Everyone knows the proverb “don’t put all your eggs in one basket,” well, this saying is very relevant to the cryptocurrency industry. This sphere is young, it has only just started evolving, and at this stage, there are a lot of scams and projects which simply do not work. So if you want to taste success as a crypto enthusiast, it would be best to heed the proverb and spread yourself out.
We’ve already talked about how to pick the right coin for your portfolio, now it’s time to think bigger. We are going to talk about two strategies which will help you to build and manage your assets.
To put it simply, diversification is a way to reduce risks by distributing your funds across different assets. But when do we need to diversify?
Of course, it doesn’t make much sense to use this strategy if all your assets cost about $200. You can stick with the most popular currencies like BTC, XRP, ETH etc. and simply hodl.
There are three main styles in diversification – conservative, moderate and risky and their names speak for themselves.
- Conservative – it is the safest method which involves old coins with a good reputation like Bitcoin, Ethereum, Litecoin, etc. (depending on your preferences) and basically, it consists of the top 10 cryptocurrencies. These coins have already proved to be worthy by their use-cases, working technology, etc.
- Moderate – here come a few altcoins in active phases of development, coins that have at least a solid first version of their product and are listed on one major exchange. It would be ideal if they had real and clear partnerships with well-known companies. You might want to look at VET by Vechain and ENJ by Enjin coin or other coins in similar spots.
- Risky – this style is a bit like gambling. You can win or you can lose - it can be an exit scam or a huge price jump. They used to be ICOs, now sometimes they are called IEO projects. They can outperform the market.
Using these three methods you can balance your portfolio with a range of safe to more aggressive style.
The crypto industry is very young and things are still developing. You should regularly update your portfolio as the situation of the market is always changing. Rebalancing is a strategy when you determine what amount of assets you want to allocate for each one. In crypto, the assets are coins and tokens. Let’s look at an example.
For 100% of your money, you bought 10 different cryptocurrencies in equal shares of 10%
and left them for half a year. Six months later you see that the price changed; some of them are more expensive, some cheaper, and as a result your portfolio is very unbalanced. Let's say, the most depreciated of your shares now constitutes only 4% of your portfolio while the asset that rose the most takes up 18%. In order to balance your portfolio you would sell off a portion of the asset that increased to buy the asset that decreased to the extent that you would end up at the original 10% ratio. That is portfolio balancing in a nutshell.
But what’s the whole point of the method, why would I sell coins that are headed to the moon?
- Using this method you follow the main trading principle – “Buy low and sell high”.
- Equal distribution helps us avoid additional risks. If, for example, LTC has risen in price and began to take up to 30% of a portfolio’s total value, then this is already quite risky. If something happened to this asset, the crypto user would lose a very tangible share of his portfolio.
These two basic strategies are widely used in stock portfolio management. They are also applicable to cryptocurrencies. But you should understand that the risks here are much higher than those on traditional markets.
Disclaimer: This article should not be considered as a financial recommendation and serves only as educational material. The cryptocurrency market suffers from high volatility and regulatory uncertainty. Every crypto enthusiast should research multiple viewpoints and be aware of local regulations.