Are you a new crypto investor making your first steps into trading? People have likely given you tons of advice, like creating a versatile portfolio. But what does that mean? And how can you achieve it? Setting up a diverse portfolio is easier than you think. All you need to do is follow our thorough guide below, and before you know it, you’ll have a versatile portfolio at your disposal. But that’s not all. We also took it one step further and decided to introduce you to several diversification methods and help you determine your risk tolerance. By the time you’re done reading this page, you’ll be a diversification expert!
What you'll learn 👉
What Is a Versatile Crypto Portfolio?
The idea behind creating a versatile crypto portfolio is to accumulate enough digital assets so that you not only achieve your trading goals but also successfully mitigate risk. This is achieved by investing in cryptocurrencies with various market capitalisations, such as large-cap, mid-cap, and small-cap coins. A bouquet of these results in a flexible crypto portfolio.
Diversification does not, however, ensure profits or protect against losses. Therefore it is crucial to remember that investors should always perform their own research and speak with a financial advisor before making any investment decisions.
Advantages of a Diversified Crypto Portfolio
When you avoid investing in a single digital asset, you spread out the volatility risk. A well-diversified cryptocurrency portfolio can also aid in profiting from the varied price fluctuations of different digital assets. Let’s take a look at how a diversified portfolio can be beneficial to you:
| Benefits of a Diversified Crypto Portfolio |
| Optimises Returns: A varied portfolio may profit from the expansion of several cryptocurrency market niches, producing higher returns than traditional investments. |
| Reduces Risk: A diversified portfolio can help lower the risk of losses caused by volatility in any one particular asset by investing in a range of cryptocurrencies. |
| Flexibility: A varied portfolio can allow investors to change their holdings in response to shifting market conditions or new investment possibilities. |
| Possible Reduced Tax Liability: Compared to investing in only one asset, a diverse crypto portfolio may offer tax advantages depending on the investor’s jurisdiction. |
How To Build a Crypto Portfolio
Before we go into the necessary steps for building a diverse crypto portfolio, it’s important to note that due to the increasing popularity of these digital assets, more and more scams are popping up on the horizon. Cyber attackers and con artists are getting increasingly creative with their schemes. A recent example that comes to mind is the infamous Squid token, inspired by the popular TV series Squid Game. We want our readers to avoid falling for these fraud attempts and desire to stress the importance of visiting safe websites for purchasing your crypto.
Look for red flags such as promises of huge gains, suspicious freebies, lack of Terms and Conditions and unclear fees, and always look up reviews of the platforms you intend to visit in order to spot unsatisfied customers and avoid getting burned yourself.
When it comes to reliable platforms, we recommend matching websites, specifically Immediate Connect or Kucoin, which have excellent tools to help both novice and seasoned investors. Signing up only takes a minute, after which the websites will match you to a local crypto broker who can assist you with advice, trading tools and strategies. We recommend these platforms both for their security and affordable service.
Remember that you may also look for the creators of every given token and find ways to purchase it on their official websites too.
The 5 Simple Steps for Portfolio Diversification
Now that you know a safe and secure place to buy cryptocurrencies, let’s take a look at the five crucial steps towards creating a versatile crypto portfolio.
Step 1 – Set Investment Goals
Before you start trading, it’s essential to ask yourself why you are looking to trade cryptocurrencies. Are you looking for a short-term gain or a long-term profit? Are you trying to pay off a loan or mortgage, or do you have a different idea in mind? Once you determine your investment goals, you can set up a trading strategy accordingly and understand what kind of investor you are. Take a look at the following investor types and try to determine which definition describes you best:
- Enthusiasts: These investors engage in cryptocurrencies to support the crypto movement because they are passionate about the technology and philosophy behind DeFi.
- HODLers: These investors purchase and keep cryptocurrencies for a lengthy period in the hope that their value will rise.
- Day traders: These traders constantly buy and sell cryptocurrencies, frequently every day, in an effort to profit from momentary price swings.
- Miners: These investors employ specialised machinery to address challenging mathematical puzzles in exchange for newly created currencies.
- Investors in initial coin offerings (ICO investors): These investors take part in ICOs, a kind of crowdsourcing for cryptocurrency projects.
- Enterprise investors: Institutional investors are major financial organisations that purchase cryptocurrencies on behalf of their shareholders or clients, such as hedge funds or pension funds.
- Speculators: These investors purchase cryptocurrencies in an effort to make a quick profit, often without having any prior knowledge of the underlying technology or value of the asset.
- Swing Traders: Individuals or entities who engage in trading cryptocurrencies with the goal of making profits through short-term price swings or fluctuations in the crypto market.
Now that you have determined the type of investor you are, it is important to assess your risk tolerance. Many financial advisers can help you develop trading strategies based on your risk tolerance, so it’s always a good idea to speak to one if you haven’t already.
Step 2 – Assess Your Risk Tolerance
Before building a portfolio, it is crucial to determine your risk appetite. As you know, the crypto market is inherently volatile, and there are no guarantees that you will earn a profit. That is why it is essential that you determine your risk tolerance. Your age, financial status, investment experience and overall personal preference can tell you your tolerance appetite. There are three major categories:
- Conservative – You prefer assets with predictable returns at little risk since you are hesitant to make rash decisions and risk your money.
- Average – You value stability and favour a well-balanced portfolio as a moderate cryptocurrency investor, but you are also willing to take some risks in order to generate larger returns.
- Aggressive – If you’re an aggressive investor, you don’t mind taking on significant risks in exchange for a potentially rich gain.
