How to build an excellent crypto portfolio? What crypto portfolio strategy should I go with? Which cryptocurrencies should I invest in? These are some of the many questions that many crypto investors ask themselves.
With over 11,000 crypto assets to choose from, the key is to diversify your crypto portfolio by investing in multiple cryptocurrencies. However, there are still risks involved with this type of investment. But what can you do to mitigate those risks? This article will discuss how to build a diversified crypto portfolio and share the best tips.
What is a Diversified Crypto Portfolio?
A crypto portfolio is a collection of various cryptocurrencies that investors hold in order to balance their risk/reward profile. You can diversify your portfolio across coins, tokens and products that present different goals. Creating a diversified crypto portfolio is a common strategy used by expert crypto investors. But to diversify a crypto portfolio, you need to understand the different types of cryptocurrencies that are available for investment.
Different types of cryptocurrencies
The crypto market encompasses more than 11,000 digital assets. These cryptocurrencies have different use-cases, functionality, operations, etc. Let’s take a look at some of them.
1. Payment coins
Among the most common crypto coins are payment coins. These are digital currencies with the largest market cap, and they provide fast transactions at low fees, such as Bitcoin (BTC) and Litecoin (LTC). These are the first generation of cryptocurrencies that existed before Ethereum and the introduction of smart contracts.
Stablecoins are designed to avoid the volatility typical of crypto markets. They are pegged to a fiat currency or commodity, so their value doesn’t fluctuate much as most other cryptocurrencies do. Stablecoins provide traders with an easy way to transfer money between exchanges having different crypto-assets. One example of stable coins is Tether (USDT).
3. Security tokens
Security tokens are crypto-assets that derive value from external factors, such as the real estate market or oil reserves. One can trade these tokens on exchanges just like any other asset. Security tokens also allow firms to accept new types of currencies — cryptocurrencies over fiat money-without going through bank intermediaries.
4. Governance Tokens
These crypto-assets give the owners a right to vote and help in decision-making. For instance, by using crypto tokens that provide voting rights, shareholders of a company will be able to cast their votes based on the number of shares they own. The value of governance tokens directly relates to the success of the underlying project.
How To Create A Diversified Crypto Portfolio
It is essential to research past trends in the market and analyse the current situation. Here are a few tips to help you get started.
1. Divide your assets
A portfolio that contains only high-risk investments might end up in losses if the market gets turbulent, potentially affecting your entire portfolio. If you want to be successful, it is crucial to divide your crypto assets into different categories and investments within each category. This will allow you to manage the price volatility of one cryptocurrency by spreading out across multiple cryptocurrencies. Consider splitting your assets and giving them appropriate weightage.
2. Invest in stablecoins
Stablecoins are crypto assets that have low volatility. They serve as an excellent way to minimise risk in your portfolio and reduce the potential fluctuations in the value of your crypto assets. This is because stable coins maintain their price, unlike other cryptocurrencies whose prices vary with demand and supply forces on exchanges.
3. Avoid overweighting in any one area
You must allocate new capital strategically to avoid overweighting any one area of your portfolio. For example, if you have invested in crypto that helped you earn big profits, it can be tempting to keep investing in the same coin and make more money. New crypto investors can make the mistake of putting too much faith in a coin and allocating significant capital to it. However, this strategy often fails as one crypto asset cannot be expected to outdo other cryptocurrencies consistently.
4. Research thoroughly before investing
Never invest in crypto without doing your research first. Make sure to learn about the crypto asset by reading reviews, FAQs and understanding its underlying technology. Identify if it is a good fit for you before putting your money into it. Do thorough research before making an investment decision as many factors can contribute to a crypto assets’ success, including public opinion, industry dynamics, and even government regulations.
The Bottom Line
Although crypto is still new, it’s not too early to create a diversified crypto portfolio. Several strategies can be deployed when building a crypto portfolio. Unfortunately, there are risks involved with investing in cryptocurrencies because they can be highly speculative and come with a substantial risk of loss due to factors such as volatility or regulation changes.
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