By the end of 2023, there were more than 420 million crypto users worldwide.
Bitcoin was launched in 2009, and since then the popularity of cryptocurrencies has grown massively. People worldwide have made huge profits from their crypto investments – but plenty of people have also made losses. One of the best ways to reduce your risk when it comes to your investments is to have a strong cryptocurrency portfolio.
In this guide, we’ll go over the basic elements of building a solid cryptocurrency portfolio. Keep reading for more.
What Is a Cryptocurrency Portfolio?
Investment portfolios are nothing new, and a cryptocurrency portfolio is one that’s made up entirely of cryptocurrencies. Before you start investing, bear in mind that, while cryptocurrencies are becoming more popular, they’re still considered to be very volatile, and are therefore quite risky.
You also need to remember that cryptocurrencies don’t yet have the same kind of regulation as other asset classes. This applies wherever you are in the world. More regulation will likely come in the future, and this will affect the value of different coins.
It’s essential to understand the crypto space, blockchain, and investing in general before you start building a portfolio. The more you know going in, the better informed your decisions will be.
Cryptocurrency Investing Basics
There’s a lot to learn about cryptocurrencies. The first thing to figure out is what they actually are. A cryptocurrency is a digital currency that can be bought, sold, and traded. Users can make financial transactions without the use of a bank or third-party intermediary.
This all happens using blockchain technology. All transactions are processed on a distributed ledger that no one can alter or manipulate in any way.
There’s a wide selection of exchanges that you can use to buy crypto. Each one is different, so you should take the time to look into some of the most popular options available and find one that suits you. When you buy crypto, you can store it in three types of wallets.
Custodial Wallet
When you buy crypto on an exchange, it will automatically go to your custodial wallet on the platform. While this is very convenient, it’s also the least secure.
It’s best to only keep crypto on an exchange if you plan on making quick trades with it. If you want to hold your crypto for a longer period, you should move it off of exchanges.
Hot Wallet
Hot wallets (or soft wallets) work as smartphone apps and browser extensions, and give you complete control over your crypto. They’re considered very safe but are still not 100% secure as they’re always connected to the internet.
Cold Wallet
Cold wallets (or hard wallets) are physical devices that hold your private keys. They’re only online when you physically connect them to another device such as a laptop or computer. This makes them the safest way to store crypto, so you should definitely consider getting one if you have large amounts that you want to hold long-term.
Pros of a Diverse Portfolio
The main reason to diversify your portfolio is to lower how much risk you’re exposed to. If the value of one coin drops, having other assets in your portfolio will protect you from huge losses.
All experienced investors know that this is a key component of investing. It also makes it easier to explore new investment opportunities because you won’t have as much risk.
Cons of a Diverse Portfolio
As of March 2023, there are more than 23,000 cryptocurrencies in circulation. Many of these will likely fail, so you probably want to avoid investing in these coins. With so many to choose from, you may end up with some that will lose value in the future.
An experienced trader will usually maintain a portfolio with a lot of low-risk assets, and then a few high-risk assets. While this is the safest choice, you may then miss out on some huge gains from other, less stable assets.
Types of Cryptocurrencies
Everyone has heard of Bitcoin, but there are plenty of other cryptos that you could include in your portfolio. Over the years, more types of cryptocurrencies have been developed, and adding more types will help diversify your portfolio.
Payment Coins
This is where crypto started, though these aren’t developed so much these days. The purpose of payment coins is to transfer value, with Bitcoin (BTC) being the first, and the most well-known. Some other popular examples include Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH).
Stablecoins
Stablecoins do something that other cryptos don’t, which is to resist volatility. Some are pegged to the US dollar, such as Tether (USDT). This means that 1 USDT always has a value of 1 USD.
Having stablecoins in your portfolio will protect you if the market crashes. You can quickly transfer your other coins to stablecoins and back if you want to try to avoid being affected by volatility.
Security Tokens
Security tokens are not unlike traditional securities as they can represent various assets. This often includes things like company equity, project-issued bonds, or voting rights.
They work in the same way as securities (but using blockchain technology) so they operate under the same regulations. This means that they fall under the jurisdiction of local regulators. Before they can be issued, they need to go through a thorough legal process.
Utility Tokens
A utility token is a part of a specific service or product. Perhaps the two most well-known are Binance Coin (BNB) and Ethereum (ETH). For several years, ETH has been the second most popular cryptocurrency in the world.
They have a range of uses, such as paying transaction fees when using decentralized apps (DApps). A lot of projects develop their own utility tokens as a way of raising funds. The value of a token should directly relate to the value of the utility.
Governance Tokens
Governance tokens are issued by projects, and the holders have voting power within that project. If you have some, you’ll have a say in decisions about the project’s future. In some cases, the project team will also give holders a share of the revenue.
These are common on DeFi (decentralized finance) platforms like PancakeSwap and Uniswap. Like Utility tokens, the value of the token and the success of the project are directly connected.
Investment Strategies
Before investing, you should define a strategy that you want to use. There are some techniques you can use that are common among other types of investments, as well as some that are new to the crypto space.
Holding Crypto
The buy-and-hold strategy was popularized by Warren Buffet. While this came about well before crypto, it still works very well for it. The idea is simple — you just buy the cryptos you’re interested in, and hold on to them. If things go well, the value of the coins you’ve bought will increase over time, making it one of the easiest strategies to implement.
Yield Farming
This involves lending your crypto to exchanges or other platforms for them to use. They’ll reward you with additional crypto (usually the same as the one you’ve yielded). Think of it like a loan, and they pay you interest on it.
Depositing
This is similar to putting your crypto in a savings account. You can deposit and stake it, then you’ll earn rewards over time.
This is another strategy that requires very little effort. The rewards vary depending on the platform and crypto you’re using, so take the time to look at the different options available.
Trading
This is a popular strategy, but it typically involves a lot of risk. The values of cryptos often fluctuate quite a lot, so if you can buy low and sell high, you stand to make some sizable profits in a short period.
The problem here is that it’s not easy to predict the market. As such, there’s a lot of potential for both profits and losses. You should only consider doing this if you have a good understanding of what you’re doing and are fully aware of the risks involved.
Tips for Diversifying Your Portfolio
One of the most important things you should always do is carry out adequate research. Never invest in anything if you don’t know what it is. For any cryptocurrency, you should take the time to research the project to determine if it’s a good investment for you or not.
Keep an eye on current crypto values. This will help you stay up to date with how different coins are performing and give you a better idea of your risk tolerance.
Observe how various cryptocurrencies are being used. Ones with strong use cases and future plans are likely to do well. Conversely, cryptos that have few or no use cases and no future plans in place are more likely to fail.
There are plenty of news outlets that provide up-to-date information on the crypto market. You probably won’t be able to keep up with everything that’s going on, but you should try to take note of things that are relevant to your strategy. This will help with your decision-making so that you can build a portfolio that works for you.
Keeping Safe While Investing in Crypto
Building a strong cryptocurrency portfolio isn’t easy. Make sure you take the time to understand everything that you’re investing in.
There’s always a level of risk when investing in crypto, so take appropriate measures to stay safe. The better you understand the crypto space, the easier it will be for you to navigate it. Research projects, store your crypto safely, watch out for scams, and always try to learn more.