Digital currencies are currently some of the most sought after asset classes in the market, and the recent influx of crypto-based investment funds further affirms this new reality. While the market remains manifestly volatile, it presents some of the most lucrative trading opportunities today.
Last year, Bitcoin outstripped all other traditional assets, with BTC investors ending 2019 with better ROI than venture capitalists in commodities, stocks, and bonds. Expectedly, investors are now increasingly looking to include digital assets into their wider portfolio.
In this post, we round up how investors can wade through the mania to build up an optimal crypto portfolio that can stand the test of time. The following tips will help you decide if you want to follow hype or build a strategy that can assist in investing in crypto and building wealth.
Diversify Your Investments
First things first, if you want to build a winning portfolio, you have to have a good mix of cryptocurrencies. Most successful investors recommend a mixture of about three to seven digital currencies. They recommend doing that for the same reason you’d do with other asset classes like bonds and stocks.
The diversification of crypto in your portfolio not only improves your risk-adjusted return but also decreased exposure risk. The best way to do this is by investing in both solid options such as Bitcoin and Ethereum to low-cost options that haven’t broken into the mainstream yet.
As such, should either of the investment take a sudden dip, your other investment will act as a buffer to your losses. Similarly, in case your new crypto coins take an unexpected or steady bull run in the market, you’ll be in for great proceeds from their amplified valuation.
Do Your Homework
How do you know what to include in your diversified portfolio? By doing good research. There is so much that could go wrong if you don’t do enough research in this industry. Clearly, the market is very volatile, which means you could invest in today, and nearly everything tomorrow. You could also be a victim of a collapsed exchange or scam.
To build a successful portfolio, you need to do your homework and do it right. Analyze market conditions and trends to keep yourself in-the-know and up-to-date with the crypto market. Before you consider exchanges, wallets, and or potential returns, it’s vital to not only have a robust understanding of how the crypto markets operate and move but also how blockchain technology works.
These markets operate significantly differently in specific areas compared to traditional financial markets such as bonds, stocks, and derivatives. Understanding their underlying technology, blockchain, will, therefore, position you better in comprehending the monetary rules behind whatever tokens you want to trade or invest in.
Identify Your Risk Tolerance Level & Capacity
In any kind of investment, it is vital that you understand both your risk tolerance level and capacity. Risk tolerance denotes how much of an investment loss you can stomach, while risk capacity refers to the amount of risk that you ‘must’ take in order to reach your financial targets in an investment.
Often, risk tolerance varies with income, age, and financial goals. Both risk tolerance and capacity can be used to determine the type of crypto investments to add to your portfolio and the level of risk to take on. For example, newer currencies are normally available at low prices, but while they may bring huge potentials for profits, they may also fade out quickly compared to established coins such as BTC.
Doing your homework and understanding both your risk tolerance and capacity can allow you to create a hypothetical ‘balanced’ portfolio. This entails determining the distribution of your investment funds, depending on the aforementioned risk levels. In such a case, about 70% of your funds can be invested in mainstream tokens such as BTC, about 20% on lower-ranking tokens, and about 10% on tokens that are entering the market.
Be Patient with Winning Investments, Exist Losing Ones
Constantly check and analyze your investments. Be patient with those that remain positive in the market or those promising to rise. However, it is advisable to exit investments that are constantly losing or expected to drop significantly based on market analytics.
If the position of a coin remains positive, especially by going up, you can even buy more. As mentioned prior, learning about the market will actually help you understand when to buy more or cut your losses and exit. Essentially, educate yourself on how to stop orders as this will aid you in regulating losses and adding positions in periods of bull runs.
It doesn’t matter how confident you are in your position. If the price of your asset continues to move downwards, reaching a stop loss, it’s time to stop and close the position. You should not even place another bid at this moment. Take your time. The key deduction here is to cut losses often and early enough.
Remain Rational in Decision Making
The final and one of the most important tips in building a successful crypto portfolio is about remaining rational in decision making. You should maintain the ability to think and make decisions rationally. One of the key things you’ll realize, or have already realized, is that this industry and its prices are heavily influenced by hype and emotions.
Amidst all the hysteria and media chaos, you must always strive to preserve your sanity. Don’t just dump a coin just because you made a loss. Make your analysis and deep evaluation to make a decision. It would be best if you always based your decisions on careful considerations and tangible facts. You should also never invest for the sake of investing or simply because others are investing. Research and scrutinize.
Remember, every investor makes bad stakes every once in a while. It is part of the investment game, especially in a market of this high degree of volatility. The essential and one of the key elements of maintaining an optimum portfolio is avoiding emotional attachment to a position!