One of the most notable hallmarks of the cryptocurrency market is volatility. Prices can soar or crash overnight, which offers immense opportunities for investors to make life-changing gains but also carries significant risk. The key to achieving long-term success in this unpredictable environment is building a balanced portfolio. A steady portfolio helps you manage risk and maintain steady growth despite the impact of market swings.
This article explores the fundamentals of building a well-balanced crypto portfolio for long-term success in your investment journey.
What is a Crypto Portfolio?
A crypto portfolio is simply a collection of various digital currencies that an individual holds or trades. This is similar to a traditional investment portfolio where investors diversify their assets across different stocks, bonds, and real estate. However, the crypto portfolio focuses on a single asset class, comprising various digital currencies such as Bitcoin, Ethereum, Litecoin, and others.
The main purpose of the crypto portfolio is diversification. Instead of putting all your eggs in one basket, it’s often best to spread your investment across multiple projects. This is because cryptocurrency assets are highly volatile. The price of a coin can drop significantly within a few hours, resulting in substantial losses for investors.
To avoid such an occurrence, a balanced portfolio is essential. This way, even if a single project underperforms or fails, its impact on your overall investment will be significantly reduced. Additionally, you can offset the losses from one asset with gains from another. The goal is not only to reduce risk but also to increase an investor’s chances of achieving long-term success.
Building a Balanced Crypto Portfolio: Essential Tips
To build and maintain a strong, diversified portfolio, it’s important to understand a few fundamental principles. Below are some essential tips and strategies that can help you.
DYOR (Do Your Own Research)
Unlike luck-based games like Crazy Coin Flip online, success in cryptocurrency investments relies heavily on strategy and research. Before investing in any digital asset, take the time to conduct thorough due diligence rather than relying on public opinion or guesswork. Evaluate the project’s use case, underlying technology, road map, leadership, and development team to determine whether or not it has potential for long-term success.
Diversify Across Market Capitalisation
When building your portfolio, it’s essential not to limit yourself to just one cryptocurrency category. Instead, you should have a mix of assets across different market capitalisations to achieve true balance. This means spreading your investment across not only large-cap cryptocurrencies but also mid-cap alt coins and low-cap projects.
- Large-cap assets: Established core holdings like Bitcoin, Ethereum, Binance coin, etc
- Mid-cap alt coins: Established Layer-1 competitors or Layer-2 scaling solutions like Solana, Polkadot, Chainlink
- Low-cap projects: New emerging projects with high risk and massive growth potential
A practical approach you can employ is to allocate a larger percentage of your investment to large-cap assets (e.g., 50-70%), a smaller percentage to mid-cap assets (e.g., 20-30%), and the smallest percentage to low-cap assets (e.g., 5%-15%).
Include Stablecoins
Another important tip for building a solid, balanced crypto portfolio is to have a portion of your investment allocated to stablecoins. As the name suggests, these are assets that provide price stability and are not subject to the typical volatility of the crypto market.
Due to their stable nature, these assets serve multiple purposes that are vital to crypto investments. First, they provide a safe haven for investors during market downturns. Second, they provide instant liquidity when you need to buy dips. The asset also allows investors to participate in various low-risk yield-generating opportunities. A standard approach is to allocate 8-20% of your investment budget to stablecoins.
Implement Strategic Investing Techniques
One of the most effective investment strategies for building a balanced crypto portfolio is dollar-cost averaging (DCA), a popular technique for long-term investors. Instead of trying to “time the market” perfectly (which can often result in bad investment decisions), DCA helps you spread your buy entry over time.
Dollar-cost averaging typically involves making a fixed, recurring purchase at regular intervals, such as weekly, monthly, or at a preferred schedule of your choice. It ignores market conditions, helping investors avoid the stressful psychology of trying to find the perfect time. DCA helps average the cost of investments over time, reducing the impact of short-term market fluctuations.
Besides DCA, you can also consider other investment strategies, such as HODL (Hold On for Dear Life), staking, lending, and yield farming, among others.
Rebalance Your Portfolio Periodically (If Needed)
Your initial asset allocation will fluctuate as prices rise or fall in value. A cryptocurrency that performs well will naturally increase your asset value, potentially disrupting your initial budget allocation for diversification. For example, if Bitcoin rallies, your portfolio allocation of the asset may grow from 35% to 50%. This will significantly increase your risk level.
As such, it is essential to rebalance your portfolio regularly to match your initial target allocation. This process involves selling the gains from overperforming assets and reallocating them to buy underperforming or underrepresented projects. You can choose to rebalance monthly, quarterly, biannually, or on any schedule that best suits your strategy.
Conclusion
Volatility is a double-edged sword for the crypto market. It can bring massive profits one minute and devastating losses the next. To weather these sharp market swings, investors must embrace the concept of a balanced portfolio. By implementing the strategies above, you can effectively minimise risk, smooth out volatility, and achieve long-term success.