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How to build a diversified cryptocurrency portfolio
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In this article we'll look at some of the opportunities available in cryptocurrency and how to maintain safe investment practices based on your risk profile.
Let's jump in.
The Importance of DYOR (Do Your Own Research)
The cryptocurrency market is young and full of opportunity. Anyone can get into crypto. The hard part is doing the research to find those gems that will yield the best turns.
Here are a few thing to keep in mind when you're researching a potential investment:
- Look at the project's goals and if they seem reasonable. If the proposition sounds outlandish, maybe stay away.
- Check out the website and read the whitepaper. Don’t blindly follow advice on any project.
- Look at the project’s online communities on Reddit, Telegram, Discord and other social platforms. Do some inquiring to gauge community sentiment, helpfulness and professionalism.
- Remember: if something sounds too good to be true, it probably is.
Bitcoin and altcoins
Today’s cryptocurrency market is diverse. Bitcoin is no longer the only investment vehicle.
In addition to Bitcoin, the cryptocurrency market is comprised of many “altcoins”, a popular term used to describe alternatives to Bitcoin.
If you take a look at CoinMarketCap’s coin listings, you can see hundreds if not thousands of altcoins.
Determine your risk profile
When building a cryptocurrency portfolio, it’s important to stick to your risk profile.
Here are a few questions you should ask yourself before investing:
- How much can I afford to invest without losing sleep?
- Should I diversify at the asset class level by buying stocks and precious metals?
- What level of inter-market risk am I comfortable with? Should I invest in riskier coins for potentially higher rewards or stick with less volatile options?
- Do I view cryptocurrency as a short-term or long-term investment?
Based on the answers to these questions, you’ll be able to determine your personal risk profile.
Here are a few examples.
Ultra-conservative long-term investor
Tyler is a businessman who’s close to retirement and has already invested in stocks, precious, metals and real estate.
He’s a traditional but open-minded investor and wants to have some exposure to this new asset class called cryptocurrency.
He has a family to take care of, so he has to maintain a strict risk profile.
Tyler chooses to allocate 5% of his total investment capital between the top ten cryptocurrencies.
Risky short-term investor
Josh is a college student who’s looking to invest his “beer money” into cryptocurrency.
When he’s not in class, he’s always keeping a close eye on the newest hyped coin on the market.
Since he’s still young, Josh figures the best way to make quick gains is to jump on the latest pump and get out before the dump.
Josh chooses to allocate 75% of his beer money between relatively unknown and extremely volatile cryptocurrencies.
Risk-neutral long-term investor
Catherine is a recent law school graduate who is also interested in cryptocurrencies.
She managed to land an excellent paying job at a law firm and is learning about crypto in her free time with the hopes of providing legal consultations to blockchain firms in the future.
Since it’s difficult for young people to invest in real estate nowadays, Catherine figures she can invest in cryptocurrencies along with her current stock investments.
She has an above average paycheck, so she invests 50% of her investment capital into cryptocurrency.
Her law background has given her the analytical ability to see through the many scams in the market.
After a few days of research, she decides to allocate her capital between the top 10 cryptocurrencies and a select few other altcoins with real business partnerships and ventures.
Different types of cryptocurrencies
In 2008, Bitcoin, the world’s first blockchain-based electronic money, was born.
Ten years later, Bitcoin is still around, but many other projects are competing in the space.
Today, projects are applying blockchain technology to distributed computing, privacy, supply chain, interoperability and more.
As an investor in an ever-evolving market, it’s important to know about some of these projects which can help you build a diversified portfolio.
The Big 10
The Top 10 cryptocurrencies by market capitalization are the ones that have withstood the test of time.
When creating a diversified cryptocurrency portfolio, you may choose to have adequate exposure to these large caps because they tend to be less volatile in times of uncertainty.
Recently, we’ve even seen cryptocurrency index funds enter the market. These products are designed to expose investors to top cryptocurrencies without having to worry about constant portfolio rebalancing and management.
Interoperability blockchains are focused on connecting different blockchains to enable cross-chain communication.
Connecting purpose-specific blockchains can result in innovative business opportunities that were not possible before.
ICON, Wanchain, AION, Cosmos, and PolkaDot are examples of interoperability blockchains.
Privacy coins are focused on giving users the power to make transactions that cannot be traced or linked to their physical identities.
Monero, Zcash, and DASH are examples of private cryptocurrencies.
Supply chain projects
Supply chain and business logistics is a ripe industry for innovation through blockchain.
Projects in this space are focused on reducing the costs of doing business by providing tracking and authentication tools powered by blockchain.
Vechain and Waltonchain are two examples of blockchain projects targeting the supply chain industry.
Many crypto traders buy and sell exchange tokens because their price appreciation can show a strong correlation with the success of the exchange.
Exchange tokens also give users access to reduced trading fees and other special promotions. QASH, Huobi Token, nd Kucoin Shares are examples of exchange tokens.
Computing, networking, and storage
Incentive-based distributed computing is a popular use case for blockchain technology.
Most projects involved in this niche are building tools to enable users around the world to contribute their computers’ processing power, storage, and network connection in exchange for tokens.
SIA, Maidsafe, and Golem are examples of distributed computing projects.
Cryptocurrencies with low market caps (8-12 million USD) have more potential upside but are usually more risky plays.
Sometimes it’s not possible to tell if a project is an undiscovered gem or merely a scam.
Furthermore, low cap coins are often listed on smaller exchanges and can easily be manipulated by bigger players, so they may not be suitable for long-term investment.
If you’re interested in taking a punt on low caps, be sure to maintain a strict risk profile and only use a small fraction of your capital.
After you’ve determined your risk profile and sufficiently researched the cryptocurrencies you’d like to invest in, it’s time to learn how to buy them.
Here are a few tips to kickstart your research process.
- Where can I buy the cryptocurrency?
- Can the cryptocurrency be bought with fiat?
- Where do I store the cryptocurrency after I buy it?
- Is there an upcoming mainnet token swap?
If you don’t know the answer to these questions, it’s best to do a bit more research before jumping onto a cryptocurrency exchange with your hard-earned money.