The crypto industry has come a long way, with its pioneers, Bitcoin and Ethereum leading the way to the enormous growth we have seen in the crypto space. Over the years, there have been some great changes in the adoption of crypto projects, with the industry passing through phases called the market cycle, leading to the need for traders and investors to preserve their portfolio of crypto assets using different means to stay profitable for the long term.
Therefore, smart crypto investors will not put all their eggs in one basket. Instead, there is a need to diversify their crypto portfolio, making a pick from each of the major sections. This will enable them to increase their profit potential and minimize their risk exposure.
In this article, we will discuss extensively how to carry out cryptocurrency portfolio allocation, and how to pick the best crypto portfolios. We will also consider the various factors to put in mind when creating your portfolio and suggest which coins should appear in it. We will also discuss why it is crucial to have a well-rounded portfolio and how you can do so. Lastly, we’ll touch on some frequently asked questions on the topic.
What Does Crypto Portfolio Allocation Mean?
Crypto portfolio allocation means making a calculated investment in various sectors of the crypto world. There is no hard and fast rule about what the best crypto portfolio should look like. However, a general rule is that you should have enough exposure to both low-risk and high-risk crypto assets. In some cases, your crypto portfolio may also include investing in other asset classes that are tied to cryptocurrencies.
However, diversifying your crypto portfolio does not eliminate the risks of crypto trading and investments. It only minimizes it. As long as you have assets in the crypto world, they are still at risk. Therefore, before considering whether and how to diversify your crypto portfolio, determine how much risk you can take and for how long. If you have some funds you can’t do without, it’d be best not to invest them in crypto.
Factors That You Should Consider When Choosing Your Cryptocurrency Portfolio.
The market capitalization of a coin or token is the total value of its available supply. It indicates how stable an asset is and how much potential it has for growth. Crypto assets with low market capitalizations (low-cap coins) are usually more suited to post astronomical gains. But they can also more readily ‘disappear’ because they do not have solid footing.
On the other hand, large market capitalization cryptocurrencies (large-cap coins) may bring fewer gains than low-cap coins. But they are more stable because they have immense liquidity to draw on. Bitcoin, for example, currently has a market cap of about $317 Billion, even though we are in the throes of a bear market!
So, a well-balanced crypto portfolio should feature coins from both ends of the market cap spectrum. You might make large-cap assets a more significant portion and allocate a small percentage for low-cap coins. That way, you won’t be terribly affected if the market goes down. If it goes up and your low-cap tokens explode in price, your entire portfolio will still benefit considerably.
Most altcoins have a team of developers and investors. Some operate entirely online, while others have physical offices. Their whitepapers usually reveal where they are based and operate from. When doing your research as to what tokens to add to your portfolio, this is another factor to put in mind. Why is that.
This is because many governments still have a sketchy relationship with digital assets. Therefore, they may enact rules and regulations that affect crypto assets. Some may even ban cryptocurrencies outright, which will adversely affect the altcoin teams based in such countries.
So, if all or most of the tokens in your portfolio come from the same region, you might be at the mercy of the government policies in that region. Thus, it is wise to choose assets that come from different geographical regions when creating your portfolio.
Not all cryptocurrencies were born equal. Some, like Bitcoin, were made as payment currencies; some are smart contract giants (like Ethereum); some are NFTs; some are stablecoins; and others fill needs in the gaming, art, social media, and privacy industries.
As a smart crypto investor, you should spread your tentacles into these various sectors to ensure you are included in any potential bull run. You might even choose two or more rival crypto projects that address the same issue. For example, you might buy some ETH tokens to maintain exposure to smart contract technology, while also scooping some portions of BNB, MATIC, AVAX, and other Ethereum competitors.
Best Cryptocurrencies to Add to Your Portfolio
These are digital assets that one can use to make fast, low-cost payments around the world. Bitcoin is a prime example of this. Being the premier and most valuable cryptocurrency, it is a must-have for every balanced crypto portfolio. If Bitcoin goes to zero, it will definitely take the entire crypto world with it. So, as long as you are in the crypto world, you might as well grab some.
Other payment currencies you may invest in are Litecoin, Ripple, Dash, Monero, Bitcoin Cash, Zcash, and many others.
Decentralized Finance is currently gaining traction in the crypto world, especially with the failures of many centralized platforms that people once trusted. Therefore, DeFi tokens should be another vital part of any crypto portfolio.
You could start with decentralized smart contract blockchain platforms that host other applications and projects. Ethereum is the largest of those. Adding it to your portfolio may bring some stability even in volatile times. Other blockchain platforms are BNB chain, Polygon, Solana, Cardano, Near, etc. Some of these tokens are still far behind in market cap, so they may bring explosive gains if market conditions are right.
Apart from blockchain platforms, you may also invest in DeFi tokens hosted on these platforms. These include tokens of decentralized exchanges and applications that have gained considerable followings. Uniswap (UNI), for example, is one of the largest decentralized exchanges on the Ethereum blockchain, while Pancake Swap token (CAKE) is a rival on the BNB chain.
