The vast majority of crypto investors in one way or another use the principles of portfolio investment when trading cryptocurrency (the so-called Buy & Hold strategy). Few people only store Bitcoin or Ethereum, ignoring the rest of the coins.
Analysts have prepared a material especially for AltCoinLog magazine that will help beginners figure out how to competently create an investment crypto portfolio and effectively manage it.
The main goal of any investment is to make a profit. But before talking about profitability, you need to decide how to calculate it.
Here’s what ordinary crypto traders do most often:
- They fix the profit in fiat money. This is primarily due to the underdevelopment of the crypto-economics itself. Many people use tokenized USDT dollars for this purpose, even despite the rather alarming news background concerning their issuer – Tether. The situation may change with the development of the crypto-economy in general and, in particular, with an increase in the share of bitcoin in the financial market as a reliable and efficient means of payment. If the final calculation of the crypto portfolio is carried out in fiat currencies, then it is desirable that its profitability for the corresponding period exceeds the bitcoin profitability. In this case, BTC acts as a benchmark for profitability (by analogy with the S&P 500 and similar indices in relation to the traditional financial market);
- Accumulate the deposit and fix the profit in bitcoin. When trading altcoins, traders try to get more BTC. In other words, “digital gold” is used as a store of crypto capital;
- They prefer Ethereum (or another altcoin) to accumulate a deposit. This is a rarer case, but the vector of investor interest may shift if bitcoin loses its dominant position in the market.
Regardless of the profit fixing currency, its value must be determined in advance, even at the planning stage of the crypto portfolio and its structure. It can be + $ 2000 in Fiat, + 50% in BTC, etc.
When the set goals are achieved, portfolio management should be stopped and profit should be fixed.
Acceptable risk level and portfolio diversification
As you know, risk and profit are in a direct relationship – the greater the risk, the greater the potential profit should be and vice versa. Investing in cryptocurrency is no exception.
Diversification is one of the simplest and most effective risk mitigation techniques. Depending on the degree of risk, the crypto investment portfolio can be conditionally divided into several key categories:
1. Low-risk assets (HA) – the first 5-10 coins by market capitalization;
2. Average risk assets (CA) – TOP-30 of the Coinmarketcap rating;
3. High-risk assets (VA) – TOP-100 cryptocurrencies by capitalization.
Of course, there are many types of risks and ways to identify them. The above is the simplest cryptocurrency classification criterion based on market capitalization.
Depending on the percentage of assets with varying degrees of risk, there are three main types of crypto portfolios:
- Conservative. Usually contains no more than 5-10 coins. Ratio of assets by risk level – 75% / 25% / 0% (HA / CA / VA). Such a portfolio is unlikely to generate a large profit, as highly capitalized assets grow in price more slowly;
- Moderate (balanced). The total number of coins is 10-20. The asset ratio is 25% / 50% / 25%. This is perhaps the most common type of investment portfolio;
- High risk. Asset ratio 25% / 25% / 50%. The emphasis here is on high-risk assets, which, however, can bring large returns. Alternatively, tokens of new ICO projects can be used in such a portfolio. Some investors make up a portfolio of only ICO coins, assuming that if the projects are selected correctly, then at least one of ten objects will recoup the losses on investments in the other nine (the principle of investing business angels).
At the moment, there is a general recommendation for all crypto portfolios: the share of bitcoin in it should be from 25 to 50%.
You can also carry out diversification of a higher level: distribute all capital across several investment portfolios. For convenience, you can store each portfolio on a separate multicurrency wallet or crypto exchange.
It is also possible to create a beta-neutral portfolio in relation to bitcoin, where half of the coins directly correlate with BTC and grow with its strengthening, and the other half, on the contrary, grows when the price of “digital gold” falls. Correct compilation and rebalancing of such a portfolio will generate income regardless of the general trend in the market. It should be remembered, however, that assets can correlate differently with Bitcoin at different time periods.
So, we have decided on the financial goals, risks, it remains to select specific assets to create an investment crypto portfolio. One of the key parameters for the selection of assets is their liquidity.
It is recommended to invest primarily in highly liquid assets with the highest trading volume over the last month.
- market interest in the asset, which directly affects its volatility;
- the ability to operate with large volumes of this asset.
When compiling an investment portfolio, it is recommended to pay attention to undervalued assets using the techniques of technical and fundamental analysis.
You should also only invest in projects that you understand.
One of the most important points at the stage of portfolio formation in determining the investment horizon. The latter can be from several days to decades. Profit benchmarks will largely depend on the size of the investment horizon.
The shortest working interval is for scalpers (supporters of many short-term trades with minimal profit) and intraday traders (adherents of intraday trading). These are quite aggressive, intense types of trading that require a great concentration of attention and a long stay of the trader in the market. These types of trading also imply the constant presence of assets on the crypto exchange, which is also additional systemic risk.
In speculative trading, it is recommended to take small short-term targets for coins (5-10% is quite a good profitability in the range of a trading day). The probable losses should be taken into account in advance when placing stop orders.
Trading with a longer time horizon can be conventionally called investment. Compared, for example, to the stock market, the term for investing in a crypto portfolio will be several times shorter. It can be several weeks, months, quarters, and half-years (and not years, as in the stock market).
With long-term investment, you can (and should) try to reduce systemic risks and store coins not on the exchange, but on reliable crypto wallets, preferably “cold” ones.
It is necessary to choose an investment horizon based on the expected profit and risk, as well as your own trading psychology. Discipline will be an important point – when the target for the portfolio’s profitability is achieved, it must be closed and summed up.
The key to portfolio management is portfolio rebalancing. It largely depends on the investment horizon and should be carried out according to a pre-planned scenario, for example:
- Saving the current percentage of various groups of assets (or each separately). For example, you have a 25% / 50% / 25% portfolio of moderate-risk and want to keep it until expiration. If there is a bias, then it must be leveled by selling/buying the corresponding assets until the original proportion is restored.
- Change in shares – an increase in the share of assets that bring large profits and a decrease in the share of low-income and unprofitable coins.
Also, the investor should decide what to do with the positive imbalance as a result of the rebalancing – withdraw, keep in the portfolio or reinvest.
The frequency of rebalancing depends on:
- investment horizon. For long-term portfolios (from a quarter to a year or more), it makes sense to carry out this operation once a month. For medium-term – once a week;
- a sharp change in proportions. For example, there was a portfolio with a 50/50 balance of assets, and after a while, it became 60/40. Such a significant structural change usually requires rebalancing;
- individual news background for each asset. For example, on the eve of the fork of the coin, you can fix a part of the profit; then buy more coins after it is held in case of a price decrease.
It is not recommended to get too carried away with diversification, since it is very difficult to keep track of a large number of projects at the same time.
In any case, the crypto portfolio should be monitored. It makes sense to use specialized resources to track changes. One of the most famous is Cryptocompare.
Having considered the main points of portfolio investment, we can conclude that here, as in traditional trading, it is necessary to adhere to a clear trading plan. The latter should describe most of the trading situations – from opening the first positions to closing the entire portfolio and calculating profit/loss. Many traders neglect this critical aspect by trading structureless. But it should be remembered that with this type of trading, the final result will also be “structureless”.
Building an investment portfolio is akin to creating a trading strategy. There are no perfect golden combinations here. They need to be created for yourself, based on your own experience and understanding of the market.