How do you build a well-balanced crypto portfolio? Although investing in cryptocurrency can be a volatile ride, the basic principles of asset allocation and diversification still come into play when you build a solid crypto portfolio.
By investing in different types of crypto, you can set an asset allocation that reflects the amount of risk you’re comfortable with, and the potential gains you’re hoping to achieve to reach your financial goals.
What Is a Crypto Portfolio?
Any investor interested in building the best crypto portfolio for themselves would be wise to remember that even as crypto usage becomes more popular, it can still be a very volatile investment. This fact should be top-of-mind as you create a balanced crypto portfolio, because unlike a traditional investment portfolio a crypto portfolio contains a single asset class that has a higher risk profile overall.
With that in mind, you can consider different types of crypto for diversification, which helps to manage risk, including so-called stablecoins, which are pegged to a fiat currency like the dollar, yen or euro, and as their name might imply they typically don’t have the same fluctuations in value as coins, altcoins, and tokens.
Also bear in mind that as of September 2021, cryptocurrencies remain largely unregulated in the United States and in many parts of the world. As that changes, and cryptocurrencies receive greater regulatory scrutiny, that could affect the valuations of different coins — which in turn might require you to rebalance your portfolio.
With that in mind, potential crypto investors may want to learn as much as possible about investing in cryptocurrency before putting their money on the line.
Crypto Investing Basics
Ready to invest in crypto? Make sure you can answer the question “what is cryptocurrency?” before you put your money toward this asset. Here’s a quick review:
• Cryptocurrency is a digital currency used in financial transactions between individuals or entities that doesn’t require going through a bank, or another third party.
* Typically, cryptocurrencies are created using transparent distributed ledger technology called blockchain, and peer-to-peer review. Coins are encrypted using specialized computer code called cryptography.
• Depending on the specific cryptocurrency, units are sometimes known as tokens, and they’re sometimes referred to as coins — you may have also heard the term “altcoins,” which refers to the coins developed as alternatives to bitcoin.
• Tokens or coins are stored in a “wallet,” accessible with public and private keys that allows users to interface with others.
• Investors can purchase tokens, or shares of tokens, on major online crypto exchanges by connecting a bank account and going through a verification process similar to opening an account to trade stocks or other securities.
Different Types of Cryptocurrency
There are thousands of cryptocurrencies out there — estimates range from about 6,000 coins to over 10,000 — with a total market capitalization of nearly $2 trillion, as of October 2021. There are a few leaders in the crypto world, as measured by market cap, including Bitcoin, Ethereum, Cardano, Dogecoin, and Litecoin.
A crypto portfolio may contain one or more of these cryptocurrencies, in addition to some of the countless other smaller currencies that are available and have much smaller market caps. The market capitalization of each cryptocurrency listed below is as of October 6, 2021.
By far the largest cryptocurrency with a market cap of nearly $1 trillion, Bitcoin was the first crypto to hit the market in 2009, and it is still the most well-known cryptocurrency. Bitcoin established the use of blockchain technology, a decentralized public ledger that contains a digital record of every Bitcoin transaction.
Bitcoin also pioneered the basic system of cryptography and consensus (or peer-to-peer) verification that is the foundation of most forms of crypto today. There are more than 18.8 million Bitcoin tokens in circulation as of September 2021, against a capped limit of 21 million.
With a market cap of more than $400 billion, Ethereum is another blockchain network, but it’s known as a programmable blockchain, which allows for the building of decentralized applications, and the creation of smart contracts. Its currency is known as Ether (ETH), which is the main form of exchange on the Ethereum platform. But unlike Bitcoin, there is no limit to the number of ETHs that can be created.
Ethereum has been behind the boom in non-fungible tokens (NFTs) — digital versions of art or collectibles that are linked to a blockchain.
In 2017, Cardano was created by Jeremy Wood and Charles Hoskinson; Hoskinson co-founded Ethereum so it makes sense that Cardano and Ethereum have similarities. Similar to Ethereum, developers are able to make use of the Cardano blockchain to write smart contracts and decentralized applications (dApps).
Cardano boasts a large library of academic research that its founders point to as a factor that makes the blockchain unique. Cardano’s creators also hope that the platform will be used by “innovators and visionaries” to create positive change in the world.
Cardano’s cryptocurrency is called ADA, after Ada Lovelace, a 19th-century mathematician, and has a market cap of over $71 billion.
Dogecoin (pronounced dohj-coin), with its playful Shiba Inu icon, was launched in 2013 as a way to poke fun at Bitcoin. Sometimes called a joke-coin, the currency has captured people’s attention and a fair amount of investment — and now has a market cap of over $33 billion.
Dogecoin is similar to Bitcoin and Ethereum in that it’s run on a blockchain network. But the number of coins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin).
Litecoin’s price is generally correlated to Bitcoin’s price movements, rising when Bitcoin rallies and falling when Bitcoin declines. Due to Litecoin’s faster transaction speeds and lower fees, some merchants, vendors, and blockchain applications have introduced Litecoin payment processors. Litecoin has a market cap of about $12.5 billion.
How to Build the Best Crypto Portfolio
It pays to do your research before building a crypto portfolio — especially if you want to put together the best crypto portfolio for your individual goals and risk tolerance. Here are some ways to get started:
• Keep tabs on current crypto values. CoinMarketCap and Live Coin Watch can be good places to start to see what cryptocurrencies are available, and the values at which they’re trading.
• Read the research. Some crypto platforms publish white papers or other research reports, like the Bitcoin white paper published in 2008 that jump started the crypto revolution. These reports often explain how a cryptocurrency works, what it’s designed to do, and a roadmap for the currency.
• Pay attention to how a currency is (or will be) used. What gives a particular crypto currency its value? A currency that ultimately has no concrete use may not be valuable in the future, versus a currency that is predicated on innovation or developing new systems or technologies.
• Follow news and events involving cryptocurrency. Even among the most established currencies like Bitcoin, things can change fast, and the news cycle can affect values. Staying up to date can help investors make informed decisions about trading crypto.
• Consider stop losses. Because the cryptocurrency market can be volatile, it may be a good idea to set some guardrails around your investments, such as stop loss orders. Stop losses are orders to sell an asset when it falls to a certain price. Setting stop losses on cryptocurrencies may help protect investors from taking too big of a hit to their crypto portfolio’s value, should prices drop.
There are thousands of cryptocurrencies on the market right now, which means that despite the overall volatility of the crypto market, it’s possible to build a balanced crypto portfolio that suits your goals, time frame and risk tolerance. As with any investing portfolio, it’s important to research the different types of crypto, and put together a portfolio that suits your needs and investing personality.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.