Balancing a crypto portfolio is not that different from balancing a traditional portfolio. You can easily reduce your overall risk according to your profile and investment strategy. All it takes to get started is simply diversifying your investments among different cryptocurrencies.
The extent to which you diversify is up for debate, as there are pros and cons to both sides. However, it's generally accepted that some diversification is beneficial. You can reduce the risk of your investments by holding different crypto assets (including stablecoins) and making sure to rebalance your asset allocation regularly.
To make managing your portfolio easier, you can use a third-party portfolio tracker or manually record your transactions on a spreadsheet. Some trackers can be linked to your personal wallets and cryptocurrency exchanges, making the process more convenient.
Getting started with crypto investing is as easy as purchasing your first bitcoin (BTC), ether (ETH), or any other cryptocurrency. While some investors prefer to buy and hold the largest cryptocurrencies, others choose to experiment with altcoins. But what's the best way to do this? You are more likely to succeed by thinking carefully about your asset allocation and balancing your crypto portfolio regularly. Depending on your risk tolerance, there are a few ways to do this. Balancing your portfolio isn't hard, and the results can literally pay off.
What is a crypto portfolio?
What are asset allocation and diversification?
Concentrated vs. diversified crypto portfolios
However, the more diversified your portfolio is, the closer it will track the overall market. Most traders and investors are looking to beat the market with larger gains. A highly diversified portfolio will lead to more average returns than a successful concentrated portfolio. Worse performing assets can balance out high earners.
Managing a diversified portfolio also requires more time and research. To invest soundly, you should understand what you are buying. With a large portfolio, the chances of understanding everything well decrease. If your portfolio is across different blockchains, you may also need to use multiple wallets and exchanges to access your assets. The decision to diversify or not is yours, but some diversification is always recommended.
Different types of cryptocurrencies
The cryptocurrency market is volatile, so having something in your portfolio that keeps its value is useful. If the stablecoin pegs something outside of the crypto ecosystem, a crypto market dip shouldn’t affect it. If you want to move tokens out of a coin or project, you can rapidly transfer them to a dollar-backed stablecoin like BUSD to safeguard your gains. Converting into fiat is a much longer process than trading for a stablecoin.
Financial crypto products
A portfolio doesn't just have to consist of holding different coins. Financial crypto products can also help diversify your portfolio even more. Think of it a bit like investing in government bonds, ETFs, or mutual funds rather than just holding shares. There's a massive amount of products you can invest in across different blockchains and DApps.
How to build a well-balanced crypto portfolio
Each investor or trader will have their own ideas on what makes a well-balanced crypto portfolio. But, there are some general rules worth considering:
1. Split your portfolio between high, medium, and low-risk investments and give them appropriate weightings. A portfolio containing a large portion of high-risk investments is definitely not balanced. It might have the chance to provide you bigger gains but may also cause huge losses. Your risk profile will determine what's best for you, but there should be some mix.
2. Consider holding some stablecoins to help provide liquidity for your portfolio. Stablecoins are the key to many DeFi platforms and can help you quickly and easily lock in gains or exit a position.
3. Rebalance your portfolio if needed. The crypto market is very volatile, and your decisions should change depending on the current situation.
4. Allocate new capital strategically to avoid overweighting any one area of your portfolio. If you've made big gains recently from one coin, it can be tempting to pump in more money. Don't let greed interfere, and think about where you can better place the money.
6. Only invest what you can afford to lose. Your portfolio isn't correctly balanced if you feel stressed about it. Your positions should not cause you serious consequences in case things go terribly wrong.
Crypto portfolio trackers
A portfolio tracker is a program or service that allows you to trace the movements of your holdings. You can see how your current allocation stacks up with your long-term goals and track your progress. Here are some examples you might want to consider:
CoinMarketCap is a hugely popular price tracker that’s developed its own portfolio feature. The portfolio tracker is available for free on desktop and mobile devices. To use the portfolio tracker, you need to add in your holdings manually as it doesn't connect to your wallet or exchange. There's also the option to add in the prices you bought at to track your gains accurately.
CoinGecko is mainly known for its cryptocurrency price tracking, but it has a portfolio option too. It's free to use and is available on your browser or mobile device. If you’re already a regular CoinGecko user, the tracker is worth a try too.
Delta is a mobile app that allows you to view your crypto portfolio and traditional investments simultaneously. It can connect with 20 exchanges and a variety of wallets, including Binance. There's both a free and paid version, but you cannot trade within the app.
A lot of the cryptocurrency market is dependent on the health of Bitcoin. But that's no reason not to balance your portfolio. Varied crypto investments can offset some of the losses that occur with a Bitcoin crash, so it's always worth having some diversification. Remember, there’s more to balancing your portfolio than holding multiple coins. A bit of strategy will go a long way in creating a suitable portfolio for your risk tolerance.