This growth has opened up numerous investment opportunities for traders, including trading coins, holding tokens, exploring NFTs (Non-Fungible Tokens), and entering the world of Decentralised Finance (DeFi).
However, the abundance of choices can be overwhelming for investors. The challenge is deciding which assets to include in your portfolio. Fortunately, there are established strategies to help you make informed investment decisions.
Let's explore these proven strategies for creating a well-balanced crypto portfolio that suits your financial goals and risk tolerance.
Five Strategies for Building a Crypto Portfolio in 2O23
- Diversify Your Crypto Portfolio for Optimal Results
- Enhance Your Crypto Portfolio by Diversifying Across Crypto Market Sectors
- Combine Cryptos from Various Blockchain Networks
- Explore Crypto-Focused Stocks
- Keep your crypto portfolio healthy by Rebalancing Regularly
1. Diversify Your Crypto Portfolio for Optimal Results
When organising your crypto portfolio, it's crucial to blend both well-established cryptocurrencies and new presale projects. This strategy aligns with the principle of diversification because different cryptocurrencies often yield varying profits.
Consider Bitcoin, the top dog of the crypto world. While it's a favourite choice for many investors, its returns may not match those of smaller counterparts like Arbitrum (ARB) or Worldcoin (WLD). Therefore, investors can enhance their portfolio's risk-return balance by including a mix of both large and small cryptos.
If you're comfortable with a bit more risk, you can look into buying brand-new cryptocurrencies during their presale phase. For further context, here's a simple explanation of what a crypto presale is:
When a new cryptocurrency is about to be launched, the creators often offer a presale phase for early investors. During this phase, you have the opportunity to buy the cryptocurrency before it is publicly available on exchanges.
By investing in a presale, you're betting on the potential success of a brand-new cryptocurrency. It's like being an early adopter of a product or technology. The hope is that as the cryptocurrency gains traction and popularity, its value will increase, and you can reap the rewards of getting in early.
However, as with any investment, there are risks involved. Since these cryptocurrencies are new and untested, their success is not guaranteed. They might face challenges and regulatory hurdles or fail to gain significant market acceptance. So, it's crucial to do thorough research and consider the potential risks before diving in.
2. Enhance Your Crypto Portfolio by Diversifying Across Market Sectors
Effective crypto portfolio management involves diversifying across various market sectors. Not all cryptocurrencies are created equal; each has its own unique role within the larger crypto ecosystem. Consequently, a cryptocurrency in one sector often generates different returns compared to one in another sector.
To achieve a well-rounded portfolio, investors should explore the best cryptocurrencies from multiple market areas. Here are some popular sectors within the current crypto market:
Decentralised Finance (DeFi):
Decentralised Finance, or DeFi, refers to a system where financial transactions, such as borrowing, lending, or trading, happen without traditional intermediaries like banks.
DeFi operates on blockchain technology, typically using smart contracts to automate and secure transactions. It aims to provide more accessible and inclusive financial services to anyone with an internet connection.
Staking is a process where individuals hold and lock up their cryptocurrency in a digital wallet to support the operations of a blockchain network. By doing so, participants help validate transactions and secure the network. In return, they earn rewards, often in the form of additional cryptocurrency, for their contribution.
The Metaverse refers to a virtual reality space where people can interact, socialise, and engage in various activities, similar to a digital universe. It combines elements from gaming, social media, and online communities. Users can create digital avatars and explore vast virtual worlds, often with their own economies, properties, and experiences.
NFT stands for Non-Fungible Token. NFT projects involve creating and trading unique digital assets that represent ownership of a specific item, artwork, or collectible, often using blockchain technology.
These assets have a digital certificate of authenticity, distinguishing them from interchangeable cryptocurrencies like Bitcoin. NFTs have gained popularity in the art world, gaming, and digital collectibles space.
Blockchain is a decentralised and transparent digital ledger that records transactions across multiple computers. It ensures trust and security by creating an unchangeable and publicly verifiable history of transactions. Blockchain is the underlying technology for many cryptocurrencies and enables various applications beyond finance, such as supply chain management and voting systems.
