“I don’t want high profit-margins on my crypto investment”, said nobody ever! As long as you have some stake in crypto, you’re automatically interested in maximising the returns on your investment. Your crypto investment portfolio can be healthy despite the infamous crypto volatility. How?
In this post, you’ll learn the strategies to maximise your profit and give your crypto investment portfolio a much-needed boost or complete revamp, as the case may be. Ready? Let’s dive in.
What Are The Different Types Of Cryptocurrencies?
We like to follow public sentiments and trends before investing in crypto, but do we, at least, know what types of coins there are? Different cryptocurrencies are built for varying purposes. Let’s check them out before we dig into the heavier stuff.
1. Payment coins
Bitcoin, the premier cryptocurrency, was initially built as an alternative to traditional currencies. Bitcoin was developed to be used as a value exchange. However, crypto has grown from that to the mind-blowing innovations we now see, so it’s uncommon to see coins designed just for payment purposes. Some designed for this sole purpose are; Bitcoin, Ripple, Litecoin, Bitcoin Cash, etc.
Stablecoins are tied to a government-backed currency, most commonly the US Dollar, or precious metal, like gold. This is to emulate something that has relative stability to combat the high volatility of regular cryptocurrencies. With stablecoins tied to Dollars, the value is set at 1:1, i.e., 1 Dollar equals one stablecoin. But with precious metals like gold, one stablecoin equals one troy ounce of gold in reserves.
On the flip side, the stability of stablecoins does not allow these coins to make large jumps like their counterparts. To compensate, stablecoins will enable you to quickly liquidate your crypto assets to lock in their value in case of an unfavourable turn in the market.
3. Security tokens
Security tokens are the stock options of the crypto world. So this offers you a seat at the table in a crypto project or company. Security tokens may allow you to have a say and give you equity in a project.
You may not have heard much of this because security tokens still need to go through legal processes for regulations and checks, and nobody wants their assets to be controlled by the government.
4. Utility tokens
Utility tokens are the coins that are used to access a project. You can only use these cryptos to perform transactions on the protocol. For example, on the Ethereum blockchain, you can only use ETH to complete transactions on a Decentralized Application (DApp). Many projects are launched alongside their utility tokens to drive up the value of the said project.
5. Governance tokens
Like utility tokens, governance tokens derive value from the success and adoption of the project they’re launched with. Governance tokens are primarily used in Decentralized Finance (DeFi) projects, giving investors voting rights – and in some cases, proceeds – as rewards for the project’s success.
You can find governance tokens on dedicated DeFi platforms like PancakeSwap, SushiSwap, and Uniswap.
The Principles Of Asset Allocation In A Crypto Investment Portfolio
Asset allocation is crucial in any investment, especially crypto investments. Your crypto investment portfolio should be divided nicely to accommodate different types of coins in a way that maximises your gains and hedges against volatility and bearish markets.
It sure sounds great in theory, but is this founded on anything solid? Here are the guiding principles for asset allocation.
1. Equal Weighting
This draws from the same principle in traditional asset allocation to proportionally allocate portfolio portions to stocks, index funds, bonds, etc. The same applies to crypto —your investment should be divided among a crop of digital assets. This is so that your investment capital is distributed proportionally to benefit from the increase in market value from all sides. So instead of concentrating attention on one asset, your portfolio is a healthy balance of success.
2. Market Cap Weighting
This principle is applied when you allocate assets based on the market capitalisation volume. Assets may have high, medium, or low capitalisation. Although investing in assets with high market capitalisation is recommended, your risk appetite determines your investment technique.
If you invest more in assets with low capitalization, you’ll deal with high volatility but potentially higher profits. However, assets with high market cap, like Bitcoin or Ethereum, have less volatility and potentially lower yields.
3. Sector-Based Allocation
Sector-based allocation is when you invest based on their utility. You may decide that your investment capital will be divided into DeFi projects, Non-Fungible Tokens (NFTs), the metaverse, blockchain projects, gaming, etc.
The Importance Of Asset Allocation In Your Crypto Investment Portfolio
Why should you practice asset allocation? Some of the reasons it may be the best move to boost your crypto investment portfolio are listed below.
1. Partake in innovations early on.
We’ve all seen that in the web3 world, if you snooze, you lose. So, allocating investment capital to promising projects will give you an edge. Being an early bird means buying coins at the floor price — so when it eventually becomes successful, your profits will be through the roof.
2. Hedge against volatility.
The best way to win against crypto volatility is to spread your investment across different asset classes. With investments in stablecoins, you’ll be shielded from the effects of a highly volatile market.
3. Diversified Portfolio
A variety of assets will ensure that no matter the state of the market, you have some assets faring very well and bringing in profits. High market capitalisation assets and stablecoins can hold the fort, even during bearish markets. And in a bullish market? Your low market cap assets may shine and give you handsome profits.
The Top 5 Tips To Build A Balanced Crypto Investment Portfolio
1. Set a goal.
First and foremost, why are you building a crypto investment portfolio, and what do you hope to achieve? This is the most critical question; your answer will set the stage for your decisions.
Setting a generic goal will not suffice. You have to be explicit about your expectations. For example, “I want to make X amount in profits in one year” is more specific than “I want lots of money”.
2. Determine your risk appetite.
Your goals and your risk tolerance play essential roles in the types of assets you will invest in. If you’re not impressed by the volatility in the crypto market, you may choose to invest in stablecoins and maybe high market cap assets and take the lower gains. But, if you like living on the edge, you may go for highly volatile assets with potentially higher profits, like low market cap assets.
