How to Build a Well-Balanced Crypto Portfolio

06/03/2022 By Author

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TL;DR

Balancing a crypto portfolio is not that different from balancing a traditional portfolio. You can easily reduce your overall risk according to your profile and investment strategy. All it takes to get started is simply diversifying your investments among different cryptocurrencies.

The extent to which you diversify is up for debate, as there are pros and cons to both sides. However, it’s generally accepted that some diversification is beneficial. You can reduce the risk of your investments by holding different crypto assets (including stablecoins) and making sure to rebalance your asset allocation regularly.

To make managing your portfolio easier, you can use a third-party portfolio tracker or manually record your transactions on a spreadsheet. Some trackers can be linked to your personal wallets and cryptocurrency exchanges, making the process more convenient.

Getting started with crypto investing is as easy as purchasing your first bitcoin (BTC), ether (ETH), or any other cryptocurrency. While some investors prefer to buy and hold the largest cryptocurrencies, others choose to experiment with altcoins. But what’s the best way to do this? You are more likely to succeed by thinking carefully about your asset allocation and balancing your crypto portfolio regularly. Depending on your risk tolerance, there are a few ways to do this. Balancing your portfolio isn’t hard, and the results can literally pay off.

A crypto portfolio is a collection of cryptocurrencies owned by an investor or trader. Portfolios typically contain a variety of different assets, including altcoins and crypto financial products. It’s pretty similar to a traditional investment portfolio, except you’re sticking to one asset class. You can track your crypto portfolio manually with a spreadsheet or use specialized tools and software to calculate your holdings and profits. A good portfolio tracker can come in handy. Trackers are essential to day traders and other short-term traders but also offer value to long-term investors and HODLers.

When creating an investment portfolio, you should be familiar with the concepts of asset allocation and diversification. Asset allocation refers to investing in different asset classes (e.g., cryptocurrencies, stocks, bonds, precious metals, cash, etc.). Diversification relates to the distribution of your investment funds across different assets or sectors. For example, you could diversify your stock holdings by investing in different industries, such as agriculture, technology, energy, and healthcare. Both of these strategies reduce your overall risk.

Technically, cryptocurrencies are a single asset class. But in a cryptocurrency portfolio, you can diversify across products, coins, and tokens that present different goals and use cases. For example, you could allocate your portfolio with 40% bitcoins, 30% stablecoins, 15% NFTs, and 15% altcoins. To explore the topic further, check out Asset Allocation and Diversification Explained.

Most advice will tell you that your crypto portfolio has to be diversified. While it is a standard for investors, there are pros and cons to spreading your capital around different assets. As we mentioned already, a diversified portfolio reduces overall risk and volatility. Losses can be offset by gains and keep your position stable. Your portfolio also has more opportunities to make gains with each coin you own. Not every investment will be a winner, but with proper asset allocation and diversification, you’re more likely to make profits in the long run.

However, the more diversified your portfolio is, the closer it will track the overall market. Most traders and investors are looking to beat the market with larger gains. A highly diversified portfolio will lead to more average returns than a successful concentrated portfolio. Worse performing assets can balance out high earners.

Managing a diversified portfolio also requires more time and research. To invest soundly, you should understand what you are buying. With a large portfolio, the chances of understanding everything well decrease. If your portfolio is across different blockchains, you may also need to use multiple wallets and exchanges to access your assets. The decision to diversify or not is yours, but some diversification is always recommended.

Bitcoin is the most famous cryptocurrency and is the biggest by market cap. But a well-balanced portfolio will include a selection of different coins to reduce overall risk. Let’s go through some of them.

Payment coins

Nowadays, it’s hard to find new coins that primarily deal in payments. But if you go back to the birth of cryptocurrencies, most projects were systems to transfer value. Bitcoin is the most well-known example, but we also have Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC), among others. These coins are the first generation of cryptocurrencies that existed before Ethereum and the introduction of smart contracts.

Stablecoins

A stablecoin attempts to track an underlying asset such as a fiat currency or precious metal. BUSD, for example, pegs the U.S. dollar with reserves set at a 1:1 ratio. PAX Gold (PAXG) uses the same system but ties the coin to the price of one fine troy ounce of gold held in reserves. While stablecoins don’t necessarily provide large returns, they live up to their name and provide stability.

