Getting started with investing 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, some 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 keep a regular balance of your cryptocurrency portfolio.
What is a cryptographic wallet?
A cryptocurrency is a set of cryptocurrencies owned by an investor or trader. Portfolios typically contain many different assets, including altcoins and cryptocurrencies. They are similar to traditional investment portfolios, except that they have an asset class. You can manually track a cryptocurrency portfolio using a spreadsheet or specialized tools and software to calculate assets and returns. A wallet tracker is best for these purposes. Trackers are very useful for day traders and other short-term traders, but they are also valuable for long-term investors.
What is asset diversification and allocation?
When creating an investment portfolio, it is important to become familiar with the concepts of asset distribution and diversification. Asset allocation means investing in different asset classes (e.g., 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 actions by investing in different sectors such as agriculture, technology, energy and health. Both strategies help reduce overall risk.
Cryptocurrencies are a single class of assets. But in a cryptocurrency portfolio, you can diversify products, currencies, and tokens that are used in different ways and for different purposes. So, for example, you can collect 40% bitcoins, 30% stablecoins, 15% NFT and 15% altcoins in your wallet.
Different types of cryptocurrencies
Bitcoin is the best known and largest cryptocurrency by market capitalization. But a well-balanced portfolio should include a variety of currencies to reduce overall risk. Let’s look at some of them in more detail.
It is quite difficult to find new paid currencies today. When cryptocurrencies were conceived, most of these projects were conceived solely as money transfer systems. Bitcoin is the best known of these, although you can also name Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC). These currencies, which existed before Ethereum and the introduction of smart contracts, were the first generation of cryptocurrencies.
Stablecoin tracks an underlying asset: a fiat currency or a precious metal. BUSD currencies, for example, are backed by the US dollar in a 1: 1 ratio. PAX Gold (PAXG) works on the same principle, but binds the currency to the price of one troy ounce of gold in reserves.
Safety data sheets
Like traditional securities, security tokens can represent many things: a company’s assets, a project bonus, voting rights, and more. Security tokens are scanned and placed in a blockchain, which means they work under the same rules as other tokens.
Utility tokens are used as a key for a service or product. For example, BNB and ETH are utility tokens. Many projects issue their own utility tokens to raise funds when placing coins.
With a management token, you can have a voice in the project and even a portion of the revenue. These tokens can be found on decentralized financing platforms (DeFi) – PancakeSwap, Uniswap or SushiSwap. The value of a management token, such as a utility token, depends directly on the success of the underlying project.
Concentrated and diversified cryptographic portfolios
The view that a cryptocurrency portfolio needs to be diversified is the most common. This is the standard for investors. However, allocating capital to different assets has its pros and cons. As we have said, a diversified portfolio helps reduce overall risk and volatility.
Losses can be offset by profits and thus keep their positions stable. A wallet also allows you to make a profit with each currency. Not all investments will be profitable, but with the right distribution and diversification of assets, your chances of making a profit increase in the long run.
The more diversified your portfolio is, the more accurately you will track the market as a whole. Most traders and investors strive to break the laws of the market and make big 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 need to be clear about what you are buying. The larger the portfolio, the harder it is to figure out how it works. If your wallet is full of assets from different blockchains, you’ll need to use multiple wallets and purses to access them. The decision to diversify or not is up to you, but a small amount of diversification is always recommended.
How to create a well-balanced cryptographic portfolio
Every investor or trader has their own idea of what a well-balanced cryptocurrency portfolio should look like. However, there are general rules to follow:
- Divide your portfolio investments by risk levels: high, medium and low. Determine your weight accordingly. A portfolio with a large share of high-risk investments is definitely not balanced. These investments can generate big profits and big 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.
- Stable currencies 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 needed. The cryptocurrency market is very volatile and you have to make decisions depending on the current situation.
- Allocate new capital strategically to avoid overloading an area of your portfolio. When you make a big profit with a coin, you may be tempted to invest more money, but don’t give in to greed and think carefully about each step.
- Do your own research on all available information – this advice will always be relevant. Invest your own money, so don’t just rely on strangers.
- Invest as much as you are willing to lose. If you’re worried about your wallet, you’re probably not well-balanced. Try to secure positions that prevent you from incurring serious losses if things go south.
The cryptocurrency market depends a lot on the state of bitcoin, but you should not overlook the importance of balancing your wallet. Investments in different cryptocurrencies can offset the losses associated with a bitcoin crash, so diversification is very important. Remember that the balance of the portfolio is not just about keeping different currencies. A good strategy is an important tool to create a portfolio that satisfies your risk appetite.