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How to build your crypto portfolio

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PDAX

December 23, 2022

6 min read

BeginnerTrading

TL;DR

It is important for any investor at whatever level of experience to have a proper investment plan including how to manage one’s portfolio as a means of minimizing risk through diversification.

A portfolio may be a collection of different assets that cover a wide range of investments like stocks, bonds, real estate, and crypto. A crypto portfolio by itself, is also made up of different coins and tokens, each with different utilities and risk levels that should be taken into account to create a sound investment strategy. 

What is a portfolio?

An investment portfolio is a collection of financial assets owned by a single investor. These assets can take the form of bonds, stocks, cash, jewelry, real estate, art, or cryptocurrency.

The most prevailing piece of advice when it comes to investing is diversification. Through diversification, an investor would spread their investment capital over a wider range of financial assets as opposed to just investing in one or a few assets–thereby giving more potential for growth, as well as spreading the risks over a wider area. 

For example, if your entire investment portfolio is only put into a single company on the stock market, then the growth of your money will be solely dependent on the performance of that single company. However, if you invest in many different companies, then you have a higher chance of growing your money because you’ve also increased your chances that one or more of these companies will perform exceptionally well. 

It’s like the old saying about how one should not put “all of the eggs in just one basket” as a metaphor for how to effectively mitigate risks. And when it comes to volatile assets such as cryptocurrency, diversification becomes even more important. 

What should be in your crypto portfolio?

Even though crypto is often branded as a relatively riskier investment, diversification is still a tried-and-tested means of mitigating such risks, and many savvy crypto investors take a lot of pride in the contents of their portfolios as a reflection of their outlook towards the market and their overall investment strategy.  

There are no hard rules on what your crypto portfolio should consist of. This can vary depending on your personal goals, risk appetite, and market conditions. But here are a few popular kinds of crypto assets that most investors typically have in their portfolios:

As the very first cryptocurrency, BTC remains the most popular crypto asset with the largest market capitalization. As the industry’s principal cryptocurrency, Bitcoin’s price movements also generally dictate the price movements of all other cryptocurrencies.  

Ethereum is the blockchain that pioneered smart contract functionality on the blockchain, making it responsible for the rise of decentralized applications (dApps), non-fungible tokens (NFTs), and decentralized finance (DeFi) products. Despite the rise of other blockchain competitors with smart contracts, Ethereum retains a majority hold over the dApp, NFT and DeFi industries.  

Altcoins 

Technically, an “altcoin” refers to any other cryptocurrency other than Bitcoin, so with the thousands of other options out there, it is important to make a thorough evaluation of their tokenomics and utilities before making an investment decision. The top ten or twenty performing altcoins might be a good place to start reading up on, but take note that historically, it only takes a matter of time for new altcoins to take over the top spots.   

Stablecoins are relatively safe crypto investments because they are pegged to the value of real-world assets such as cash or gold. Stablecoins can also be used to generate passive yield through DeFi staking platforms. Having stablecoins as part of your portfolio can also be very useful for timing market opportunities when you need to make quick crypto purchases. 

Utility tokens and governance tokens

Interacting with dApps or DeFi platforms usually means having to transact with their native utility or governance tokens. Utility tokens are usually used to pay for a platform’s services while governance tokens allow users to vote on network proposals. The value of these tokens will depend heavily on the adoption and popularity of the dApp that they service, so a good rule-of-thumb is to only invest in dApps that you honestly believe in or which you actually use and offer you real-life value. 

Best practices in managing your portfolio

Here are some general rules that you should look to keep when investing in building your crypto portfolio: 

Know your risk appetite and allocate wisely

As different tokens have different risk profiles, your funds should also be allocated accordingly. Most traders recommend putting anywhere between 70 to 95 percent of your portfolio just for blue-chip cryptocurrencies (Bitcoin and Ethereum), and only 5 to 30 percent for riskier assets such as altcoins. 

Do-Your-Own-Research (DYOR) and do it regularly

Perhaps the most important piece of advice you could ever follow, doing your own research makes you less likely to fall for market hype or speculation alone. Furthermore, the process of investing doesn’t end when you put your money into an asset. You must consistently monitor the performance of your assets so that you can make sound adjustment strategies whether to hold on for longer, or cut your losses with tokens that are performing poorly. 

If putting your crypto funds in more than one basket can reduce risks, making sure to not put all your funds in all at one time can make your chances even better. By making smaller regularly  scheduled investments, one can drastically decrease the chances of having one sudden market event affect all of your planned investments in just one go. 

Invest only funds that you won’t be needing anytime soon

Investments are different from savings, and any funds you might be needing soon shouldn’t be allocated any percentage of your portfolio. Only invest money that you won’t be needing in a few years, and only that which you are willing to potentially lose. 

Forget the “get-rich-quick” mindset

You might have heard stories of how some people became millionaires overnight by buying one token or another, but always remember that such stories don’t always elaborate on the risks that came with it. Making sound financial investments takes time, and being impatient and reckless is still the surest way to lose money in any investment venture.    

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.

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