Cryptocurrencies have emerged as a popular investment option over the last decade, with many investors looking to capitalize on their potentially high returns.
However, due to the crypto market’s high volatility, crypto asset allocation is crucial in creating a crypto portfolio to maximize returns and minimize risks.
Whether you’re a seasoned investor or a newbie, this guide will discuss various crypto portfolio allocation methods for maximum growth and provide valuable insights to help you make informed decisions and achieve your investment goals.
Let’s get right to it!
Importance of Allocating Assets in a Crypto Portfolio for Maximum Growth
Crypto portfolio allocation for maximum growth is important for several reasons:
Crypto investments have the potential to generate significant returns for investors. For example, Bitcoin, the largest cryptocurrency by market capitalization, has experienced an average annual return of over 200% since its launch in 2009. Crypto investors can maximize their potential returns and minimize risks by strategically allocating assets.
Crypto portfolio diversification can help spread the risk and reduce the impact of one asset class on the portfolio’s performance. Allocating a portion of your portfolio to high market cap coins and stablecoins to ensure gains even in a bear market and a small amount into small projects with great potential will help reduce risk and ensure the portfolio is well-positioned to generate long-term growth.
Hedging Against Market Volatility
Cryptocurrencies are notoriously volatile, with substantial price fluctuations. By allocating a portion of your crypto portfolio to stablecoins, pegged to the value of a stable asset, such as the US dollar or gold, you can mitigate the risk of volatility in cryptocurrencies.
The cryptocurrency world constantly evolves, with new cryptocurrencies and projects emerging as investment opportunities. By allocating assets in a crypto portfolio, investors can gain exposure to unique investment opportunities and participate in developing innovative technologies.
Overall, allocating assets in a crypto portfolio is crucial for investors wanting to benefit from the potential returns offered by cryptocurrencies while minimizing risks and volatility. A disciplined and strategic approach to asset allocation is a good starting point for creating a well-balanced crypto portfolio to achieve your financial goals.
Principles of Allocating Assets in a Crypto Portfolio
Asset allocation is a great way to diversify your investment portfolio and earn significant returns. However, investing in cryptocurrencies can also be risky, with high volatility and regulatory uncertainty.
Strategically allocating your crypto investment assets in a disciplined manner is vital to minimize risk and maximize returns. Some crypto asset allocation principles for a diversified crypto portfolio are given below.
- Equal Weighting: It shares similar principles to allocating a portfolio of more traditional assets like bonds, stocks, etc., through a proportional measuring method that gives the same importance to stocks or index funds in a portfolio. In the context of a crypto portfolio, equal weighting involves dividing your investment capital evenly among a selection of digital assets. This principle is based on benefiting from the growth of the entire market while avoiding the risk of concentrating your investments on a single cryptocurrency that may underperform. However, it’s important to note that equal weighting may not be the most optimal strategy for all investors.
- Market Cap Weighting: This method involves allocating your crypto holdings based on each cryptocurrency’s market capitalization. Investing more in cryptocurrencies with a higher market capitalization, like Bitcoin and Ethereum, and less in those with a lower market capitalization is recommended. However, your investment in small, medium, and large caps depends on your risk preferences and goals. Investing heavily in small market capitalization cryptocurrencies would present the most portfolio volatility with potentially high returns. On the other hand, investing in large market capitalization cryptocurrencies would present the least volatility, with a lower expected return.
- Sector-Based Allocation: This method involves allocating your crypto assets based on cryptocurrencies with various use cases. For example, you may allocate a percentage of your portfolio to decentralized finance (DeFi) or metaverse projects, non-fungible tokens (NFTs), gaming and privacy coins, or blockchain network projects that run smart contracts.
The Modern Portfolio Theory (MPT) is a popular strategy for allocating crypto portfolio assets. MPT is a framework for creating portfolios that maximize potential returns for a certain level of risk. The idea is to balance risk and return across different asset classes in a portfolio. In crypto investing, this means diversifying across different cryptocurrencies with varying risk and return potential levels.
Suppose you have low-risk tolerance and seek a more conservative investment strategy. In that case, you should allocate more of your portfolio to large-cap coins and stablecoins. On the other hand, if you have a higher risk appetite and are seeking massive gains, you must allocate a larger percentage of your portfolio to small-cap cryptocurrencies and NFTs.
For example, a reasonable allocation for a well-balanced portfolio might be 60% (large-cap), 20% (mid-cap), 10% (small-cap), 5% (stablecoins), and 5% (NFTs).
Don’t sweat it yet; we’ll delve deeper by providing practical steps for allocating your crypto assets.
