What is a crypto portfolio?
A crypto portfolio is a collection of cryptocurrencies owned by an investor or trader. Portfolios typically contain various assets, including altcoins and crypto financial products. It's pretty similar to a traditional investment portfolio, except you’re sticking to one asset class. You can track your crypto portfolio manually with a spreadsheet or use specialized tools and software to calculate your holdings and profits. A good portfolio tracker can come in handy. Trackers are essential to day traders and other short-term traders and offer value to long-term investors and HODLers.
What are asset allocation and diversification?
When creating an investment portfolio, you should be familiar with the concepts of asset allocation and diversification. Asset allocation refers to investing in different asset classes (e.g., cryptocurrencies, stocks, bonds, precious metals, cash, etc.). Diversification relates to the distribution of your investment funds across different assets or sectors. For example, you could diversify your stock holdings by investing in other industries, such as agriculture, technology, energy, and healthcare. Both of these strategies reduce your overall risk.
Technically, cryptocurrencies are a single asset class. But in a cryptocurrency portfolio, you can diversify across products, coins, and tokens that present different goals and use cases. For example, you could allocate your portfolio with 40% bitcoins, 30% stablecoins, 15% NFTs, and 15% altcoins. To explore the topic further, check out Asset Allocation and Diversification Explained.
Concentrated vs. diversified crypto portfolios
Most advice will tell you that your crypto portfolio has to be diversified. While it is a standard for investors, there are pros and cons to spreading your capital around different assets. As we mentioned already, a diversified portfolio reduces overall risk and volatility. Losses can be offset by gains and keep your position stable. Your portfolio also has more opportunities to make gains with each coin you own. Not every investment will be a winner, but you're more likely to earn profits with proper asset allocation and diversification.
However, the more diversified your portfolio is, the closer it will track the overall market. Most traders and investors are looking to beat the market with more significant gains. A highly diversified portfolio will lead to more average returns than a successful concentrated portfolio. Worse performing assets can balance out high earners.
Managing a diversified portfolio also requires more time and research. To invest soundly, you should understand what you are buying. With an extensive portfolio, the chances of understanding everything well decrease. If your portfolio is across different blockchains, you may also need to use multiple wallets and exchanges to access your assets. The decision to diversify or not is yours, but some diversification is always recommended.
Different types of cryptocurrencies
Bitcoin is the most famous cryptocurrency and is the biggest by market cap. But a well-balanced portfolio will include a selection of different coins to reduce overall risk. Let’s go through some of them.
Nowadays, it's hard to find new coins that primarily deal in payments. But if you go back to the birth of cryptocurrencies, most projects were systems to transfer value. Bitcoin is the most well-known example, but we also have Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC), among others. These coins are the first generation of cryptocurrencies that existed before Ethereum and the introduction of smart contracts.
A stable coin attempts to track an underlying asset such as a fiat currency or precious metal. BUSD, for example, pegs the U.S. dollar with reserves set at a 1:1 ratio. PAX Gold (PAXG) uses the same system but ties the coin to the price of one fine troy ounce of gold held in reserves. While stable coins don't necessarily provide significant returns, they live up to their name and provide stability.
The cryptocurrency market is volatile, so it is helpful to have something in your portfolio that keeps its value. A crypto market dip shouldn't affect if the stable coin pegs something outside the crypto ecosystem. If you want to move tokens out of cash or project, you can rapidly transfer them to a dollar-backed stable coin like BUSD to safeguard your gains. Converting into fiat is a much longer process than trading for a stable currency.
Just like traditional securities, a security token can represent many things. It could be equity in a company, a bond issued by a project, or even voting rights. Securities have effectively been digitized and put on the blockchain, meaning they mostly fall under the same regulations. For this reason, security tokens are in the jurisdiction of local regulators and must go through a legal process before issuance.
A utility token acts as the key to a service or product. For example, BTC and ETH are both utility tokens. You can use them to pay for transaction fees when interacting with decentralized applications (DApps). Many projects issue their utility tokens to raise funds in a coin offering. The token's value should theoretically directly link to its utility’s value.
You can receive voting power on a project and even a revenue share by holding a governance token. You'll most likely find these tokens in decentralized finance (Defi) platforms like PancakeSwap, Uniswap, or SushiSwap. Like utility tokens, the value of a governance token directly relates to the success of the underlying project.
How to build a well-balanced crypto portfolio
Each investor or trader will have their ideas on what makes a well-balanced crypto portfolio. But, there are some general rules worth considering:
1. Split your portfolio between high, medium, and low-risk investments and give them appropriate weightings. A portfolio containing a large portion of high-risk investments is not balanced. It might have the chance to provide you with more significant gains but may also cause huge losses. Your risk profile will determine what's best for you, but there should be some mix.
2. Consider holding some stablecoins to help provide liquidity for your portfolio. Stablecoins are the key to many Defi platforms and can help you quickly and easily lock in gains or exit a position.
3. Rebalance your portfolio if needed. The crypto market is very volatile, and your decisions should change depending on the current situation.
4. Allocate new capital strategically to avoid overweighting any one area of your portfolio. If you've made significant gains recently from one coin, it can be tempting to pump in more money. Don't let greed interfere, and think about where you can better place the money.
5. Do your research. You really can't beat this classic piece of advice. You are investing your own money, so don't rely solely on the advice of others.
6. Only invest what you can afford to lose. Your portfolio isn't correctly balanced if you feel stressed about it. Your positions should not cause you severe consequences in case things go wrong.
Crypto portfolio trackers
A portfolio tracker is a program or service that allows you to trace the movements of your holdings. You can see how your current allocation stacks up with your long-term goals and track your progress. Here are some examples you might want to consider:
CoinMarketCap is a hugely popular price tracker developing its portfolio feature. The portfolio tracker is available for free on desktop and mobile devices. You need to add in your holdings manually to use the portfolio tracker as it doesn't connect to your wallet or exchange. There's also the option to add the prices you bought to track your gains accurately.
CoinGecko is mainly known for its cryptocurrency price tracking, but it has a portfolio option too. It's free to use and is available on your browser or mobile device. If you’re already a regular CoinGecko user, the tracker is worth trying.
Delta is a mobile app that allows you to simultaneously view your crypto portfolio and traditional investments. It can connect with 20 exchanges and various wallets. It also has both free and paid versions, but you cannot trade within the app.