The cryptocurrency market is volatile, so having something in your portfolio that keeps its value is useful. If the stablecoin pegs something outside of the crypto ecosystem, a crypto market dip shouldn’t affect it. If you want to move tokens out of a coin or project, you can rapidly transfer them to a dollar-backed stablecoin like BUSD to safeguard your gains. Converting into fiat is a much longer process than trading for a stablecoin.

Security tokens

Just like traditional securities, a security token can represent many things. It could be equity in a company, a bond issued by a project, or even voting rights. Securities have effectively been digitized and put on the blockchain, meaning that they mostly fall under the same regulations. For this reason, security tokens are in the jurisdiction of local regulators and must go through a legal process before issuance.

Utility tokens

A utility token acts as the key to a service or product. For example, BNB and ETH are both utility tokens. Among other things, you can use them to pay for transaction fees when interacting with decentralized applications (DApps). Many projects issue their own utility tokens to raise funds in a coin offering. The token’s value should theoretically have a direct link to its utility’s value.

Governance tokens

By holding a governance token, you can receive voting power on a project and even a share of the revenue. You’ll most likely find these tokens in decentralized finance (DeFi) platforms like PancakeSwap, Uniswap or SushiSwap. Like utility tokens, the value of a governance token directly relates to the success of the underlying project.

A portfolio doesn’t just have to consist of holding different coins. Financial crypto products can also help diversify your portfolio even more. Think of it a bit like investing in government bonds, ETFs, or mutual funds rather than just holding shares. There’s a massive amount of products you can invest in across different blockchains and DApps.

If you’re new to the topic, Binance offers a variety of financial products. To check them out, log into your Binance account and navigate to the [Finance] section. All these products have different risk levels, so make sure you understand their working mechanisms before taking risks.

Each investor or trader will have their own ideas on what makes a well-balanced crypto portfolio. But, there are some general rules worth considering:

1. Split your portfolio between high, medium, and low-risk investments and give them appropriate weightings. A portfolio containing a large portion of high-risk investments is definitely not balanced. It might have the chance to provide you bigger gains but may also cause huge losses. Your risk profile will determine what’s best for you, but there should be some mix.

2. Consider holding some stablecoins to help provide liquidity for your portfolio. Stablecoins are the key to many DeFi platforms and can help you quickly and easily lock in gains or exit a position.

3. Rebalance your portfolio if needed. The crypto market is very volatile, and your decisions should change depending on the current situation.

4. Allocate new capital strategically to avoid overweighting any one area of your portfolio. If you’ve made big gains recently from one coin, it can be tempting to pump in more money. Don’t let greed interfere, and think about where you can better place the money.

6. Only invest what you can afford to lose. Your portfolio isn’t correctly balanced if you feel stressed about it. Your positions should not cause you serious consequences in case things go terribly wrong.

A portfolio tracker is a program or service that allows you to trace the movements of your holdings. You can see how your current allocation stacks up with your long-term goals and track your progress. Here are some examples you might want to consider:

CoinMarketCap

CoinMarketCap is a hugely popular price tracker that’s developed its own portfolio feature. The portfolio tracker is available for free on desktop and mobile devices. To use the portfolio tracker, you need to add in your holdings manually as it doesn’t connect to your wallet or exchange. There’s also the option to add in the prices you bought at to track your gains accurately.

CoinGecko

CoinGecko is mainly known for its cryptocurrency price tracking, but it has a portfolio option too. It’s free to use and is available on your browser or mobile device. If you’re already a regular CoinGecko user, the tracker is worth a try too.

Delta

Delta is a mobile app that allows you to view your crypto portfolio and traditional investments simultaneously. It can connect with 20 exchanges and a variety of wallets, including Binance. There’s both a free and paid version, but you cannot trade within the app.

A lot of the cryptocurrency market is dependent on the health of Bitcoin. But that’s no reason not to balance your portfolio. Varied crypto investments can offset some of the losses that occur with a Bitcoin crash, so it’s always worth having some diversification. Remember, there’s more to balancing your portfolio than holding multiple coins. A bit of strategy will go a long way in creating a suitable portfolio for your risk tolerance.

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