Building a profitable cryptocurrency portfolio isn’t much different than building a traditional investment portfolio. The main difference is that you’ll be staying within one asset class instead of dipping into multiple asset classes.
Cryptocurrency and blockchain projects still have a reputation for volatility. However, this is starting to change as investors continue to embrace cryptocurrencies as a legitimate asset class, which means the wild price fluctuations that crypto is known for have become less dramatic. You can now manage your risk by building a diversified crypto portfolio that’s balanced based on your risk tolerance.
So, how are attitudes towards cryptocurrency changing? Bitcoin was once considered too volatile to take seriously as an investment opportunity. Now, Goldman Sachs called Bitcoin a store of value that might challenge gold for dominance. According to Goldman Sachs’ analysis, Bitcoin has a 20% hold on the “store of value” market.
It’s time for investors to seriously consider building a cryptocurrency portfolio to accompany their traditional investment portfolio. Today, we will dive into the different types of cryptos and blockchain projects, then discuss the three primary risk tolerance levels to consider as you build your portfolio.
The Different Types of Cryptocurrencies & Blockchain Projects
Bitcoin may have been created as “digital cash” to transfer value on a trustless peer-to-peer basis, but the world of cryptocurrency has grown far beyond that initial goal. As a result, you need to know about several types of cryptocurrencies as you proceed. Others are more accurately described as blockchain projects since users do not expect to conduct financial transactions with coins and tokens.
The main categories to be aware of include:
- Payment coins: This is where it all began, but surprisingly, very few new blockchain projects are designed around financial transactions. Before Ethereum introduced smart contracts, most new blockchain projects focused on transactions, such as Ripple (XRP), Bitcoin Cash (BCH), Litecoin (LTC), and Digibyte (DGB). These coins are still around and thriving, even though a minority of holders use them for actual payments.
- Stablecoins: The emergence of stablecoins formed the foundation of Decentralized Finance (DeFi) and brought blockchain technology to investors that aren’t interested in seeing their portfolio increase or decrease by 20% on an average Tuesday. A stablecoin is any currency pegged to a fiat currency, such as Tether (USDT), Binance USD (BUSD), and Tether EURt (EURt). Other stablecoins are pegged to precious metals, such as Pax Gold (PAXG). The goal of every stablecoin is to maintain the exact same value regardless of the broader crypto market.
- Utility tokens: Utility tokens act as the key to a specific platform or product. Technically speaking, Ethereum (ETH) is a utility token as it is required to conduct transactions. Gaming is an emerging market for utility tokens as many blockchain games offer tokens that function as in-game currency, such as Axie Infinity’s token (AXS).
- Governance tokens: A governance token is a specific utility token that allows holders to vote on changes to the related platform. Uniswap’s token (UNI) must vote on changes to the token swapping platform.
There’s a wide world of cryptocurrencies and blockchain projects for investors to explore as they create their portfolios. The key to building your ideal portfolio is understanding how to mix and match these coins and tokens to suit your specific risk tolerance.
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The Three Basic Risk Levels to Consider
There are three standard levels of risk to examine as you build your portfolio. An ideal portfolio will typically draw from each level of risk depending on the investor. While some cryptocurrency purists will pick one coin and go all in, it is recommended to diversify your portfolio.
Lowest Risk: Stick to Stablecoins Pegged to Fiat Currency
Stablecoins are the lowest risk since they are pegged to fiat currency or precious metals. Therefore, your value will only change if the value of the pegged asset changes, such as the United States inflation rate affecting USD’s value. However, the stablecoins themselves will still be worth USD$1.
The primary benefit of stablecoins is that they offer interest rates that are much higher than traditional financial institutions. Of course, the exact interest rate will vary based on the platform holding your coins, but it’s common to find interest rates ranging from 2 to 10%.
Investors will need to research the chosen stablecoin and the platform holding it thoroughly. Some platforms will offer high-interest rates to lure investors in, but the platform itself is new and untested. Pick a platform that’s been around and has an excellent reputation.
The decision is yours, but stablecoins can make an excellent foundation for a cryptocurrency portfolio. On top of generating interest (if on the right platform), they can also quickly be converted into another crypto.
Medium Risk: Focus on Less Volatile Legacy Coins
A legacy coin can be considered any coin around long enough to establish its value. Bitcoin (BTC) and Ethereum (ETH) are the two popular legacy coins that will still experience price fluctuations but aren’t likely to disappear overnight. As a result, Bitcoin has been widely considered a store of value. Ethereum is the utility token that hosts smart contracts and powers countless blockchain projects.
Bitcoin’s future price is the topic of heated debates worldwide, but most agree that it’s not going to plummet to zero. Bitcoin has proven itself as the worthy backbone of the entire asset class.
Highest Risk: Invest in Newer Cryptocurrencies and Blockchain Projects
CoinMarketCap is currently tracking 17,644 different cryptocurrencies. A massive portion of those coins are either blatant cash grabs or new projects that may be exciting but have yet to prove themselves. The utility and governance tokens mentioned above are part of this risk level.
Investors with a high-risk tolerance may wish to allocate a more significant portion of their portfolio to a collection of newer cryptocurrencies. It’s not uncommon for a newer cryptocurrency to have triple or even quadruple-digit annual gains, but it’s also not uncommon for new coins to become worthless.
Unlike Bitcoin, which was intended for universal usage, most of these new blockchain projects are tied to a specific project or platform. That means investors need to do their due diligence and thoroughly investigate the project, the development team, and how the token is used within the project.
For example, BAT is a token tied to the Brave web browser. Users earn BAT by opting into advertisements. They can then use BAT to tip content creators and businesses, hold it, or cash out into fiat or another crypto. So even though the project has been around for a few years and is still promising, if the company and development team have problems, it won’t impact the value of BAT.
Investors should do a deep dive into any investment, and that’s especially important with any new coin or project that catches their attention. However, be wary of any project generating buzz and making mainstream headlines; don’t believe the hype and do your own research.
“Always do your own research”
Stay Aware and Rebalance Your Portfolio As Needed
The cryptocurrency world moves quickly, and investors must stay informed about every asset they’ve invested in. Stay on top of crypto news by following crypto-specific news sites that will report on stories well before reaching mainstream news sources. Additionally, investors should use a portfolio tracker so that they’re always aware of the actual value of their investments.
Investors may need to regularly rebalance their portfolios to coincide with their ideal level of risk. For example, if a coin becomes too risky, it’s time to cash out and perhaps move to a stablecoin or legacy coin. Alternatively, if new crypto looks promising, it might be time to convert a stablecoin to the new crypto.
Coinmotion makes it easy for investors to build a well-balanced portfolio based on their ideal level of risk. Sign up today to start building a cryptocurrency portfolio and take advantage of this rapidly growing asset class.
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