How To Build A Well-Balanced Crypto Portfolio

How To Build A Well-Balanced Crypto Portfolio

Investing in cryptocurrencies has become a very popular investment strategy amongst many people. When Bitcoin exploded onto the scene and prices skyrocketed, it propelled cryptocurrencies into the mainstream investment world, and from there on, crypto investments have been gaining momentum. But cryptocurrencies are highly volatile and their prices change pretty frequently. Because of this, investing in cryptocurrencies is not as easy as simply investing in the S&P 500 and benefitting from constant profits.

When investing in cryptocurrencies, investors should have a clear investment strategy and they should know what they are doing. Having a good investment portfolio is a must if we want to make profits when investing in these digital currencies, but building this portfolio is not an easy goal to achieve. There is no one simple guideline that every investor should follow, but there are a few steps that will work for everyone. This is exactly what we will be discussing today and seeing how we can build a well-balanced crypto portfolio for long-term profits.

Building a Portfolio

When investing in cryptocurrencies, or any other asset, it is advised to never invest in only one asset class. Since cryptocurrencies are volatile assets, when investing in one token, prices can shift quickly and we might suffer losses. When looking for a long-term investment, these price changes might return, but the crypto market is very competitive, and there is a good chance that prices won’t return to previous levels for that token. 

Because of this, it is important to have a portfolio consisting of multiple different cryptocurrencies, which will balance each other out and will increase the possibility of making profits. When building a portfolio, there are multiple factors that every trader should consider, and there are multiple steps that need to be taken. So how do we build a well-balanced crypto portfolio?

Determine The Goals You Want To Achieve

Before you start building a crypto portfolio, you should determine what you want to achieve with this investment. Each crypto portfolio should have a goal in mind and depending on the goal, they will look different from each other. The goal should be unique to you and there are no set rules when it comes to achieving it. You can set a goal of doubling your investment in 1 year, making a set amount of profit each month, and so on.

But you should also be realistic about the goals you set. Don’t go for unrealistic or unachievable aims, as not achieving your goals might leave a bad feeling, and being in a bad emotional state when investing is one of the worst states to be in. 

Choose multiple assets and investment amounts

Once you know what goals you want to achieve, then it comes to actually buying cryptocurrencies you are going to invest in. As we mentioned before, it is not advised to invest in only one or two cryptocurrencies, and it is always better to have multiple assets in your portfolio. This protects us from losing a lot of money from just one cryptocurrency because if one token loses value, another might gain value and they balance each other out. 

When selecting these cryptocurrencies, it is also important to give each token a certain amount of weight in your portfolio. What this means is that you should not invest in every cryptocurrency evenly and there should be few tokens that take the majority of the portfolio, while others take less space. So for example, you are investing in Bitcoin, Ethereum, Solana, and BNB. You might choose to allocate 50% of your funds to Bitcoin, 25% to Ethereum, and 12.5% each to Solana and BNB. This distribution should be based on the profit predictions you have for the cryptocurrencies you are investing in and the goal you want to achieve. 

During this time, you should also determine how much you are going to invest. It is important to have a clear understanding of how much you are investing, in order to build proper risk management around it. Since cryptocurrencies are highly volatile assets, investing in them is risky, even with a well-built portfolio. This is why you should not invest your life savings into them, and should only invest the amount you can afford to lose. 

Regularly Rebalance Your Portfolio

Once you have determined your goal and invested in a portfolio of cryptocurrencies, you might think that this is it and you are done. But leaving your portfolio unattended is a very big mistake to make. It is always important to regularly rebalance your investment portfolio based on performance and market conditions. You might have invested in cryptocurrency that you thought was a good investment, but as time goes on, you might realize that it is not delivering the results you wanted. Because of this, you should always look for weak links in your portfolio, remove them, and replace them with something else. 

This rebalancing is not only about changing one cryptocurrency with another but also about the weight of these cryptocurrencies. You might have allocated a big portion of your portfolio to Bitcoin, but there might be a time when it will be better to sell some of your Bitcoin and purchase more tokens of other cryptocurrencies. This all comes down to market conditions and the goals you want to achieve.

Add A Few Crypto Associated Stocks

This is not a must, but it will be a good idea to also introduce some stocks into your crypto portfolio. Blockchain technology is developing at a rapid speed and there are many different companies that are making waves in these fields. If you are interested in blockchain, then investing in some companies that work in blockchain is also a good way to diversify your portfolio. There are companies that produce necessary hardware, such as Nvidia, or payment companies such as PayPal, who just recently gave people the opportunity to purchase and store cryptocurrencies on their PayPal accounts. 

By investing in blockchain-associated companies' stocks, you are limiting the potential risks your portfolio might suffer. Stocks tend to be less volatile and determining their prices is much easier since you can look at the companies' performance and analyze where prices might go. This way, you will be introducing less volatile assets to your portfolio and will have some safety. 

Final Thoughts

When investing in cryptocurrencies having a well-balanced portfolio that has been built after careful analysis is a must. Since the crypto space is full of newcomers, many of them make the mistake of simply buying 1-2 cryptocurrencies and hoping that prices will go up. But in order to increase chances of making good profits it is important to have a portfolio consisting of multiple cryptocurrencies that have been chosen very carefully in order to achieve certain goals. It is also good to introduce a few blockchain-related stocks to your portfolio, as these are less risky assets. Lastly, portfolios always need to be monitored closely and rebalanced when there is a need. 

It is important to understand that cryptocurrencies are highly volatile assets and you should only invest the amount of money that you can afford to lose. It is also important to have some sort of risk management implemented with your investment and always be ready to act when necessary.

FAQs On How To Build A Well-Balanced Crypto Portfolio

How many cryptocurrencies should be in my crypto portfolio?

The amount of cryptocurrencies in your portfolio should depend on your goals. In most cases having between 4-7 cryptocurrencies in your portfolio is the go-to strategy when it comes to building your crypto portfolio. You should also be ready to add or remove certain cryptocurrencies when there is a need for it, so you should expect the number of cryptocurrencies in your portfolio to change over time.

How should I choose cryptocurrencies for my portfolio?

When it comes to choosing which cryptocurrencies to invest in, you should first determine what your goal is. Each portfolio should have a certain goal to achieve, and it should not be simply to make as much profit as possible. Once you have understood your goal, you can start thinking about which cryptocurrencies to add to your portfolio. These cryptocurrencies should be chosen based on this goal, so for example, if you are looking to double your investment in 3 months, you might want to go for cryptocurrencies that tend to be more volatile. This will be more risky, but will also be best for achieving your goal. If you are looking for a long-term investment, then choosing cryptocurrencies with low volatility will be a better option.