Like their traditional counterparts, crypto portfolios, too, need to be balanced. It means planning and diversifying your investments so that the level of risk is acceptable. In addition, the crypto market is highly volatile and needs a proper planning before you start investing.
If you are a crypto enthusiast looking to put your money into the digital currency space, here’s how you can build a balanced crypto portfolio for higher returns.
What is a balanced crypto portfolio?
A balanced crypto portfolio means structuring your investments so that the level of risks is acceptable. When you invest, there is always a chance that you will lose your money owing to the volatility of the crypto market. Hence, balancing out your investments in a manner that has both growth and stability is a must for any investor.
You can achieve this by splitting a crypto portfolio into two categories: growth and capital preservation. Both have different levels of risks involved.
Methods of building a balanced crypto portfolio
There are various methods of building a balanced crypto portfolio. They are as follows:
- Understanding capital preservation vs growth
Capital preservation is a type of investment that has low risk/returns. It will provide stable but slow growth based on market conditions and is less susceptible to volatility.
On the other hand, growth assets have a high risk/return. This is because they provide rapid growth but are highly volatile.
Before investing, you need to divide your portfolio into two sections – capital preservation and growth.
In crypto, you can plan your portfolio by investing in cryptocurrencies like Bitcoin, Ethereum, etc., for growth and stablecoins like Tether, USD Coin, Dai, etc., for capital preservation.
- Diversifying your assets
When you diversify your assets, you are just ensuring not to put all your eggs in one basket. Cryptocurrency being a single asset class, you can diversify your assets by investing in Bitcoins, Stablecoins, NFTs, Altcoins, etc.
Let’s explore the asset options in detail.
Bitcoins
Bitcoin is currently the most popular cryptocurrency on the planet. Its value is highly volatile but, like every risky investment, has a high propensity for growth. As a result, you can dedicate a part of your portfolio to Bitcoins as growth assets.
Stablecoins
A stablecoin is a cryptocurrency with a value pegged to a fiat currency, commodity, or financial instrument. Investing in them helps keep your portfolio stable.
For example – 1 USD coin has its value pegged at 1 US Dollar. Therefore, when the value of 1 Dollar rises, so does the value of the USD coin. However, the rise and fall in value are less volatile than traditional cryptos like Bitcoin, Ethereum, etc. Hence, it has the name stablecoins.
NFTs
NFTs (Non-fungible tokens) are a great way to diversify your crypto investment. They cannot be exchanged for one another; hence, if you make the correct investment, they can show a rise in value in the long run. NFTs will also contribute to the capital preservation factor in your crypto portfolio.
Altcoins
All cryptocurrencies other than Bitcoins are called Altcoins. There is a huge list of them in the current market, some popular ones being Ethereum, Binance, Cardano, etc.
The altcoins fall in the growth part of your investment, and dividing your investment among Bitcoins and various altcoins will help your investment achieve growth while minimising the risk factor by a certain level.
Crypto tokens
To put it simply, a crypto token is a denomination of a cryptocurrency. It is an exchangeable asset in a blockchain of its compatibility, and you can use it for investment or payment purposes.
An investment like this is again high risk but has high returns too. Bitcoin Cash, Ripple, Litecoin, etc., are some examples.
Security tokens
A security token is a digital asset that represents ownership and other rights. It transfers the value of an asset or assets to a token and can be considered the digital form of traditional assets like stocks, bonds, or other securitised assets.
For example, you can offer security tokens instead of stocks if you want to release a part of your company ownership.
- Using crypto portfolio trackers
Keeping track of all your investments can be confusing and hectic as well. However, you can view your current allocation using a crypto portfolio tracker.
Some popular crypto portfolio trackers are:
- CoinMarketCap
- CoinGecko
- Delta
- CoinTracker
- CoinStats and much more
Important factors to remember
Here are some crucial factors that you have to remember while you are working on building a balanced portfolio for crypto investments:
- When you split your portfolio into capital preservation and growth sections, it is up to you to determine what portion of your investment to allocate to each category.
- Always hold a certain amount of stablecoins for liquidation so that when you need cash in a short period, you will have them at your disposal.
- Consider the odds and risks before pumping more money into a certain section of your portfolio. For example, if you get gains from a certain investment, you should measure the odds before putting in more money.
- Crypto markets are volatile, and keeping a watch on the market is crucial. It would help if you made quick decisions to churn out a huge profit or reduce your loss.
- Always invest what you can afford to lose. If you invest too much and suffer a loss, the amount lost should not affect you enough to disrupt your financial planning and money management.
Investing in cryptocurrency is still a fairly new concept in India, and having a balanced crypto portfolio will let you explore this new world without costing much of your money. Before investing, thorough research and understanding of the market and investment risks are crucial.
