Gone are the days when it seemed unreachable to own a digital asset "“ nowadays, this is more accessible than ever, especially in the countries where cryptocurrencies have become legal. Since it is so easy to access and brings many opportunities for making a profit, everyone wants to be a crypto investor these days, hoping to achieve outstanding results when checking the ETF price chart and putting their money into Ethereum ( or any other exciting crypto asset). However, if you approach the crypto landscape with this mindset, you will only set yourself up for disappointment. Achieving big results takes a lot of work, and there are some rules you need to take into account, among which one of the most essential is to build a balanced portfolio "“ the same as you'd do when investing in traditional assets. However, cryptocurrency diversification poses challenges you may not know how to handle if you're only used to the stock market.
The risk involved in the crypto market makes it difficult to find robust investments, and it's impossible to buy a large group of digital assets in one fell swoop. If you want to purchase crypto but don't know where to start, you've come to the right place, as in this blog, we will guide you through everything you need to know about building a well-balanced crypto portfolio. Read on!
What does a well-balanced crypto portfolio look like, anyway?
Building a well-balanced crypto portfolio means putting your money into multiple digital assets with unique use cases and risk levels. You allocate a set amount of funds to each asset and rebalance accordingly when selling off holdings or buying new assets. A major part of ensuring your crypto portfolio is only allocating a small portion of your overall investments to this asset class "“ ideally, crypto should represent 5% to 10% of your portfolio. Why is this a golden rule? Well, it's because crypto involves high levels of risk, and it's best to secure your funds by not making your portfolio about crypto alone. Suppose your crypto investment rises in value; in this case, it may be necessary to sell some to ensure your portfolio doesn't become too crypto-heavy. This step is essential because a portfolio with 25% to 50% crypto can be very risky during market downturns, threatening your financial health.
One of the biggest benefits of building a well-balanced portfolio is minimizing risk. When your crypto portfolio is diverse, its success won't be tied to the performance of a single digital asset. Moreover, you have better odds of putting your money into the most thriving crypto assets "“ this is because sometimes, cryptocurrencies tend to outperform the rest of the market, and the more assets you add to your portfolio, the higher the chance that you will make some impressive gains when this happens.
Essential steps for crypto portfolio diversification
To diversify your crypto portfolio, you need to take a few steps, which we will explore in detail below. What's important to know is that you don't need to use all of these strategies; rather, it's about choosing those that resonate with you most and making sense of your unique situation.
Opt for market leaders
A good strategy when creating a well-balanced portfolio is to allocate your funds to crypto assets with a large market cap "“ for instance, you can choose between the 10 to 20 largest cryptocurrencies. Even if all digital assets are volatile, market leaders tend to offer more stability compared to small cryptocurrencies, so you are safer when investing in them.
When using this method, it's wise to exclude stablecoins like Tether "“ even if it is among the most popular cryptocurrencies, it's unlikely that this digital asset will increase in value much, so it may be worth putting your money into another asset.
Choose cryptocurrencies with unique use cases
Digital assets have all sorts of uses, and this can be a significant factor in helping you decide where your money should go. Some examples of cryptocurrency use cases include low-cost payments, alternatives to traditional financial services via DeFi, blockchain video games, and untraceable transactions, to name just a few.
When searching for cryptocurrencies to invest in, you'll find that many of them fit into the categories mentioned previously, but that doesn't mean you should pick them all. Instead, choose a few use cases ( ideally, those that make the most sense to you) and then stick to one or two digital assets that fit each of these use cases.
Mix Bitcoin and Ethereum with other assets
When it comes to crypto, no investment is truly 100% safe. However, Bitcoin and Ethereum provide more safety than other digital assets, so there's no doubt they should be part of your crypto portfolio. That's because they are mainstays at the top of the market, so they likely won't go anywhere soon.
So, we recommend using one-third of the funds allocated for crypto to buy BTC and one-third for ETH and keeping the rest to buy other digital assets that interest you.
Focus on smart contract blockchains
Among the most lucrative crypto projects are blockchain networks running smart contracts, which can be used to develop dApps and launch new crypto tokens. Remember that the space of smart contract blockchains is competitive, with each network providing unique pros and cons.
Therefore, it's imperative to research and evaluate smart contract blockchains and spread your investments across the biggest ones, such as Ethereum, BNB, Cardano, Solana, and Avalanche.
Prioritize rebalancing whenever needed
Rebalancing is an essential part of managing your crypto portfolio, and as prices change, it will likely be necessary to buy and sell some of your investments to ensure your portfolio stays balanced.
For instance, if the value of some smaller investments rises, it may be necessary to trade some of them with major crypto assets to ensure you maintain the desired asset allocation.
Closing thoughts
Hopefully, after reading these methods, you can diversify your crypto portfolio. However, despite the benefits that you can get from doing this, it's worth noting that portfolio diversification won't guarantee success in the crypto landscape"”nothing can due to the inherent nature of the industry"”so you should also apply other rules of crypto investing along with this one, such as only investing the amount you're willing to lose and carefully assessing your financial situation before making an investment.