Guide to Building a Well-Balanced Crypto Portfolio

Creating a well-balanced crypto portfolio generally requires that you stick to the basic principles of asset allocation and diversification. That is, the same rules that apply to building a traditional portfolio are still at play when creating a crypto investment portfolio — perhaps the most important factor is diversification.

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. Here’s what you should know about creating a balanced crypto portfolio.

What Is a Crypto Portfolio?

A crypto portfolio is an investment portfolio composed of cryptocurrencies. It differs from a traditional portfolio, which may contain cryptocurrencies, in that it is restricted to a single asset class (crypto).

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 is still a very volatile and risky investment. This fact should remain 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 overall risk profile.

You can consider different types of crypto for portfolio diversification, which helps to manage risk. That can include stablecoins, which are pegged to a fiat currency like the dollar, yen or euro, and as their name might imply, typically don’t have the same fluctuations in value as coins, altcoins, and tokens. Nonetheless, stablecoins can still carry risks, and see very little appreciation.

Also bear in mind that cryptocurrencies remain largely unregulated in the United States, at least for the time being, and in many other parts of the world. When or if 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.

As such, 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

Here’s a quick crypto review to get you up to speed on the basics of crypto investing before getting further into the nuts and bolts of portfolio creation:

•   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 digital crypto wallets. These wallets are accessible with public and private keys that allow users to interface and transact 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 through a brokerage.

Diversifying Portfolios Basics

The concept of portfolio diversification is absolutely critical for investors. It involves investing your money across several different asset classes, which can include stocks, bonds, and even crypto. Diversification may offset a certain amount of investment risk, and may help improve returns as a result.

In effect, diversification comes down to differentiating the investments you have in your portfolio, and then differentiating even more within those investments. For instance, you may have stocks in your portfolio, but you can buy stocks from large and small companies, U.S.-based companies, and international companies.

Pros and Cons of Diversifying a Portfolio

•   Pros: The pros to diversification are clear: It can potentially decrease risk, and thus, increase potential returns. There’s no guarantee, of course, but if you’re a risk-averse investor, reducing risk may be a top-of-mind concern. Diversification can also give investors leeway to explore new investment opportunities by limiting their exposure and risk.

•   Cons: The drawbacks of diversification are that it can limit your gains. Since a good percentage of your portfolio may be invested in relatively low-risk assets, it’s possible to miss out on big market gains — if you had been invested in other assets. Diversification is also a process and a chore, and you may incur fees for making numerous trades and rebalances.

Learning About Risk Tolerance

Diversification all comes down to managing risk. And risk is important to understand and grapple with as an investor. We all have a different risk tolerance — which describes our appetite for handling financial risk. Understanding just how comfortable you are with taking higher risks with your portfolio can help guide your investing decisions.

Think about your risk capacity, the need to take on additional risk (and perhaps see additional rewards for doing so), and how your emotions may come into play. This will inform your risk tolerance, and help you make decisions when deciding how to allocate your investments.

You can even take our risk tolerance quiz to see where you land!

Diversifying a Crypto Portfolio

There are thousands of types of cryptocurrencies out there with a total market capitalization of more than $950 billion, as of October 2022. There are a few leaders in the crypto world, as measured by market cap, such as Bitcoin, Ethereum, Binance, Tether, and more.

A crypto portfolio may contain one or more of these cryptocurrencies or derivative investment vehicles, in addition to some of the countless other smaller currencies that are available and have much smaller market caps. Here are some of the types of tokens and assets that you can use to create a balanced crypto portfolio. The market capitalization of each cryptocurrency listed below is as of October 19, 2022.

Crypto ETFs

Crypto ETFs can be a great way to diversify a crypto portfolio, as they have a degree of diversification built into them from the get-go. ETFs have several benefits, and are similar to baskets of investments. There are crypto ETFs available on the market. If investors want a relatively easy way to diversify their crypto holdings, crypto ETFs may be a good choice.

You can start by checking out the Bitcoin ETFs that are on the market.