Gaming cryptos are cryptocurrencies, such as Axie Infinity (AXS) and The Sandbox (SAND), designed specifically for use within the gaming industry. They aim to create digital economies within games, allowing players to earn, trade, and spend digital assets.
Peer-to-Peer (P2P) Trading:
Peer-to-peer (P2P) trading is a way of buying and selling cryptocurrencies where traders buy and sell directly with each other on a cryptocurrency exchange app or website. The cryptocurrency exchange provides an online platform to connect buyers to sellers and sellers to buyers. The exchange also acts as a regulator between both parties to ensure safe trading.
Artificial Intelligence (AI) Cryptos:
AI cryptocurrencies are tokens that support blockchain and decentralised finance platforms such as SingularityNET and Injective Protocol.
When you buy an AI crypto token, you get access to use these platforms. You can also make money from investing or trading these tokens like you would trade regular cryptos like BTC, ETH, or ADA.
3. Combine Cryptos From Various Blockchain Networks
Setting up a solid crypto portfolio allocation requires consideration of cryptocurrencies from various blockchain networks. While this may sound like common sense, it's a crucial aspect many investors overlook.
The assets you invest in are closely connected to the blockchains they operate on, and this connection significantly impacts their performance.
Consequently, the fortunes of these cryptocurrencies are closely tied to Ethereum's performance. If Ethereum experiences a substantial downturn or crash, the prices of Uniswap and Aave will likely follow suit. This highlights the importance of diversifying your crypto holdings across various blockchains.
Here are a few other blockchain networks other than Ethereum you can add to your portfolio:
4. Explore Crypto-Focused Stocks
Allocating funds to these stocks offers diversification within your crypto portfolio, as their returns diverge substantially from the crypto assets themselves.
It's worth noting that stocks typically exhibit lower volatility, making them an appealing choice for investors and traders who are more conservative.
5. Keep Your Crypto Portfolio Healthy by Rebalancing Regularly
Crypto is constantly changing, and it is crucial for investors to embrace the practice of regular portfolio rebalancing.
This essential step involves periodically adjusting your holdings to optimise their performance. By rebalancing, you can remove underperforming coins/tokens and replace them with investments that can offer better profits.
Three Types of Cryptocurrency Portfolio Allocations
In the crypto world, there's no one-size-fits-all when it comes to portfolio allocation. Every investor must create a unique strategy that works for them.
Nonetheless, there are several popular portfolio allocation strategies you can use. Let's explain three of them below:
- The 60/40 Portfolio: A Blend of The Top Two Cryptos
- The 33% Portfolio: Balancing Risk and Reward
- Aggressive Allocation: Pursuing High Rewards, Accepting Higher Risks
1. The 60/40 Portfolio
Inspired by traditional finance's widely adopted asset allocation model, the 60/40 portfolio allocates 60% of an investor's capital to Bitcoin and 40% to Ethereum.
This allocation strategy simplifies the crypto portfolio by including the market's top two most established cryptos.
The strength of the 60/40 portfolio lies in its stability, making it an attractive choice for conservative investors with a lower appetite for risk.
2. The 33% Portfolio
For those willing to embrace a higher level of risk, the 33% portfolio approach is a great choice.
In this strategy, investors allocate 33% of their capital to Bitcoin, another 33% to Ethereum, and the remaining 33% to high-risk, high-reward cryptocurrencies of their choice. This third segment of the portfolio is where investors can explore assets they believe hold significant potential for substantial gains.
3. Aggressive Allocation
The aggressive portfolio allocation is for investors with a strong appetite for risk and a thirst for the potential for substantial gains.
This strategy allocates a smaller portion of the total capital to the top two "safe" coins - Bitcoin and Ethereum, and reserves the bigger share for riskier cryptocurrencies.
For instance, some investors may allocate just 40% of their capital, evenly split between Bitcoin and Ethereum, leaving a significant 60% to explore the more volatile cryptos that could offer higher profits.
Creating a crypto portfolio in today's market can be overwhelming, but these five strategies shared above can considerably simplify the process.
Remember to diversify your crypto portfolio for optimal results, enhance it by diversifying across crypto market sectors, combine cryptos from various blockchain networks, explore crypto-focused stocks, and keep your crypto portfolio healthy by rebalancing regularly.
Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.