Investments are quite good because it gives some return on the resources which have been invested, either in the long run or in the short run. On the contrary, investments may not live up to their expected return (ROI) if they are not properly managed.
It is one thing to invest in cryptocurrencies but it is another thing to keep track of your investment, avoid some trading mistakes, balance your portfolio and manage risks.
The first step to investing in cryptocurrency is buying your first cryptocurrencies such as Bitcoin or Ethereum. But is it enough to call it a successful investment?
Crypto investors can adopt any suitable strategy with which they will manage their investment portfolio as long as they can manage the risks. While some prefer to invest in one single cryptocurrency like Bitcoin or Ethereum, others may choose to diversify their investments to spread the risks.
There is no assurance that diversifying your investment is the best way to manage your crypto portfolio because both strategies have their pros and cons.
However, you can easily mitigate losses during the crypto winter by diversifying your investment through holding multiple crypto assets which include stablecoins, and creating a regular balance in your asset allocation.
Third-party portfolio trackers or manual spreadsheet records of the transactions can help you manage your portfolio easily. You can link these portfolio trackers to your crypto exchanges or wallets to make the tracking process a convenient one.
In the end, an investor thinks of how he can successfully manage the risks involved in the crypto investment and how well to balance his crypto portfolio regularly.
This article will show you ways you can build a balanced crypto portfolio and manage risks.
What Is A Crypto Portfolio?
A crypto portfolio is a compilation of different varieties of cryptocurrencies owned by an investor or crypto trader.
These varieties of assets may include altcoins and different financial products.
A crypto portfolio is not quite different from the traditional investment portfolio of shares, securities and bonds.
Investors can keep track of their portfolios by recording their activities manually with a spreadsheet or they can use advanced tools called portfolio trackers to keep track of their investments and calculate their profits and holdings.
A good portfolio tracker is important for both short-term and long-term investors and day traders.
What Are Asset Allocation And Diversification?
As an investor in the crypto space, you should be able to know the difference between asset allocation and asset diversification.
Asset allocation means investing in different classes of assets such as crypto, shares, bonds, precious metals(gold) and cash.
Asset diversification means distributing investment funds across different sectors or assets to mitigate risks. For example, an investor can diversify his holdings in stock by investing in the technology, agriculture, health, and energy sectors.
Cryptocurrencies are indeed just one asset but it is possible to diversify across other products like tokens, stablecoins etc in a crypto portfolio. These products represent different goals and use cases which makes it difficult for them to be risky at the same time.
For example, you can give stablecoins 30% allocation on your portfolio, 20% for NFTs, and 50% for Bitcoins.
How To Build A Balanced Crypto Portfolio
1. Decide What You Want to Achieve:
The first step to building a good and balanced crypto portfolio is to set and achieve the set goals. Be clear about what you want and set yourself up to achieve it by avoiding some mistakes.
Also, be realistic while setting your goals so that you may not set impossible goals that will be quite unattainable. The secret is starting small and gradually increasing your goals as you build your wealth of experience.
After you’ve set your goals, back them up with a plan to achieve them. You can accommodate plans such as what coins you’ll invest and how much you will invest. A plan should also tell you when to sell and when not to, hence, saving you from making impulsive decisions.
2. Consider Your Risk Tolerance:
It is important to consider the level of risk you can tolerate before investing in any cryptocurrency. While some investors love the volatile nature of crypto and see it as an opportunity to reap profits, some consider the risks to be too dear and would prefer less volatile assets like stablecoins.
The first step to determine your risk tolerance level is to examine your investment goals and see what your goals are.
For example, are you a long-term or short-term goal-oriented investor?
Investors who are interested in short-term profits will likely have higher risk tolerance than the ones who are interested in long-term profits.
The reason is that a short-term investor will accept short-term losses just to make some profits but a long-term investor will be more cautious to invest in cryptocurrencies that he believes will grow in value over a long time.
3. Choose a Mix of Assets:
Diversification of your crypto holdings will indeed minimize any potential risks on your holdings and also yield more returns on your investment.
However, there are some factors you should consider or methods you should uphold while diversifying your crypto holdings.
Firstly, diversify according to the level of your risk tolerance. For example, if you are a risk-averse investor, you may choose to allocate 80% of your funds to already established and less volatile coins like Bitcoin while other risky altcoins may have the remaining 20%
A second approach is to diversify your holdings into different types of cryptocurrency assets rather than just one type of cryptocurrency. This strategy will give you an insight into different projects and also avail you of a pool of opportunities from all of them.
For example, you may invest 50% of your funds in coins, 30% in tokens and 20% in NFTs
However, conduct thorough research on all the types of cryptocurrencies before allocating any percentage of your funds to any.
No matter the approach you choose, cryptocurrency is a volatile asset which requires a very prudent investment and diversifying your investment is the best way to minimize risks.
4. Rebalance Your Portfolio Regularly:
There’s a great need to rebalance your portfolio regularly if you must minimize risks and stay safe on your investments. Given the volatile nature of cryptocurrency, rebalancing one’s crypto portfolio will help one stay safe and diversified because a portfolio which is not rebalanced regularly will suffer loss when the price of crypto changes for bad.
Assuming you invested $20,000 in Bitcoin in early 2016, as at the end of 2021, such investment would have been worth more than $100,000 when there was a bullish crypto market. If you had not rebalanced your portfolio till today, you would have left all your asset as Bitcoin and would be running a great loss in the current bear market.
Therefore, rebalancing your portfolio regularly will protect you from losses.
A balanced crypto portfolio may not be a guarantee of success in the crypto world due to unforeseen circumstances but it is surely a good way to invest in cryptocurrency.
Diversification helps investor to mitigate risks and gives them a better chance to fight back through other sources.
Users must stay updated on the latest crypto news to know which crypto to invest in.
A well-balanced portfolio is a sure way to make long-term profits from crypto.