How To Allocate Crypto Assets in a Crypto Portfolio
Follow our step-by-step guide highlighted below to create a well-balanced crypto portfolio:
Determine Your Risk Tolerance
The first step in allocating assets in a crypto portfolio is to determine your risk tolerance – the amount of risk you’re willing to take to achieve your investment goals. Factors impacting your risk tolerance include age, investment experience, and financial situation.
Diversify Your Crypto Portfolio
Diversification is critical to crypto portfolio management. A well-diversified portfolio comprises the following cryptocurrencies:
- Large-cap cryptocurrencies: These are the least volatile and most established coins with a market capitalization of over $10 billion, such as Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB).
- Mid-cap cryptocurrencies are typically newer cryptocurrencies that are gaining popularity and adoption, with a market capitalization of between $1 and $10 billion. Examples include Polkadot (DOT), Chainlink (LINK), Solana (SOL), etc.
- Small-cap cryptocurrencies are the most volatile cryptocurrencies and are typically newer, untested projects with a market capitalization of less than $1 billion. Examples include Hoge Finance (HOGE), SafeMoon (SAFEMOON), Bonfire (BONFIRE), etc.
- Stablecoins are cryptocurrencies pegged to a stable asset, such as the US dollar or gold. They provide a hedge against the crypto market’s volatility and can be used as a means of payment or store of value as they can be exchanged for one or more fiat currencies.
- Non-fungible tokens (NFTs) are unique digital assets stored on the blockchain, like artwork, collectibles, and in-game items. NFTs offer a new way of investing in the crypto space with the potential for significant growth.
- Central Bank digital currencies (CBDC) – A digital asset issued by the central banks of various countries in token form or with an electronic record and pegged to the fiat currency of the issuing country.
Allocate Your Crypto Portfolio
Once you’ve decided on the types of cryptocurrencies to include in your portfolio, the next step is to determine their allocations. A general rule of thumb is to allocate a more significant percentage of your portfolio to larger-cap cryptocurrencies, as they tend to be less volatile and have a longer track record of growth. As a starting point, you could consider allocating your portfolio as follows:
- 60% of large-cap cryptocurrencies
- 20% mid-cap cryptocurrencies
- 10% small-cap cryptocurrencies
- 5% stablecoins
- 5% NFTs
Ric Edelman, founder of the Digital Assets Council of Financial Professionals and author of “The Truth About Crypto,” suggests several crypto portfolio examples. From owning Bitcoin or Ethereum only to having a 50-50 split of the two significant coins or 60-40 favoring your preferred coin to own moat of crypto’s market share. He also suggests market cap-weighted ETFs (exchange-traded funds), where Bitcoin and Ethereum make up over 90% of the total portfolio.
Most crypto experts suggest keeping smaller proportions of altcoins with a large share of ETH and BTC to create a diversified and balanced portfolio.
These portfolios are just examples and should not be taken as investment advice. Doing your own research and consulting with financial advisors before investing in cryptocurrencies is recommended. Plus, the appropriate allocation for a well-balanced portfolio may vary depending on an individual’s investment goals, risk tolerance, and overall investment strategy.
Unlike other asset classes like stocks or currencies, cryptocurrencies are a relatively small market. Therefore, the entire market generally follows the same path, apart from a few outliers that had a breakthrough to the up or downside based on their fundamentals.
This is one of the main reasons why many people consider Bitcoin maximalism to be one of the best strategies. If Bitcoin dictates all the uptrends and downtrends and is well-established enough so it is least likely to fail, then it’s reasonable enough to think that investing only in Bitcoin is a valid strategy. And, of course, you wouldn’t be wrong.
If you are a passive investor that wants to invest in cryptocurrency in order to diversify your portfolio filled with other asset classes, then this is a valid choice.
However, if you are trying to invest in crypto with the goal of maximizing growth, it’s important to consider other cryptocurrencies, and smaller projects generally net a bigger gain during market uptrends.
Rebalance Your Crypto Portfolio
Once you’ve established your crypto portfolio, you must regularly rebalance it to ensure it remains aligned with your investment strategy and risk tolerance.
Rebalancing is adjusting the weights of assets in your cryptocurrency portfolio to maintain your desired asset allocation. When one asset in your portfolio increases in value faster than others, it can throw off the balance of your portfolio. Rebalancing involves selling some of the outperforming assets and buying more of the underperforming asset to bring your portfolio back into balance.
Suppose you initially allocated 50% of your portfolio to Bitcoin and 50% to Ethereum, the second largest crypto asset by market cap, but Bitcoin experienced a significant increase in value. In your portfolio valuation, you’ll find that Bitcoin now accounts for your portfolio’s 70%, so you might sell some of your Bitcoin and purchase more Ethereum to maintain your desired allocation. This would bring your portfolio back to a 50/50 allocation of Bitcoin and Ethereum.