Consider investing in less volatile assets like Bitcoin or Ethereum if you want to reduce your risk and find you are a conservative investor. Alternatively, if you’re willing to take on more risk, you might consider investing in altcoins with the potential for greater profits.
Step 3 – Determine Asset Allocation
The primary rule in portfolio diversification is to avoid putting all your eggs in one basket. It’s best to take a look at the various coins and tokens available on the market and accumulate different types. As you can probably guess, some assets are more stable than others, such as Bitcoin and Ethereum, so saving a more significant chunk of your money to buy them is always a good idea. Also, consider having some average risk-return cryptos as well, and if you wish, a small percentage of high-risk coins. Here’s an example of a well-diversified portfolio:
- Bitcoin – 40%
- Ethereum – 30%
- Cardano – 10%
- Solana – 5%
- Polygon – 5%
- Shiba Inu – 5%
Of course, there are just examples of coins corresponding to the current market and prices. It is essential that you do your own research to determine the best crypto to buy according to your preference. But how do you go about doing that? We explain this in the next section.
Step 4 – Research and Analyse Cryptocurrencies
The truth is that the right coins to invest in will vary from person to person and year to year. The crypto you choose must match your individual investment strategy and finances. We’ll give you a head start and go over some popular choices, and you can continue your research from there.
Bitcoin and Ethereum
With unmatched security, Bitcoin is intended to be a self-sovereign wealth vault that can be quickly sent anywhere in the world. Anyone can get a hold of Bitcoin, provided they can invest in it. Bitcoin also uses blockchain technology, making it a decentralised currency with near unbreachable security. Currently referred to as “digital gold,” peer-to-peer payments using the Lightning Network are becoming more common.
Ethereum, on the other hand, is the first platform to house intelligent contracts, and it has the largest TVL of any network. Despite its current success, many still view the Ethereum network in its early stages of development.
Stablecoins
Cryptocurrencies called stablecoins, such as Tether and Binance, are backed by the US dollar. Traders utilise stablecoins as a “risk off” asset (meaning it is less risky than others). They frequently hold onto stablecoins until a trading opportunity arises, when the market appears unstable, or when they don’t have an active position to trade. Like any other cryptocurrency, they can be held in wallets and sent between blockchains.
Tokens
Many blockchain-based cryptocurrencies have appeared over the last few years, designed to advance current blockchain technology or provide a brand-new type of blockchain. Examples of these include Cardano, Solana, Avalanche, Near, and Algorand. They all make use of a consensus mechanism that governs how transactions are validated and added to the blockchain.
They all place a high priority on scalability and speed, with some projects claiming to execute transactions far quicker than other blockchain networks now in use. Each of them has a unique native token that is used to reward network users and speed up network transactions.
Other
Of course, the examples above only scratch the surface of possible digital assets you can invest in. There are always other options, including NFTs, metaverse and web3 protocols. It’s worth taking a look at these if you want an outside-the-box way of diversification.
Step 5 – Monitor and Rebalance Your Portfolio
Finally, once you have selected your assets, you can begin tracking all your coins. If you ended up following our advice and signing up with Bitcoin Profit or Bitcoin Trader, your crypto broker can help you stay on top of any changes and the overall performance of your assets. Make sure you adjust according to market changes and rebalance your portfolio when necessary. Reallocating your assets can ensure that your portfolio remains balanced and aligns with your investment goals and risk tolerance.
Alternatives for Diversification
We already gave you an example of portfolio diversification which was based on risk level, creating a collection of assets with varying market caps. But you can also diversify based on industries, geolocation and crypto blockchains.
Diversify Based on Geolocation
Investments in cryptocurrencies may be hampered by governmental rules. If you reside in the US, you should know that some jurisdictions have stricter regulations regarding cryptocurrencies, while others have more latitude. That’s why it’s essential to always consider the location in which you buy and hold a cryptocurrency.
Similarly, if you decide to move to a different country or province, you could find there are less strict laws and regulations in place there. Blockchains based in countries with friendly Bitcoin regulations are less prone to regulatory risk than cryptocurrencies established in nations with more stringent restrictions.
Diversify Based on Blockchains
The risk of concentration on a single blockchain can be reduced by investing in cryptocurrencies that are based on various blockchains. Consider the following four types:
- Decentralised blockchain: Nobody is in charge of the supply of cryptocurrencies or any other aspects. Bitcoin is a cryptocurrency that uses such a blockchain.
- Private: The blockchain is under the sole control of one single entity, which also controls the decision-making.
- Collaborative: The decisions made regarding the blockchain are controlled by a group of people.
- Fusion: Certain aspects of the blockchain are decentralised, while others are controlled by an authority.
These are the four primary categories, but they divide into numerous subcategories. Several cryptocurrencies run on the Ethereum or Bitcoin blockchain, for instance. Other virtual currencies each have their own unique blockchain that serves a particular purpose.
Diversify Based on Industries
Decentralised finance has utilised cryptocurrencies the most. Cryptocurrencies do, however, possess a number of qualities that go beyond finance. Several cryptocurrencies are targeted at various industries, including music, supply chains, and video games. Think of projects like Sandbox, Decentraland and Undeads Metaverse — or Web3 protocols like Filecoin. You can also invest in commodities if you want some more tangible assets, like gold, natural gas or oil.
Final Thoughts
In conclusion, creating a well-diversified and successful cryptocurrency portfolio requires time, effort, and research. You can create a portfolio designed explicitly for your needs by considering aspects like investment objectives, risk tolerance, asset allocation, and completing in-depth analysis. Your portfolio can remain efficient and well-diversified with regular monitoring and rebalancing. We hope that this article has helped you in your quest to create a profitable cryptocurrency portfolio.
