technology. When it comes to crypto trading, it is important to keep in mind that it's a long-term investment. At the same time, expect market volatility, including the possibility of a complete loss.
  • Research, research, research! Before you buy, learn everything you can about your preferred digital asset(s). Make sure you understand the objective of cryptocurrency trading before you make your final selection. However, keep in mind that not all cryptocurrencies will remain at the top of the rankings for long since changes are inevitable.
  • Be updated with cryptocurrency news. Even with the most established currencies, such as Bitcoin, things may change quickly, and the news cycle can have an impact on prices. Keeping up with current events can help investors make more educated purchasing and selling decisions in the future.
  • Divide your portfolio into three categories: high-risk, medium-risk, and low-risk assets, with suitable weightings for each. A portfolio with a significant portion of high-risk investments is unbalanced. It has the potential to give you larger gains, but it also has the potential to lead you to lose a lot of money. 
  • If necessary, rebalance your crypto portfolio. The cryptocurrency market is quite volatile; therefore, your judgments should be made in light of the present circumstances.
  • The golden rule in investment: only invest what you can afford to lose.

Additional risk note: Trading Bitcoin and other cryptocurrencies are not risk-free, which is why you should do comprehensive research on your selected asset(s). Other accessible assets in Bitcoin System include Ethereum, EOS, Litecoin, Bitcoin Cash, and many other prominent cryptocurrencies if you want to diversify your cryptocurrency portfolio.

Katharine Tate | I’m a native of Massachusetts, where I earned bachelor's degrees in Health: Science, Society, and Policy and Sculpture from Brandeis University. I enjoy assisting and inspiring women in all aspects of their lives, and I consider myself a partner in their OB an GYN treatment. I particularly enjoy forming relationships with young women and assisting them in determining their healthcare needs and goals. I love to travel, create metal and fiber art, cook, and spend time outside. Also, I’m fluent in both German and American Sign Language.

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