The steps to building a well-structured crypto portfolio to mitigate risks

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While the cryptocurrency market hasn’t been exactly in the best spot last year, with prices depreciating and causing investors to have second thoughts about their approach to cyber cash, the days are getting brighter, as headlines suggest. The world’s most renowned digital currency, Bitcoin, has weathered many storms, only to bounce back stronger and reinforce the statement that cryptocurrencies and related assets are here to stay. 

A chain of events that started with the crash of a seemingly-stable cryptocurrency – Terra Luna, and culminated with a major exchange filing for bankruptcy drove most of the losses in investors’ portfolios last year. Thus, it may have sounded like a tricky move to buy Bitcoin online when you’d have no idea of where the market is going. However, today, crypto enthusiasts have a reason to rejoice and reconsider their investing strategy. The cryptocurrency leader, Bitcoin, has surged 80% this year, breaking above $30.000 for the first time since June of last year. As a general rule, when the reigning coin’s price surges, the values of other cryptocurrencies grow as well, which seems to be the case for its counterparts if we look at the price charts provided by exchanges.

The whole market showed signs of recovery as cryptocurrency prices started to grow. While no expert or price prediction can tell whether the bull run is around the corner or we’re yet to enter that long-awaited phase, one thing is certain. If you want to add cryptocurrencies to your portfolio to generate revenue, you’ll need an all-weather portfolio. 

There’s no one-size-fits-all solution when it comes to creating a portfolio that will perform well and bring in profits. But several expert-approved guidelines help you minimize risks of losing money by developing a well-balanced crypto portfolio. Crypto’s famed volatility can be dealt with, so let’s dive into this topic to discover the ways you can bring structure into the equation to achieve better results in the long run. 

 

What exactly is a cryptocurrency portfolio?

Before jumping on the bandwagon and placing orders on exchanges, it’s important to grasp the essentials of a cryptocurrency portfolio. You can think of it as a combination of different digital coins stored in a hot or cold wallet. It’s a way to keep track of your compilation of assets, whether you’re adding the largest tokens or smaller coins by market capitalisation. Basically, a crypto portfolio is a grouping of different digital currencies that you own as a trader or investor.  

As you embark on this journey, you’ll need a well-balanced crypto portfolio to ensure it generates profits in time. This way, you’ll monitor your inventory of assets to keep yourself informed and decide what’s the next move when a token’s price is appreciating or depreciating.  

Tools for crypto portfolio diversification 

You have thousands of cryptocurrencies and crypto-related investment options, with a market capitalisation reaching $1.23 trillion and growing. Several tokens, like Bitcoin, Ethereum, Litecoin, Ripple, and Cardano, dominate the crypto sphere. You can combine the largest and most renowned tokens and some smaller coins by market cap. 

Here’s a brief rundown of two of the most popular types of assets you can opt for to build a well-structured portfolio. 

  • Stablecoins. Stablecoins are digital coins generally seen as less-volatile investment options compared with other types of assets, developed to address the volatility of most popular cryptocurrencies. Their price is pegged to that of another financial tool, commodity, or currency, such as gold or the US dollar, meaning their values are relatively constant. Examples of stablecoins include Binance USD, True USD, Tether, and USD Coin.
  • Altcoins. Altcoins (an abbreviation for “alternative coin”) are an alternative to the supreme digital currency, Bitcoin. They entail more volatility than stablecoins, carrying a higher level of risk. Some of the most popular options are Cardano, Ethereum, and Litecoin. 

Decide on your objective

You can’t jumpstart a business without understanding what you want to achieve and setting clear goals. Similarly, you can’t start on the right foot with cryptocurrency if you’re not defining specific objectives and having a clear idea of the outcome that you’re aspiring for. Having a clear goal in mind will help you avoid panic-selling when your investment is not performing as expected, buying a seemingly promising token out of FOMO, and other common mistakes that even the most seasoned crypto investors are susceptible to make.

It’s equally important to use common sense and set realistic objectives to avoid disappointment. You’re diving into a market famed for its high volatility, where fluctuations are the order of the day, so treat it accordingly. If you’re a newbie to the crypto world, start small and be modest. You can adjust your goals further down the road as you accumulate experience. 

Determine your risk tolerance 

Cryptocurrency volatility can be the cherry on the cake for many investors who realize this characteristic creates room to generate profits. For some, this provides the opportunity to develop a profitable and stable portfolio. However, others consider the high level of volatility a turn-off and turn their attention to less risky investments. 

It’s important to understand what you’re exposed to when diving into the cryptocurrency market and assess your risk tolerance. If you’re investing in cryptocurrencies to take advantage of price swings and make a quick buck, you may be more willing to expose yourself to risks, as short-term losses won’t scare you off your investment. Otherwise, if you’re approaching cryptocurrency through long-term lenses, your appetite for risks may decrease as you’ll look to assets whose value may increase in time and that won’t jeopardize your funds. 

Summing up 

A well-balanced portfolio compiles different types of digital coins and related assets in order to mitigate the risks it is exposed to, given the volatility of the market. In this regard, diversification is key to helping you weather the storms that may appear in the crypto sphere, ensuring that when an asset hits the ground and jeopardizes the financial health of your portfolio, you have another one that performs well, and vice-versa. 

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