This is another crypto arm that is quite popular among enthusiasts. The upside to owning NFTs is that the profit potential can be immensely massive. The downside is that there may not always be a ready market for them.
Therefore, when adding NFTs to your portfolio, it might be best to ensure they do not take up a large part. Also, you may get a mixture of NFTs from various industry sectors. These sectors include gaming, music, art, collectibles, sports, play-to-earn, and many others.
Stablecoins will not bring you direct profit, but they should still be a part of your portfolio. The reason is that they increase your purchasing power in times of market decline. Most stablecoins also bring some decent gains when you stake or lend them.
There are many options in the stablecoin industry. Tether (USDT) and USDC are the two most valuable stablecoins in the current crypto market. BUSD and DAI are also good options. In choosing stablecoins, remember that they also come with risks of de-pegging, so they might only be somewhat safe.
Utility And Governance Tokens
Utility tokens are tokens that have specific use cases within a crypto community. Their usefulness and growth potential are usually limited by the parent community's popularity. Governance tokens also fall under the same umbrella. However, they have an added use case - enabling holders to vote on community proposals.
So, you should have some utility and governance tokens in your portfolio mix. If the community gains traction in the crypto world, your holdings may soar in price. An example of a utility token is the Basic Attention Token (BAT) which is used for tipping content creators on the Brave browser. Others include Golem (GNT), Arweave (AR), Zilliqa (ZIL), etc. Examples of governance tokens are Uniswap (UNI), Curve protocol token (CRV), Decentraland (MANA), Compound Finance (COMP), Aave (AAVE), etc.
These coins or tokens do not have any particular utility or practical importance. They were mainly created in response to internet memes or social media hypes. Because of this, they are usually much more volatile than novel cryptocurrencies. Therefore, you should approach them with caution and with the mentality that they could disappear tomorrow.
Popular examples of meme tokens are Dogecoin and Shiba Inu. Others are Dogelon Mars, Baby Doge Coin, Pitbull, etc. Most of these have already gained massively in the last bull run, so they may have little potential for more growth. The onset of the next bull market may see more meme coins being created that have the potential for a price explosion.
However, because of how volatile they can be, your meme coin allocation should be a tiny part of your portfolio so you don’t lose it all while chasing more gains.
Margex takes out all the stress needed to look for crypto assets to make up your portfolio; this enables you to trade and stake crypto assets with a real use case. The unique staking feature of Margex makes it possible to stake your portfolio assets and make up to 13% APY returns.
There are no lockup periods for staked assets, and all staking rewards are sent to your staking balance daily.
Why it’s Important to Have a Well-Balanced Cryptocurrency Portfolio
There are currently more than 21,000 different cryptocurrencies, according to Coinmarketcap, and the entire crypto market only has a liquidity value of about $829 Billion. That means that not all cryptocurrencies will get a sizeable chunk of digital money. By diversifying your portfolio, you have a greater chance of being well-positioned to scoop part of this liquidity by having the right coins.
Another thing to note is that the crypto market mostly operates in cyclical seasons. It usually starts with an inflow of funds into large-cap coins. Then, when those coins have created enough gains, the funds flow into the mid-cap and low-cap coins. And then the cycle starts again. Therefore, if you have a solid footing in all these market-cap categories, you will keep getting profit in-flows, regardless of the market's phase.
While crypto portfolio allocation is definitely advantageous, it also has some downsides. The major one is that it may consume a lot of time. This is because you will have to research various cryptocurrency projects before picking out which ones deserve your time and money. And, in the end, the success of your portfolio is still not guaranteed, no matter how much research you’ve done.
Examples Of Crypto Portfolio Allocation Strategies
There are various strategies to follow when choosing the best crypto portfolio for you. Your choice depends on your risk appetite and your portfolio size. Let me discuss three such strategies you can follow.
Strategy 1 - Conservative Allocation Strategy
This is the best crypto portfolio strategy for a risk-averse investor. It involves investing in large-cap cryptocurrencies that have massive enough liquidity to ensure they can hardly disappear. Many who choose this strategy focus on the top 10 or 15 coins by market cap and progressively scale into positions on them.
While this strategy ensures that investors do not lose too much in times of market declines, it usually offers slower growth than other portfolios. This is because large-cap coins usually take much bigger capital to move noticeably.
Bitcoin, for example, currently has a market cap of about $317 Billion. A 10% increase would require an inflow of about $31.7 Billion! In the same way, if that amount ($31.7 Billion) were pumped into a coin with a $1 Billion market cap, its price would skyrocket by over 30x (or 3000%)!
Strategy 2 - Aggressive Allocation Strategy
This may be your best crypto portfolio strategy if you are more open to the risk of volatility in crypto markets. It involves delving into mid-cap and small-cap tokens in order to maximize gains when the market rallies.
This strategy can very quickly turn a struggling trader into a multi-millionaire. It can also strip you of your life savings in seconds. That is because most of these coins do not have solid footing yet. Some may even end up as rug pulls. So if your health and wealth can’t handle massive volatility spikes, this strategy may not be for you.
