The prospect of investing in crypto can be really exciting, until you’re actually entering the market and soon realize that things look a lot different than you may have envisioned. There is a lot of risk you’re getting exposed to, and without a proper plan in place, you could lose your hard-earned money (and your sanity) easily. The prices of cryptocurrencies fluctuate quickly, and while this can offer massive returns, it can also lead to major losses that could impact your portfolio’s performance.
Even if you buy the top cryptocurrency in the market, that doesn’t make you any less vulnerable to dramatic market shifts, which is why you need a smart strategy that sets you up for success. Simply put, you need to focus on building a well-balanced crypto portfolio, which essentially means spreading risk across various cryptocurrencies with different use cases. This way, even if one of the cryptocurrencies you’ve chosen loses its value, the others will help balance it, thus protecting your portfolio. Below, we offer advice on building a lucrative crypto portfolio, so keep reading to learn more.
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Start with the market leaders
When building your portfolio, it’s essential to first consider digital assets with the biggest market capitalization. For instance, you could choose the 10 or 20 largest cryptocurrencies, as they offer more stability compared to smaller assets, although they still experience price fluctuations.
When selecting the cryptocurrencies to add to your portfolio, it is best to exclude stablecoins like Tether or USD coin, even though they are listed among the top digital assets. However, they aren’t designed to increase in value, meaning that they won’t actually benefit your portfolio in the long term, so you may as well skip them.
Choose projects with different real-world applications
Cryptocurrencies have unique use cases, and they can be a good factor to help you choose the most valuable projects to invest in. For instance, there are store-of-value assets like Bitcoin, which are designed to maintain their value over time better than fiat money. You can also choose gaming coins, which power blockchain video games, and DeFi platforms, which offer blockchain alternatives to TradFi services.
Furthermore, some projects are designed as a metaverse platform with virtual worlds that allow users to interact with each other seamlessly. These are just a few examples of the use cases of cryptocurrencies, but if you research them, you will find out that there are a lot more of them, and some are more compelling than others. Do your research, choose several real-world applications that you find valuable, and then pick one or two cryptocurrencies that fit each of these use cases. By making them a part of your portfolio, you increase your chances of success in the market, due to the strong fundamentals that could serve as a potential catalyst for price appreciation.
Consider smart contract blockchains
Some of the most notable projects within the industry are blockchain networks that rely on smart contracts – programs that run on a blockchain. There are various ways in which smart contract blockchain networks are utilized, including dApps and new cryptocurrency tokens, making this space extremely competitive.
It’s worth noting that each blockchain comes with unique benefits and downsides, so it’s best to spread your money around to several of them. Some of the cryptocurrencies with the largest smart contract blockchains include Ethereum, Solana, BNB, Avalanche, and Cardano.
Pick smaller tokens with significant growth potential
Discovering crypto gems is one of the most rewarding aspects of investing in this market. Although smaller projects have a higher risk of failure compared to well-established coins, they can also be incredibly lucrative if they take off. While you should consider the top 25 to 50 cryptocurrencies when building your portfolio, it’s always a good idea to round it out with smaller projects that raise your interest. However, make sure to research them before investing, as this will allow you to understand how they work and avoid engaging with fraudulent projects, thereby protecting your money.
Rebalance your portfolio frequently
To minimize risks and protect your investments, it’s essential to rebalance your portfolio frequently. Due to the volatile nature of cryptocurrencies, this will help you stay safe and ensure you are always diversifying, thereby preventing significant losses. To rebalance your portfolio, several key strategies are worth considering. First and foremost, it’s imperative to choose a percentage range for rebalancing: for instance, when the asset class deviates 5% from its preferred weight.
You can select the number based on your own tolerance and the time you are willing to spend to make sure that your portfolio is compliant with the established allocation. It is also important to set a time for rebalancing; for most investors, once a year is sufficient, but some prefer to do this twice a year or quarterly. There’s no right or wrong way to go about this, but it’s worth noting that less frequent rebalancing can lead to more significant allocations and, therefore, higher overall returns, alongside increased volatility.
Why build a well-balanced crypto portfolio?
Building a well-balanced portfolio is undoubtedly a time-consuming process, which can be a drawback for many and the reason why they don’t consider doing it in the first place. You need to look for the right cryptocurrencies, decide how you will approach asset allocation, and focus on rebalancing, and all of these things can take time. However, if you commit to it, there’s less risk involved, as you are no longer tied to the failure or success of just one cryptocurrency. Furthermore, the chances of investing in the most lucrative digital assets also increase.
Oftentimes, specific cryptocurrencies have an outstanding performance at certain times compared to the rest of the market, and the more digital assets you add to your portfolio, the higher the chances of investing in those outliers and sharing their gains. However, it’s worth noting that even if you build a diversified portfolio, there are no guarantees of success, given the volatility of the market, and it’s still important to approach crypto investing with discipline and caution.
The bottom line
A well-balanced cryptocurrency portfolio is essential for managing risk and positioning yourself for long-term success in the market. By diversifying, you can protect your capital and leave room for significant upside, allowing you to navigate the unpredictable world of cryptocurrencies with confidence.
