Buying cryptocurrencies is now easier than ever. You can set up an exchange account, do your KYC, and buy Bitcoin with a debit card in under 10 minutes. But no matter how accessible digital assets are, building the perfect crypto portfolio will never become easier.
Asset allocation, diversification, risk tolerance – there are so many factors to take into account when building a portfolio. And if you don’t have the experience or knowledge to build one, you run the chance of turning your profits into losses.
In this article, I’ll show you everything you need to know about how to build a crypto portfolio on your own. You’ll also learn more about the different types of cryptocurrencies and what it takes to build a well-balanced portfolio.
What Is a Crypto Portfolio?
A crypto portfolio is a collection of digital assets that investors purchase in hopes of making profits. Cryptocurrency portfolios hold assets such as Bitcoin, Ethereum, Tether, Chainlink, Cardano, etc. The difference between a normal portfolio and a crypto portfolio is that the crypto investor holds his assets in a digital blockchain wallet.
Cryptocurrencies are decentralized assets that can be purchased through exchanges, decentralized exchanges, OTC trading desks, and P2P trading platforms. Cryptocurrencies are more volatile than TradFi investments (i.e stock) and take more experience to manage.
How to Build a Crypto Portfolio Like a Pro
Building a crypto portfolio involves two actions: research and investing.
The first step boils down to researching the crypto market and discovering provably valuable assets that come with utility. They must also have a long-term chance of bringing global adoption in a specific use case. You collect these assets and calculate or predict their returns based on factors such as:
Circulating token supply
Maximum token supply
The second step is opening an exchange account, funding it with fiat currency, and purchasing the assets you’ve researched. You then move these assets to a safe non-custodial blockchain wallet and monitor their performance.
What Part Does Diversification Play in Building a Portfolio?
Diversification is the act of exposing your portfolio to various assets in order to reduce your risk. Reducing risk also lowers the amount of loss you can suffer while simultaneously increasing the potential to profit.
Let’s say I build a crypto portfolio that has a 100% Ethereum allocation. I bet on Ethereum because of the incoming merge and believe that it will outperform every altcoin out there, as well as Bitcoin. However, things don’t go as planned and the merge fails. Ethereum takes a hit and my portfolio suffers as a consequence.
The portfolio mentioned above is an example of investing. Because I didn’t diversify and expose myself to more assets, I lost a good chunk of my hypothetical money. I basically gambled on Ethereum and exercised no risk management practices.
Now let’s repeat the same scenario but with a twist: I diversify my capital. Let’s say I’ve invested $10,000 in the following portfolio instead:
25% in Bitcoin
25% in Ethereum
25% in Chainlink
25% in Solana
Ethereum faces a 30% drawdown while the other three assets rally. 75% of my portfolio ends up in profit while only a quarter of it suffers a 33% drawdown. And having invested $2,500 into Ethereum that means I only lost $825 – or 8.25% of my total capital.
You can diversify your crypto portfolio by:
Increasing number of assets held
Exposing yourself to more use cases
Investing in competing projects
Balancing your allocation based on risk
Note that the last step of balancing allocations involves placing more capital into low-risk assets and less capital into high-risk assets. For example, a portfolio should have a higher Bitcoin allocation and lower altcoin allocation.
Different Types of Cryptocurrencies Explained
I mentioned previously the importance of portfolio diversification and allocation. I told you that you should expose your capital to different forms of cryptocurrencies. But what kind of cryptocurrencies are there and which use cases do they target? Here’s a short overview.
Utility tokens are all cryptocurrencies that have a utility within a certain project or smart contract ecosystem. BNB is the best example of a utility token. BNB is a utility token on the Binance exchange that you can use to save on fees, participate in raffles, and save on other services. For example, you can trade BNB-based trading pairs (BTC/BNB) and save 25% on fees.
In DeFi, projects that need price data from decentralized oracles pay Chainlink nodes (oracles) via LINK. The Link token is also used to provide security to the Chainlink network and ensure that the nodes don’t get spammed with requests.
Stablecoins are cryptocurrencies that are pegged to one dollar. They retain and maintain their value in order to provide stability to the investor. Stablecoins enable traders and investors to seamlessly switch from crypto to digital fiat – in case they become bearish or want to invest in other assets.
Stablecoins retain their value, which is great for downtrending markets. You’ll want to convert a portion of your portfolio into stablecoins whenever the market isn’t performing well. This ensures that you have enough capital on the side to catch the lows.
Payment tokens are tokens used to transfer value between users on a blockchain network. Bitcoin, Litecoin, Bitcoin Cash, Ripple, and Nano. Most of the altcoin payment tokens attempt to improve upon Bitcoin by either changing the blockchain network or targeting specific niches. For example, Litecoin targets micropayments and specializes in lower fees and faster transaction throughput on smaller transactions.
Governance tokens are generally found in DeFi projects and they give investors governance rights – primarily voting. Holders of governance tokens can in some cases earn rewards from the protocol’s revenue stream. Governance tokens derive their value from the adoption rate and success of the protocol they’re based on.
Security tokens are cryptocurrencies that, much like stocks, represent a share in a project. This means you have voting rights or equity in a crypto project. However, the term security token is rarely used in the space because neither investors nor founders want their assets to fall under U.S. securities laws.
How to Build a Well-Balanced Crypto Portfolio: A Step-By-Step Guide
People are different. A well-balanced portfolio can bear one meaning for me, and have an entirely different meaning to someone else. However, there are still some ground rules and steps you should follow when building a well-balanced crypto portfolio:
Discover your risk profile and adjust your portfolio’s asset weightings. Less fearful investors should align a majority of their capital with high-risk assets such as medium and low market cap altcoins. Risk-averse investors should balance their portfolio by setting a majority of allocations to less-volatile assets like Bitcoin.
Hold a portion of your portfolio in stablecoins so that you can buy dips or retain value in a downtrending market. Stablecoins are highly important because they enable you to deploy capital when the time is right.
Rebalance your portfolio every once in a while. You don’t want a single asset to represent a large portion of your portfolio’s dollar value. Platforms like Shrimpy help you automatically rebalance your portfolio whenever assets deviate from their initial allocation.
Carefully consider where to place your money when injecting your portfolio with more capital. Buying assets that have outperformed the market might seem like the smarter option, but it leaves you open to risk in case the asset retraces and loses value.
Avoid following other people’s opinions and invest solely based on the conclusions that you come up with on your own. The crypto adage of DYOR (Do your own research) is more valuable than ever in this oversaturated market.
Inject capital little by little instead of going all in the moment your paycheck arrives. Consider dollar-cost-averaging into an asset in order to avoid buying highs and losing money.
Here’s a video tutorial that explains how to build a crypto portfolio on your own with Shrimpy:
Rebalancing Your Portfolio with Shrimpy
There’s no doubt that you can build a well-balanced crypto portfolio. But can you keep it balanced? Cryptocurrencies fluctuate in value as time passes, which means that even the best balanced portfolio can at one point become unbalanced.
Shrimpy is an automated portfolio management platform that can help you solve this issue with rebalancing. Simply register, connect your exchange account, and turn on a rebalancing strategy to have your portfolio’s weightings rebalanced every once in a while.
Shrimpy offers periodical and threshold-based rebalancing. Periodical rebalancing is a strategy that maintains your portfolio on an hourly, daily or weekly basis. Threshold rebalancing is a strategy that rebalances your portfolio once your assets deviate from their original allocation.
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.