Like their traditional counterparts, crypto portfolios need to be balanced. It means planning and diversifying your investments so that the level of risk is acceptable. Additionally, the crypto market is very volatile and requires thorough planning before you start investing.
If you are a crypto enthusiast and looking to invest your money in the digital currency space, here is how you can build a balanced crypto portfolio for higher returns.
What is a balanced crypto portfolio?
A balanced crypto portfolio means structuring your investments so that the level of risk is acceptable. When investing, there is always a chance of losing your money due to the volatility of the crypto market. Therefore, it is a must for every investor to balance their investments so that they offer both growth and stability.
You can achieve this by dividing a crypto portfolio into two categories: growth and capital preservation. Both come with different risks.
Methods for building a balanced crypto portfolio
There are different methods to build a balanced crypto portfolio. They are as follows:
- Understand capital preservation vs. growth
Preservation of capital is an investment with a low risk/reward ratio. Based on market conditions, it ensures stable but slow growth and is less prone to volatility.
On the other hand, growth investments have a high risk/reward ratio. This is because they offer fast growth but are very volatile.
Before investing, you need to divide your portfolio into two sections – capital preservation and capital growth.
In the crypto space, you can plan your portfolio by investing in cryptocurrencies like Bitcoin, Ethereum, etc. for growth and stablecoins like Tether, USD Coin, Dai, etc. for capital preservation.
When you diversify your wealth, just make sure you don’t put all your eggs in one basket. Since cryptocurrencies are a single asset class, you can diversify your wealth by investing in bitcoins, stablecoins, NFTs, altcoins, etc.
Let’s examine the asset options in detail.
Bitcoins
Bitcoin is currently the most popular cryptocurrency in the world. Its value is very volatile, but like any risky investment, it has a high propensity to grow. This allows you to dedicate a portion of your portfolio to bitcoins as growth investments.
stablecoins
A stablecoin is a cryptocurrency whose value is pegged to a fiat currency, commodity, or financial instrument. Investing in them keeps your portfolio stable.
Example: The value of a $1 coin is fixed at $1. So when the value of $1 increases, the value of the USD coin increases as well. However, the rise and fall in value is less volatile than traditional cryptos like Bitcoin, Ethereum, etc. Hence it is named stablecoins.
NFTs
NFTs (Non-fungible Tokens) are a great way to diversify your crypto investments. They are not interchangeable; So if you make the right investment, you can see an increase in value over the long term. NFTs also help preserve capital in your crypto portfolio.
altcoins
All cryptocurrencies except bitcoins are called altcoins. There is a huge list of them in the current market, some popular ones are Ethereum, Binance, Cardano, etc.
The altcoins fall into the growth part of your investment, and splitting your investment between bitcoins and different altcoins will help your investment grow while at the same time minimizing the risk factor by some degree.
crypto tokens
Put simply, a crypto token is the face value of a cryptocurrency. Because of its compatibility, it is an exchangeable asset on a blockchain that you can use for investment or payment purposes.
Again, such an investment involves high risk, but it also brings high returns. Examples include Bitcoin Cash, Ripple, Litecoin, etc.
security token
A security token is a digital asset that represents ownership and other rights. It transfers the value of one or more assets to a token and can be thought of as a digital form of traditional assets such as stocks, bonds or other securitized assets.
For example, you can offer security tokens instead of shares if you want to give away part of your company’s property.
- Using crypto portfolio trackers
Keeping track of all your investments can also be confusing and hectic. However, you can view your current allocation with a crypto portfolio tracker.
Some popular crypto portfolio trackers are:
- CoinMarketCap
- CoinGecko
- delta
- CoinTracker
- CoinStats and much more
Important factors to consider
Here are some crucial factors to consider when building a balanced crypto investing portfolio:
- As you divide your portfolio into conservation and growth areas, it’s up to you to determine what portion of your investment you want to allocate to each category.
- Always keep a certain amount of liquidation stablecoins on hand so that you have them available when you need cash in a short period of time.
- Before you pump more money into a specific part of your portfolio, consider the opportunities and risks. For example, if you make a profit on a particular investment, you should weigh the odds before investing more money.
- Crypto markets are volatile and keeping an eye on the market is crucial. It would help if you made quick decisions to make a big win or cut your loss.
- Always invest as much as you can afford to lose. If you invest too much and suffer a loss, the amount lost should not affect you enough to disrupt your financial planning and money management.
Investing in cryptocurrencies is still a fairly new concept in India and with a balanced crypto portfolio you can explore this new world without spending a lot of money. Thorough research and an understanding of the market and investment risks are crucial before investing.
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