Your crypto investment portfolio depends on how much risks you’re willing to take, but still, ensure that it is balanced with a mix of assets; otherwise, it defeats the whole point of a healthy portfolio.
3. Plan for long-term gains.
It’s not advised to focus entirely on how much profit you can make at the moment or in the short term. Crypto assets increase in value, so expanding your portfolio is in your best interest. The goal should be to continuously make profits, not short bursts.
4. Keep up with the crypto market (a.k.a, do your own research).
Stay in the know of crypto projects in the scene and invest accordingly. The crypto market is quite dynamic, and staying updated with market trends and innovations will help you constantly check in with your goals to ensure that it still aligns and that you’re on track to achieving your expectations.
5. Rebalance your portfolio regularly.
Your asset allocation can only give you that security and profit margin if your portfolio remains unchanged. As the market changes, you may find that your distribution has shifted and is not as balanced as you intended.
For example, your original allocation is 60% BTC, 30% ETH, and 10% Stablecoins, but over time, BTC’s increase shifted your portfolio to 70% BTC, 20% ETH, and 10% Stablecoins. You have to trade some BTC to rebalance your portfolio.
This risk management technique also keeps your investment within your risk tolerance gauge. It also keeps your portfolio in alignment with your long-term strategy and goals.
Asset Diversification Strategy To Maximize Return In A Crypto Investment Portfolio
This is the crux of the matter. All that we have discussed so far has led us to this moment. In this section, we’ll simulate an asset strategy that shows a balanced portfolio using a mix of the principles we discussed early on in this post.
Please note that this diversification strategy is not absolute. Feel free to tweak and fit it into your personal preference and risk appetite.
I’ll split my crypto investment portfolio like this:
Stablecoins will provide a safety blanket and a readily available means to enter the crypto market. I’ll divide the 50% allocated to stablecoins between coins like USDT and USDC. These coins are readily available on exchanges and have relatively high liquidity.
30% high market cap coins
30% will go to the two market leaders: Bitcoin and Ethereum. They have high market capitalisations & high liquidity (i.e. they’re easily convertible to cash) and can be used as a store of value. Store-of-value assets are easily recoverable while appreciating.
Bitcoin is more of a store of value asset than Ethereum, so I’d dedicate 20% to BTC. Bitcoin also has a large influx of funds and a higher financial projection.
Ethereum, on the other hand, is a web3 solution with ETH as its utility token. Therefore, its value significantly depends on its blockchain ecosystem’s growth. But Ethereum has significant real-world use cases and hosts major solutions, so I’d allocate the remaining 10% to this coin.
15% DeFi projects
Projects on the Ethereum blockchain are continuously breaking new ground. Decentralised Finance has captured the interests of people wanting to remain anonymous while keeping tight reins on their finances. The DeFi projects I’d split 15% among are: AAVE, LIDO, and UNI.
5% low market cap coins
As we already know, low market cap coins are high-risk investments, but they’re the market’s big movers. Low market cap coins often experience pumps, which would most likely boost my portfolio.
Some low-market-cap coins that I’d invest in are Shiba Token and Dogecoin.
As I stated earlier, this is a simulation of a crypto investment portfolio to give you a glance at what it would look like at play. This asset diversification strategy mixes the three asset allocation principles: Equal weighting, Market cap weighting, and Sector-based allocation.
How To Monitor Your Portfolio: Types Of Portfolio Trackers
A strategy is not complete without monitoring and assessing its performance; this is where many investors fail. They put in all this work and go to sleep, thinking the job is done.
Tracking your investment means you’ll constantly check the individual cryptocurrencies to ensure that they’re performing as expected and what market analysts say before you make an informed decision. Coin trackers that can make tracking more cohesive and less daunting are:
Frequently Asked Questions (FAQs) About Crypto Investment Portfolio
Is It Better To Invest In One Crypto Or Multiple Cryptos?
Concentrating your portfolio on one crypto is a bad idea. When you do this, you will miss out on the growth and success of other coins. Adversely, in a bearish market, you may lose more. The best way to maximise your investment is to spread your capital across different types of coins with different market capitalisations and sectors.
What To Look At Before Investing In Crypto?
Before investing in crypto, you should set a goal you’d want to achieve with your portfolio. Secondly, you want to gauge your risk tolerance and only invest in cryptos based on how much risk you can afford. Then, you want to research the market extensively before you invest. Finally, you want to maximise profit by spreading your investment capital among digital assets.
How Big Should A Crypto Portfolio Be?
There’s no one-size-fits-all portfolio size. You can start small and build your portfolio as you become more comfortable with the crypto market. No one can dictate how much you should invest in the crypto market. Instead, look at how much you can afford.
What Is The Most Profitable Crypto Ever?
It’s difficult to say the singular most profitable crypto because there’s no way to measure this due to volatility, and all crypto did not come to be at once. However, in the crypto landscape as we know it now, the most profitable crypto class is low market capitalisation cryptocurrencies. This is because they are highly volatile, so they can make large jumps in the same way that they can come crashing down.
How Do I Make A Portfolio For Cryptocurrency?
First, you must choose a crypto portfolio platform like CoinMarketCap or CoinGecko. These platforms also serve as trackers to monitor your investment. Then, you will develop an asset allocation strategy, diversifying with different asset classes. You can allocate assets based on: Market capitalisation and Sector.
My friend, our journey ends here – for now. We’ve run through the practical strategies to help you get maximum return on your crypto investment portfolio. With this knowledge, confidently brush up your portfolio with these strategies to give it a shiny new look and enjoy juicier gains.
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I’ve done my bit by giving you a well-rounded profitable strategy from your portfolio till you cash out. Go ahead and have yourself a successful crypto investment portfolio. Enjoy!