Some investors choose passive portfolio management using crypto portfolio management software, while others prefer actively rebalancing their portfolio.
Why Rebalance Your Crypto Portfolio?
Rebalancing your crypto portfolio can help you achieve a number of benefits, including:
Rebalancing your portfolio can help you manage risks by avoiding holding assets that have increased in value to represent a more significant percentage of your portfolio than you intended. This can help protect your portfolio from a sudden decline in value due to one particular asset’s underperformance.
Rebalancing your portfolio can help you optimize your returns by selling high and buying low. By selling assets that have increased in value and buying assets that have underperformed, you can manage market risks in the long run.
- Maintaining Your Investment Strategy
Rebalancing can help you stick to your investment strategy and avoid emotional decisions. While holding onto a well-performing asset can be tempting, rebalancing can help you stay disciplined and focused on your long-term goals.
Types of Rebalancing Your Crypto Portfolio
Here are a few types of rebalancing your crypto portfolio:
Periodic (Calendar) Rebalancing
A straightforward strategy is to rebalance your portfolio on a fixed schedule, such as daily, weekly, quarterly, annually, etc., with no other factors besides time. You decide how often to buy or sell assets to bring them back to the original allocation. Your portfolio is only rebalanced in these periods and not when an asset increases or decreases in value.
Suppose you have a portfolio of Bitcoin, Ethereum, and Litecoin, with an initial allocation of 40% Bitcoin, 40% Ethereum, and 20% Litecoin. If you decide to rebalance your portfolio quarterly, you’d review your portfolio every three months and adjust your holdings as needed to maintain your target allocation.
Another strategy is rebalancing your crypto portfolio when an asset’s weight deviates from your target allocation by a certain threshold. It involves setting target portfolio allocation and a tolerance band that dictates how much the allocation can deviate from its original value. For example, you could rebalance your portfolio if an asset’s weight goes 5% above or below its target allocation.
Suppose you have a portfolio with a target allocation of 50% Bitcoin and 50% Ethereum, with a set 5% threshold. Each asset can maximally move 2.5% above or below its allocation target. If Bitcoin’s weight surpasses 55%, you must sell some Bitcoin and use the proceeds to buy more Ethereum, returning your portfolio to a 50/50 allocation.
Portfolio Drift Rebalancing
Portfolio drift is when your portfolio allocation shifts over time due to market movements. If you have a long-term investment strategy, you should rebalance your portfolio whenever there is a significant drift from your target allocation.
For instance, let’s say you have a portfolio with a target allocation of 70% Bitcoin, 20% Ethereum, and 10% other cryptocurrencies. Over time, the value of your Bitcoin holdings grows faster than your other assets, so your portfolio drifts to 80% Bitcoin, 10% Ethereum, and 10% other cryptocurrencies. In this case, you can sell some Bitcoin and buy more Ethereum and other cryptocurrencies to return your portfolio to its target allocation.
Rebalancing your crypto portfolio is crucial in managing risk and optimizing returns. Regularly reviewing and adjusting your portfolio can maintain a desired level of risk and return while staying focused on your long-term investment goals.
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Rebalancing your crypto portfolio is crucial in securing profits and preventing losses. Regularly reviewing and adjusting your portfolio will help you stay focused on your long-term investment goals by minimizing risks and maximizing returns.
Stay Up-to-Date With the Crypto Market
The crypto market constantly evolves, with new cryptocurrencies and projects always emerging. It is important to stay up-to-date on the latest developments and news in the crypto space to ensure your portfolio remains well-positioned for growth.
However, tracking the performance of your crypto assets from multiple blockchain networks stored in different wallets and across several exchanges is challenging and time-consuming. This is where a crypto portfolio tracker such as the CoinStats Crypto Portfolio Tracker comes into use, empowering you to manage your entire profitable portfolio – your crypto, DeFi, and NFTs directly in one place.
Moreover, CoinStats’ comprehensive analytics provides the latest market insights and technical analysis, helping you stay on top of the market!
Allocating assets in a crypto portfolio for maximum growth requires diversification, risk management, and staying up-to-date on the latest market developments.
Diversifying your portfolio by gaining exposure to large-cap, mid-cap, and small-cap cryptocurrencies, stablecoins, NFTs, etc., helps you reduce risk and get risk-adjusted returns.
Regularly rebalancing your portfolio and staying up-to-date on the latest market developments can also help you maximize your gains and achieve your investment goals.