Cryptocurrency investment portfolio is the main task of the crypto investor. A sensible approach to investing will allow you to provide yourself with good returns and at the same time not worry during drawdowns. In this article, we will analyze the basic principles of building a cryptocurrency portfolio and tell you what to look for when choosing cryptocurrencies.
Basic premise when investing in cryptocurrency
Before investing in a crypto, an investor must make an important decision for himself. He must decide that he understands that cryptocurrencies will rise in value. And also that crypto is not a short-term hype. There is no point in investing without such a position. You need to invest in what you believe in. It is no coincidence that we used the verb “believe” here, because the cryptoindustry is still a very young field of activity. Bitcoin is only 12 years old. Unlike the stock and commodity markets, the crypto industry has nothing to rely on when analyzing the market. There is simply no historical data here. This is a new phenomenon in the life of people, which had no analogues before. Therefore, the crypto investor acts as a trailblazer during the Gold Rush in the Wild West. And his actions must be based on faith in the further growth and development of crypto.
And one more important point. It should be remembered that at this stage of its development, the crypt is very volatile. Coins rise and fall in price synchronously. So, if “crypto winter” or at least “crypto fall” comes, you just have to wait out the drawdown.
The principle of choosing cryptocurrencies for an investment portfolio
When investing in crypto, we must determine the investment horizon for ourselves. It makes no sense to invest for a short period, for example, six months. In these six months, all crypto can easily do -30% or even more. And the investor will receive a net loss instead of profit. We will build a portfolio based on an investment term of 5 to 10 years. On this interval, given the general interest in the crypt and the growth of tokens, it is most likely to get profitability from their coins. Why do I think “most likely”? First of all, based on the history of crypto. Five years ago, in 2016, bitcoin cost less than $ 1,000, and now it is $ 63 thousand (and at the maximum it was generally $ 67 thousand) We can assume that the positive dynamics will continue.
Important note for buying coins
Many crypto investors recommend investing regularly, investing some of their funds once in a certain period of time. For example, you can buy a crypto for a small amount every day. You can do this as a weekly session or monthly. The more often you do this, the less you will be subject to drawdowns. When the market falls, you will buy the “straits” and get coins cheap, thus averaging the position.
How to choose crypto coins
I will try to choose coins so that the portfolio gives a sufficiently high yield when the cryptocurrency market grows strongly and does not fall too much when it falls. Now the market is bearish, so you can, to play it safe, invest about 30% of your portfolio in Bitcoin, 30% in Ether. And for another 40% of the coins, buy other coins, for example, 10% for each coin. In this case, with a strong market growth, our altcoins (i.e. everything that is not bitcoin) will rise well in price. And with a decrease in the market, the share of bitcoin will help smooth out the overall decline. Such a portfolio will be quite conservative, because many investors recommend keeping no more than 50% of their portfolio in bitcoin. At the same time, 30% can be reviewed from time to time, depending on the availability of the altseason.
What is Altseason
When evaluating the crypto market, they use such a concept as altseason. This is the upward trend in non-bitcoin coins as BTC declines or moves sideways. Alt season reflects the general interest of market participants in altcoins and the lack of high interest in bitcoin.
How to determine the alt season?
It is determined by such an indicator as the bitcoin dominance index. This is the ratio of bitcoin capitalization to the total cryptocurrency market capitalization. It can be easily calculated by going for example to coinmarketcap. There, on the main page, the total cryptocurrency market capitalization and BTC capitalization are always shown. It is believed that if this index is 50% or less, the altseason is in full swing. If the index exceeds 50%, there is no altitude, and bitcoin rules the show. To some extent, this situation can be compared with indices in stock markets. There, participants look at one or more major indices and, on their basis, assess the state of the market as a whole.
With a low dominance index (less than 50%), you can reduce the share of bitcoin in the portfolio to 10%.
What coins to include in the investment portfolio
I am not a visionary, and I cannot foresee the exact dynamics of certain currencies in the future. However, to form a portfolio, you can safely take the first 6 coins by capitalization and regularly invest in them. The only point that needs to be noted here is Ether. Its share can be made more than 30% and brought up to 50%. Ethereum 2.0 has not yet been implemented, and how it will behave in the future is not known for sure. Therefore, we select coins from the TOP-6 and collect a portfolio from them. A list of them can be viewed on the Coinmarketcap website. But it does not need to include stablecoins, memecoins (there will be a separate conversation on them) and WBTC. This is the same Bitcoin, but only on the Ethereum network.
Here’s my list:
All these tokens have shown tens and hundreds of percent since the beginning of the year. Therefore, they will give good profitability further with the general positive trend in the market. Once again, let’s make a reservation! The dynamics of the portfolio will be strongly influenced by general market trends and its acceptance by the general public. In the event of a market decline, everything will turn red, and then you just need to be patient and wait out the drawdown.
Meme coins as a way to play
Nobody prohibits investing part of their funds (up to 5%) in meme-coins, which is Dogecoin. This coin is growing contrary to the market and seems to be completely oblivious to the general trends. Since the beginning of the year, the token has grown by a whopping 300 times and, possibly, will grow even more. Such shitcoins do not carry any fundamental value. However, the market is, first of all, psychology, and the ways of the collective psyche are inscrutable.
Important note. DeFi as a new approach to investing
Everything described above is a kind of classic approach to investing in cryptocurrencies. We just selected a few coins and invested our funds in them.
However, trends in 2020 and the first half of 2021 show that DeFi – decentralized finance – is gaining momentum. They already offer many solutions for profitability pharming, loans, etc. And this is a new, emerging economy. In the future, it may stop correlating with the classic crypt and take on her own life. In other words, DeFi is a market within a market, a crypto in a crypto. DeFi protocols offer many earning opportunities. And that means they can develop independently of the crypto market. And the tokens of these protocols will grow in value. I have indicated some DeFi tokens in my list, but there are also coins from this cohort: Dai, Aave, Maker, PancakeSwap, Avalanche and others.
It seems that in six months or a year, if the situation is favorable, it will be possible to revise the approach to investing and consider the strategy related to DeFi.
There are many strategies for investing in cryptocurrencies, for every taste and appetite for risk. However, in this article I tried to convey one important point to our readers. Success will come when there are three factors, namely, a reasonable choice of coins, regular portfolio replenishment and time. These classic investment principles work in the crypto market as well.
Disclaimer: This article is not investment advice. Assess the risks yourself before making any investment decisions.