Stablecoins

Stablecoins are cryptocurrencies that are generally less volatile than most. They’re generally pegged to fiat currencies (as mentioned), which keeps their values relatively flat. Whereas Bitcoin or other cryptos can see wild price fluctuations, stablecoins may help buoy a portfolio’s value when the markets go wild.

Altcoins

Adding some altcoins to your portfolio — which, again, are any tokens or coins other than Bitcoin — are another relatively easy way to diversify your holdings. While Bitcoin is and remains the major player in the crypto space, there are new altcoins springing up almost every day, giving investors a litany of choices.

NFTs

Non-fungible tokens, or NFTs, are not cryptocurrencies in and of themselves. But they do exist in the crypto space, and function as a sort of proof of ownership over a certain asset — most people probably associate them with digital artwork.

But NFTs can represent just about anything (music NFTs are an example), and can carry value. That value can be used as a tool to diversify a crypto portfolio. NFTs are very new and carry a very high degree of risk.

Zombie Currencies

“Zombie currencies” refer to cryptos that see no or barely any trading activity. That means that they are functionally dead, but still floating around on the markets. There are thousands of them out there. While that may not whet an investor’s appetite, there’s always the chance that some of these zombie currencies could spring back to life at some point and appreciate in value.

That said, adding these to your portfolio would incur some serious risk.

Platform Cryptos

Platform cryptos are the native cryptocurrencies to digital exchanges and platforms. These tokens are generally used to facilitate transactions on their respective networks, and while they may not have the same utility or broad appeal as, say, Bitcoin, they can be used as a diversification tool in a portfolio.

Protocol Coins

Protocol coins are tokens used to access services provided by certain crypto protocols. Without getting too deep in the weeds, you should know that there are certain protocols built on top of blockchain networks, and protocol coins can grant owners access to those layers of the networks. Again, adding some of these to your portfolio could help diversify it.

Bitcoin

By far the largest cryptocurrency with a market cap of nearly $370 billion, 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, which is the foundation of most forms of crypto today.

💡 Learn more about what Bitcoin is and how it works.

Ethereum

With a market cap of roughly $160 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.

Dogecoin

Dogecoin (pronounced dohj-coin), with its playful Shiba Inu icon, was launched in 2013 as a way to poke fun at Bitcoin. The currency has captured people’s attention and a fair amount of investment — and now has a market cap of almost $8 billion. The number of Dogecoins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin).

Litecoin

Litecoin isn’t among the top ten largest cryptocurrencies by market cap, but it is still a relatively popular one. It was created in 2011 through a soft fork in the Bitcoin blockchain and thus was one of the first Bitcoin spinoffs, or “altcoins.”

The value of Litecoin 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 $3.5 billion.

Crypto Investment Strategies

Just like there are strategies for investing in stocks or other assets, you can create and stick to various crypto investment strategies, too. Here are some of the more familiar to investors in the crypto space:

Holding Crypto

If you’re familiar with a buy and hold investment strategy, popularized by none other than Warren Buffett, you can apply the same logic to a crypto portfolio. The strategy is easy to stick to: You simply invest in the cryptos you want to invest in, and do nothing. You hold them.

The idea is that they will appreciate over time, earning you relatively stress-free returns down the road.

Yield Farming

You don’t need a hoe or a plow, so fear not! Yield farming in crypto basically means that investors lend their crypto holdings to exchanges or platforms in exchange for additional crypto. It’s similar to lending money and earning interest. So, to yield farm, you’d simply lock up your assets in a liquidity pool, and earn a percentage of transaction fees, interest payments, or governance tokens in exchange.

Depositing

Depositing, in this sense, is similar to stashing your crypto holdings in a savings account and accruing interest. You can lock up your assets (similar to yield farming) and stake your crypto, which can earn you additional rewards, and help you grow your holdings while doing almost nothing at all.

Trading

Finally, you can always get involved in crypto trading and try to earn returns that way. This is risky, however, especially in the crypto markets, where prices fluctuate in much wilder swings than they generally do in the stock markets. But there are crypto traders out there who make a profit. Just be sure you’re well aware of the risks before trying to make any money through crypto trading.

