Building a well-balanced cryptocurrency portfolio is not an overnight task. It takes time, research and calculated decision-making. You need to consider the level of risk you’re prepared to accept and how much you can afford to put in. Investing in cryptocurrency can be a volatile rollercoaster and you should have a clear idea of the financial goals you wish to achieve.
What is a cryptocurrency portfolio?
Each investor will have a different idea of what their portfolio should look like. A cryptocurrency portfolio is ultimately a folder of your digital assets, consisting of cryptocurrencies. You’ll need an eye for figures and an understanding of the basic principles of asset allocation and diversification.
Your cryptocurrency portfolio is not a static entity and you’ll need to keep tabs on your invested cryptocurrency prices. Valuations can fluctuate and knowing when to sit tight or trade will be crucial for successful portfolio building.
Tip 1: Learn the basics
Before steamrolling ahead, take note of the old adage ‘knowledge is power’ and when it comes to crypto investment, there has never been a truer word spoken. Before adding anything to your crypto portfolio, you should have a clear picture of what cryptocurrency is and how it all works.
Here is a very brief overview:
Did you know that there are over 10,000 products on the cryptocurrency list? Of course, it wouldn’t be feasible to invest in them all, nor would you want to. In fact, the five most-valued cryptocurrencies make up over 75% of all cryptocurrency value.
Cryptocurrencies are decentralized digital currency, not beholden to any government or central bank but a network of computers (blockchain) that regulate its production and value. Bitcoin kicked it all off, with the first transaction being completed in 2009.
Cryptocurrency units are often known as ‘tokens’ or ‘coins’, while some prefer the term ‘altcoins’, which refers to those coins developed as an alternative to the infamous Bitcoin. Tokens or coins are stored in a digital wallet, which can either be ‘hosted’ by a third party, e.g. Coinbase (private key) or a ‘hardware’ wallet, which is a physical device and not overly popular.
Tip 2: Portfolio diversification
For many beginners, investing in cryptocurrency basically means to buy and hold Bitcoin, but as we mentioned earlier, there are thousands of available products. Many investors believe that you shouldn’t put all your eggs in one basket and diversification helps to manage risk.
Some of the well-known cryptocurrencies are Bitcoin, Ethereum, Cardano, Dogecoin and Litecoin. At the time of writing, as measured by their market capitalization, Bitcoin holds top position, with Ethereum (ETH) sitting in second place on the cryptocurrency list and Tether (USDT) a cool third.
Digital stablecoins such as USDT or the USD Coin (USDC) are a type of crypto, pegged to a fiat currency. Take the USDC: for example, you can always redeem one USDC for US$1.00, giving it a stable price. So while stablecoins may not provide huge returns, they can provide stability and are considered a useful addition to your crypto portfolio.
Managing a diverse portfolio will take up more time but is often advised as it leads to increased average returns. Cryptocurrency prices can fluctuate resulting in underperforming assets balancing out high earners. Research is most definitely needed prior to any investment and you may also require multiple wallets to access your assets.
Tip 3: Research and portfolio tracking
Research is key for growing a successful cryptocurrency portfolio. Here are some initial pointers:
- Watch out for market fluctuations – Keep an eye on cryptocurrency prices and market cap statistics.
- Get reading – Some platforms publish white papers or research findings: read them! Reports can often provide a relevant roadmap and info on how the crypto works.
- Follow crypto news and events – Keeping abreast of any significant changes or events gives an investor the opportunity to make informed decisions.
- Check out its value – How will the crypto be used? Is it based on innovation or technology?
- Use a stop-loss order – Some traders use these to limit their losses, and sell an asset when the price falls to a certain level.
As we mentioned earlier, when investing in more than one cryptocurrency it may be necessary to hold multiple digital wallets to access your assets. This can become a little cumbersome and/or cause confusion. To resolve the issue, investors may utilize a portfolio tracker. This is a piece of software that enables you to track and monitor all of your investments from a single dashboard.