The process of balancing a crypto portfolio is similar to that of balancing a regular portfolio. Depending on your profile and investing plan, you may minimize your total risk. Simply spreading your assets across several cryptocurrencies is all it takes to get started.
Cryptocurrency has gone a long way, and according to Coinmarketcap, the digital coin umbrella currently includes over 5,300 currencies. Even though just the top 20 coins are regarded as the most tradeable and account for the majority of the market, the huge adoption and population speak volumes about the condition of cryptocurrency.
You may use a third-party portfolio tracker or manually record your transactions on a spreadsheet to make monitoring your portfolio easier. Some trackers may be connected to your wallets and bitcoin exchanges to make the process easier.
In another way, portfolio diversification is the process of allocating a varied amount of your funds to various assets to maximize profit while minimizing risk. When diversifying, the likelihood of two or more assets’ prices correlating is given more weight. A well-diversified portfolio is made up of assets that have diverse performance characteristics.
How to start diversifying your portfolio
Asset allocation and diversity are essential topics to understand when building an investing strategy. Investing in several asset classes is referred to as asset allocation. The dispersion of your investing funds across multiple assets or industries is referred to as diversification.
Why is it important?
Unlike most traditional assets, the market for digital assets is extremely volatile. Several times a day, prices might abruptly move in various directions to the benefit or cost of investors. As a result, while volatility tends to boost profitability, it also increases the risk of losing money. It is not uncommon for the price of Bitcoin to decrease by 50% in a couple of days. Investors that are significantly involved in the Bitcoin market will see their portfolio value plummet in such circumstances.
Spreading one’s capital across various digital assets is recommended to reduce such levels of risk exposure. This investing approach helps to mitigate the size of losses experienced during market downturns. Because you just put a portion of your money in Bitcoin and spread the rest among various currencies, a 50% Bitcoin fall is unlikely to be as severe. This is because the performance of the component crypto-assets in a diversified portfolio would compensate for the losses.
Types of portfolio diversification
Depending on your preferences and risk tolerance, you may combine American, European, or even Asian blockchain initiatives. There has been a recent movement toward Asian enterprises, which are seen as attractive investments.
They also have a devoted fanbase, which increases their chances of success.
However, if you want a more globally diversified portfolio, you may combine your investments with European and American enterprises.
You might be wondering why time diversification is essential. One of the oldest and most well-proven diversification methods is time diversification.
When done correctly, it has been proved to be effective. This method requires you to timing the market and purchase your crypto assets at the correct time.
You don’t buy your portfolio entirely at once; instead, you acquire pieces of it at a time. You might elect to purchase 10% of your portfolio on a monthly basis. In this instance, putting together a comprehensive crypto portfolio will take ten months.
Timing diversification assists you in avoiding bad timing by removing the burden of incorrect timing decisions off your shoulders. It is, however, tough to time the crypto market, especially if you are a beginner. It might sometimes be challenging to determine when is the best time to act.
How to build a well-balanced crypto portfolio
1. Divide your portfolio into three categories: high-risk, medium-risk, and low-risk assets, with suitable weightings for each. A portfolio with a significant share of high-risk investments is unbalanced.
2. To assist offer liquidity for your portfolio, consider owning some stablecoins. Many DeFi platforms use stablecoins, which may allow you to lock your winnings or exit a position fast and easily.
3. If necessary, rebalance your portfolio. The cryptocurrency market is quite volatile. Therefore your judgments should be based on the present circumstances.
4. Strategically allocate fresh cash to prevent over-investing in any one part of your portfolio. It’s tempting to put more money into a coin if you’ve just earned large gains from it. Don’t let greed get in the way; instead, consider where the money may be better spent.
5. Only put your money where you can afford to lose it. If you’re concerned about your portfolio, it’s not balanced correctly. If something goes wrong, your stances should not have severe implications for you.