5 Steps to Building a Solid Crypto Portfolio

If you’re ready to build your crypto portfolio from the ground up, it can be a relatively easy process. Here are five steps you can follow to get your portfolio up and running:

1. Keep tabs on current crypto values

You’ve heard before, but it’s worth repeating that crypto values are very volatile. And in 2022, investors experienced a big drop in the market, with almost every crypto seeing a significant loss in value. This is why it’s important to keep tabs on where the market’s at, and to try and develop a sense of your risk tolerance.

There are numerous websites out there with data related to the markets, updated by the second. Search the internet, find a site or two that you like or find useful, and start to keep tabs on what tokens appear promising, and which you might be interested in adding to your portfolio.

2. 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.

If you’re serious about investing in a specific crypto project or token, it’s probably worth your time to do some homework and read its corresponding white paper. You’ll get a sense of what’s ahead for the project, which may help you decide whether or not you want to add it to your portfolio. Stocks are different as companies publish financial data and have a history to dig into — that’s not an option with cryptocurrency.

So, if you get the chance, try to read and absorb as much information as you can.

3. Pay Attention to How a Currency is 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.

Again, this can be critical to investors. If a crypto is functionally useless and doesn’t have much popularity as an asset, it may not be worth investing in. Conversely, if it is used as a currency (similar to Bitcoin) and is picking up steam with merchants, it may have a bright future. It all comes back to paying attention to the market and staying informed.

4. Follow News Involving Crypto

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.

Case in point: Markets of all types saw a big decline in early 2022, including the crypto space. This was notable as crypto has really only existed during a bull market — crypto has grown as the market accelerated between 2010 and 2022. We’re now seeing first hand that crypto isn’t immune to economic factors like the stock market. That can be valuable to know for guiding your investing decisions in the future.

5. Consider Stop Losses

As a last-ditch effort to keep your portfolio from sinking too far during a downturn, you may want to consider using some common trader tools.

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.

Traditional vs Crypto Portfolios

As discussed, there are some stark differences between the composition of a traditional investment portfolio, and a crypto portfolio. A crypto portfolio is concentrated in one specific asset class — crypto — so it’s already limited.

There may be pros and cons to that. For example, the crypto markets never close, so investors can trade day and night. But a crypto portfolio can’t really offer that much diversification because the crypto markets overall are so volatile.

Crypto vs Traditional Asset Correlation

In investing, correlation refers to the degree at which two variables move relative to one another. So, a portfolio can be created that tracks the larger moves of the stock market, for example. That’s important when it comes to diversification, as investors can choose investments of different types that can be correlated to the moves of market segments, industries, etc.

Since a crypto portfolio comprises only one asset class, it’s a bit trickier to garner a more diversified set of investments. But investors can still create a crypto portfolio with a degree of correlation to the wider markets.

Crypto vs Traditional Asset Correlation
Traditional Portfolio	Crypto Portfolio
Can use index funds or ETFs to mimic market performance	Can use crypto ETFs or large cryptos (BTC, ETH) to mimic market performance
Many more investment options (bonds, precious metals, etc.) to further diversify	Limited options for diversification
Many options for creating correlations to market segments or indexes	Limited options for creating correlations, as the portfolio is limited to a single asset class

The Takeaway

Creating a well-balanced crypto portfolio starts with understanding diversification, and working towards creating a relatively low-risk group of investments. Depending on an investor’s specific risk tolerance, this may take several forms — but a crypto portfolio is limited in how diversified it can be.

Keep in mind, though, that 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 financial goals.

FAQ

Does anyone know what crypto will be worth in 5 years?

No, nobody knows what will happen in the crypto market in the future, or in any market. There are no crystal balls in the investing world.

What can make a crypto portfolio balanced?

A degree of diversification can help balance a crypto portfolio, and that would mean including several different types of cryptocurrencies, along with crypto-related assets like NFTs. Keep in mind, though, that a crypto portfolio will always be riskier than a traditional portfolio, as it is invested in a single asset class.

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