Strategy 3 - The 80/20 Strategy
This strategy balances the first two we have mentioned. It involves putting 80% of your funds in large-cap coins while maintaining the other 20% in smaller-cap coins. Investors who choose this strategy usually build a more stable portfolio while still being exposed enough to scoop up some volatile gains.
You could also divide each group into further percentages. For example, you may hold 40% BTC, ETH 20%, USDT 10%, and 10% MATIC. That makes up the first part of your portfolio (80%). The second part could include various memecoins and other small-cap tokens that are more volatile.
Keep in mind that the cryptocurrency allocation outlined above is merely a suggestion and should not be taken as a form of financial advice. In the end, you are the only one that knows what the best crypto portfolio will be for you, depending on your circumstances.
How to Diversify Your Cryptocurrency Portfolio
Diversifying a crypto portfolio requires that assets are well invested in different crypto projects with a good use case and a track record of performing in present and long-term market situations.
Step 1 - Assess Your Capital
Before drawing up a crypto portfolio allocation strategy, first, assess how much you have and how much you can afford to lose. It is important that you only invest an amount that won’t affect you significantly if you lose it. This will ease the stress and pressure on your part and make it easier to follow through on your strategy.
While determining how much you can put down, remember that your gain is directly proportional to how much capital you put in. So, try to have enough skin in the game to benefit from price swings.
Step 2 - Do Your Own Research
This is one of the golden rules of crypto trading and investing. Even though tens of thousands of cryptocurrencies exist, not all of them are worth your time and effort. So, find out all there is to know about the coin you want to invest in. This might take some time, but you will be glad you did.
Some things to find out about a coin or token include where it originates from, who the developers are, what it can be used for, how robust its community is, and what the tokenomics are, among others. It’s your money you’re planning to invest, so take extra care to ensure you are not just giving it away.
Step 3 - Choose A Strategy
You can select from any of the abovementioned strategies or choose another that works better with your circumstances. Whatever strategy you choose, it is imperative that you stick with it down to the very end. This will ensure that you get the most out of it. But if you feel it needs some tweaks due to current market conditions, you can still make adjustments down the road.
Step 4 - Start Buying
Once your strategy is set, it’s time to go to the crypto market. You may decide to buy all your crypto assets at once and wait to see how the market turns. However, buying set amounts at regular intervals may be better so that you are more primed to pick your assets at lower prices. This method of buying is known as Dollar-cost averaging and has proved to be an effective buying strategy over the years.
After buying, you also need to determine where you will store your digital assets. If your strategy is long-term, keep your assets safe in cold storage wallets until you need to cash out on them. If, on the other hand, you are trading or investing on a short-term basis, you might keep them in hot wallets so as to quickly connect to the markets whenever you want to.
Step 5 - Rebalance
When some of the assets in your crypto portfolio start giving you profits, you may cash out on them and use the profit to bolster the size of your other crypto assets. This is called rebalancing and is another essential aspect of maintaining a well-balanced portfolio. This is also particularly important because the crypto world can be very volatile. Therefore, you should make good use of the profits when they come.
Step 6 -Track Your Portfolio
Because your crypto portfolio will likely involve buying various tokens across different sectors of the crypto world, keeping track may take a lot of work. But you need to keep track, so you don’t miss out on any price gains. You can use an automated portfolio tracker if you feel you can’t track it all alone. Most of these trackers are free to use and only require inputting your crypto purchase amount and price. Typical examples are the Coinmarketcap and Coingecko trackers.
Frequently Asked Questions (FAQ) On Crypto Portfolio Allocation
What is the best crypto portfolio?
The best crypto portfolio includes a mix of large-cap, mid-cap, and low-cap cryptocurrencies. It should also cut across various crypto sectors and geographical locations. This type of portfolio is best because it opens you to volatility while still helping you maintain relative stability.
How Should I Diversify My Crypto Portfolio?
Here are the steps you should take when diversifying your crypto portfolio:
- Assess how much capital you have to spend
- Research the tokens you want to buy
- Select your diversification strategy
- Start buying
- Track and rebalance your portfolio as needed.
How Many Coins Should I Have In My Crypto Portfolio?
There is no hard and fast rule about this. There are more than 21,000 different crypto assets to choose from. However, the number of coins you invest in should not be more than you can keep an eye on.
Why Should I Diversify My Crypto Portfolio?
Diversifying your crypto portfolio removes some of the volatility risks that crypto assets present. It also puts you in a prime position to benefit from whatever direction the crypto industry faces.
What Are The Best Cryptocurrencies To Have In My Portfolio?
This depends on your investment strategy. You can pick Bitcoin, Ethereum, and stablecoins to add stability to your mix. You can also include smaller-cap tokens like ETH, LTC, XRP, MATIC, and others. Non-fungible tokens should also make the cut. And you can add a decent mix of meme coins and tokens. All of these assets can be accessed on the Margex platform, where you can also use its unique staking feature to trade and stake these assets simultaneously.