How to Build a Well-Balanced Crypto Portfolio
Irrespective of how good your crypto trading strategies are, you are bound to experience bad losing streaks that may put a dent in your portfolio. This is where creating a well-balanced portfolio comes in.
While there is no one-way approach to trading the crypto market, building a diversified portfolio can put users in a better position to benefit from the interesting world of cryptocurrency. This guide will explain what a well-balanced portfolio is and give a few tips that can help you create one.
What is a Crypto Portfolio?
A crypto portfolio is a pool of various crypto assets owned by a trader. Similar to a traditional portfolio, a well-balanced portfolio is a reliable risk management tool to enhance your trading strategy and minimize potential losses.
Although building a good crypto portfolio revolves around diversifying your investments among different cryptocurrencies, investing in crypto assets with different goals and use cases is essential.
In addition, it’s important to the concept of asset allocation, which involves determining the right allocation ratios within the portfolio for optimum performance. Let’s explore tips you can employ to build a well-balanced crypto portfolio.
How to Create a Well-balanced Crypto Portfolio
As mentioned earlier, there is no-size-fits-all when it comes to building a well-balanced crypto portfolio. However, there are basic tips to consider:
Unlike other traditional markets like stocks and forex with different classes, cryptocurrency is a single asset class with several exciting use cases.
The crypto market is broad, ranging from DeFi, NFTs and much more. So, for example, you can split your portfolio and invest 40% bitcoins, 30% stablecoins, 15% DeFi and 15% NFTs in your portfolio.
Additionally, you can sort the assets in your portfolio by the levels of risk: high, medium and low. Typically, cryptocurrencies with large market capitalization are considered less risky. At the same time, mid-cap and low-cap crypto assets are relatively high risks. For example, bitcoin and ethereum are large-cap coins, Litecoin is mid-cap, while coins including Tamadoge are low-cap.
So it’s important to balance your portfolio with all, as some assets can result in big profits as well as huge losses.
Do Your Own Research
The importance of doing your own research before trading any crypto asset can out be overemphasized. Don’t get carried away with the hype surrounding a certain coin; read the research reports supplied for the coin and study the graphs supplied for price movements and trading volumes. Get a good feel for a specific asset’s long-term and short-term trends before risking your funds.
Consider Your Risk Tolerance
Some traders take advantage of highly volatile assets and enjoy the thrills of scalping the market and making quick, profitable trades. However, high volatility is risky for others, and they would rather invest in stablecoins. It’s important to understand trading plans and goals and not risk your funds as much as you can afford to lose.
Usually, if you’re concerned about your portfolio, it’s possibly not well diversified. It’s important to safeguard positions that will prevent you from incurring huge losses if things go wrong.
Rebalance Your Portfolio Regularly
Similar to other asset classes, you need to constantly rebalance your holdings in order to stay diversified and protect yourself from any huge potential loss.
For example, if you invested 50% of your portfolio in bitcoin and the other half in stablecoins, within a year or two of making your investments, the crypto market picks up high. As a result, your bitcoin grows and takes up a bigger proportion of your portfolio.
While the cryptocurrency market is majorly controlled by the state of bitcoin, it’s important to balance your portfolio. Diversifying your crypto holdings is an important risk management tool that can prevent a zero-balance account.