There are more than 420 million crypto users worldwide. Since Bitcoin was invented, the popularity of cryptocurrencies has grown massively. All over the world, people have made significant profits from their crypto investments, but many people have also made losses. If you want to make sure you profit from crypto, you need a solid cryptocurrency portfolio.
In this guide, we’ll go over everything you need to know about building your cryptocurrency portfolio.
What Is a Cryptocurrency Portfolio?
There are various types of investment portfolios, and a cryptocurrency portfolio is one that’s made up of a single asset class — cryptos. It’s important to remember that, while cryptocurrencies are becoming more popular, they’re still a very volatile type of asset, and therefore considered quite risky.
Another important thing to remember is that cryptocurrencies currently don’t have anywhere near the same level of regulation as other asset classes. This applies to the US, as well as the rest of the world. More regulation will likely come into play in time, and this will affect the value of various coins.
Things like this mean it’s essential to understand crypto as much as possible before investing and building a portfolio. The more you know about the crypto space, the better informed your decisions will be.
Cryptocurrency Investing Basics
When it comes to investing in cryptocurrency, there’s a huge amount to learn. The first thing to know is what cryptocurrencies actually are.
A cryptocurrency is a digital currency that you can buy, sell, and trade. This allows you to make financial transactions without the use of a bank or third-party intermediary.
Cryptocurrencies are usually made using blockchain technology. This means that all transactions are done on a distributed ledger that no one can alter or manipulate in any way.
You can buy crypto on exchanges, and there are plenty of these available. Each is different, so it’s worth taking the time to research them and find one that suits you. You can store your crypto in three types of wallets.
Custodial Wallet
This is a wallet on an exchange where you can buy and sell crypto. This is the most convenient method as you can quickly make trades, but it’s also the least secure. If you plan on holding your crypto for a while, you should move it off of exchanges.
Soft Wallet
These work as browser extensions and smartphone apps, and give you complete control of your crypto. They’re quite safe but not 100% secure as they’re always connected to the internet.
Hard Wallet
These are physical devices that hold your private keys. As they’re only online when you physically connect them to a computer, they’re the safest way to store your crypto, and highly recommended if you have large amounts that you want to hold for a long time.
Pros of Diversifying Your Portfolio
The main benefit of diversifying your portfolio is to reduce risk. If the value of one asset suddenly goes down, having various other assets in your portfolio will ensure you don’t suffer huge losses.
All skilled investors know that this is essential to avoid failure. It will also make it easier for you to explore new investment opportunities as you won’t have as much risk exposure.
Cons of Diversifying Your Portfolio
There are currently more than 21,000 cryptocurrencies in circulation. Many of these won’t succeed, so you want to make the best choices. With so many available, you may end up investing in some that won’t do as well as you’d hoped.
A typical portfolio will contain a lot of low-risk assets. While this is often beneficial, it can result in you missing out on some huge market gains from other, riskier assets.
Types of Cryptocurrencies
Anyone who knows anything about crypto knows about Bitcoin, but there are plenty of other coins you could add to your portfolio. Over the years, different types have been developed, and adding more types will help to make your portfolio more diverse.
Payment Coins
Most early crypto projects were based around payment coins, though these are now less common. The purpose of these coins is to transfer value, and Bitcoin (BTC) is by far the most well-known. Some other popular examples include Litecoin (LTC), Ripple (XRP), and Bitcoin Cash (BCH).
Stable Coins
Stablecoins stand out as the entire purpose is to avoid volatility. Tether (USDT) is one of the most well-known, and it’s pegged to the US dollar. This means that 1 USDT is always equal to 1 USD.
Having stablecoins in your portfolio means that you’ll be less affected by dips in the crypto market. You can quickly transfer your other cryptos to stablecoins and vice versa to help deal with volatility.
Security Tokens
Security tokens are similar to traditional securities in that they can represent a wide range of assets. This can include things like project-issued bonds, company equity, or voting rights.
As these work in the same way as securities (but using blockchain technology) they operate under the same regulations. They, therefore, fall under the jurisdiction of local regulators. This means they need to go through a legal process before they can be issued.
Utility Tokens
A utility token is a part of a specific product or service. Ethereum (ETH) and Binance Coin (BNB) are two of the biggest utility tokens, and ETH has been the second most popular cryptocurrency in the world for several years.
They have various uses, such as paying transaction fees when using DApps (decentralized apps). Many projects develop their own utility tokens to help raise funds. In theory, the value of a token should relate directly to the value of the utility.
Governance Tokens
Governance tokens are issued by projects, and those who hold them will have a degree of voting power within that project. This means you can have your say in decisions about the project’s future. You might also get a share of the revenue.
Governance tokens are common on DeFi (decentralized) platforms like Uniswap and PancakeSwap. Like Utility tokens, there is a direct link between the value of the token and the success of the project.
Investment Strategies
Whatever assets you work with, there are always strategies that you can employ. When investing in cryptocurrency, there are some techniques that are familiar, as well as some newer ones.
Holding Crypto
The buy-and-hold strategy was popularized by Warren Buffet for other assets, and can easily be applied to crypto. It’s very simple — all you need to do is buy the cryptos you’re interested in and hold on to them. The plan is that they will increase in value over time, making it one of the easiest ways to make profits.
Yield Farming
Yield farming involves lending the crypto you own to exchanges or other platforms, and they’ll reward you with additional crypto. Think of it as giving them a loan, and you’ll make interest on it.
Depositing
This is like placing your crypto in a savings account. You can deposit and stake it, and over time, you’ll earn rewards. This strategy is another simple one that requires little effort, and the rewards will vary depending on the platform you use and the crypto in question.
Trading
This is a popular strategy, but it’s also considered one of the riskiest. Crypto prices fluctuate quite a lot, so buying cryptocurrency when it’s low and selling it when it’s high can yield sizable profits in a short space of time here.
The issue with this is that it’s very difficult to predict the market, so while there’s a lot of potential for profits, there’s also a lot of potential for losses. This is something that you should only consider if you’re aware of the risks and have a good understanding of what you’re doing.
Tips for Diversifying Your Portfolio
One of the first key things you should do is research. Never invest in a cryptocurrency if you don’t know what it is. When you find a new coin, take the time to look into the project so that you can decide if it’s a good investment for you.
Make sure you keep track of current crypto values. This will help you get a better idea of your risk tolerance, and you can see how different coins are performing.
Pay attention to how different cryptocurrencies are used. Ones with solid use cases and planned innovations will likely do well. Conversely, ones that have no use cases and no viable future plans are more likely to fail.
Various news outlets provide up-to-date information on the crypto space. No one can keep up with everything, but you should try to stay on top of things that relate to your strategy. This will help with your decision-making so that you can get the most out of your portfolio.
Keeping Safe While Investing in Crypto
Building a strong cryptocurrency portfolio isn’t easy. Make sure you take the time to understand what you’re investing in and how everything works.
There’s always some risk when investing in crypto, so make sure you’re taking measures to stay safe. FDAR is a non-profit organization that’s working to keep investors safe from risk in the crypto space. Take a look at our guide on digital asset protection to learn more about keeping your investments secure online.