Building a Strategic Crypto Portfolio: An Essential Guide

A word that could be used to describe the cryptocurrency market is “volatile.” This volatility is why cryptocurrencies are considered risky investments; investing in the wrong crypto asset can lead to significant losses, but investing in the right asset can yield substantial returns.

Investing in cryptocurrencies is as easy as buying your first Bitcoin or any other type of cryptocurrency. However, to become a successful crypto investor, you need to have an excellent cryptocurrency portfolio. Regardless of your strategy, a good portfolio will minimize your risk level (depending on your risk appetite) and open up opportunities for profit.

However, building a successful crypto portfolio is not an easy task, especially with the volatile nature of the cryptoc market, and there is no guaranteed way to mitigate this. But in this article, we will guide you on how to build a cryptocurrency portfolio by diversifying in the MOST EFFECTIVE way, helping you minimize risk while still increasing the chances of having many potential investments.

Best Practices for Building a Crypto Portfolio

How to Diversify Your Crypto Portfolio

Diversification involves avoiding the risk of concentrating all your investments in a single cryptocurrency, often referred to as ‘putting all your eggs in one basket‘, by allocating capital across various types of cryptocurrencies. This largely reduces your risk level. This is very important due to the nature of the crypto market.

Portfolio diversification – you might be wondering – how many coins should I invest in to be sufficient? Well, the extent to which you diversify is entirely subjective and relates to your capital size or investment goals. But remember:

• Most investors will allocate more money to market leaders like Bitcoin and Ethereum, as they experience the least price volatility.
• When diversifying your portfolio, watch out for correlated coins, meaning these coins often have price actions that tend to move similarly (they are usually from the same ecosystem, the same niche industry…). Remember, you’re spreading your money across different coins to minimize risk. It’s pointless if all the coins in your portfolio move in the same direction. If so, it’s better to just invest in one coin.

Below are ways to help you diversify your portfolio best:

Diversify by Market Capitalization

Under this criterion, cryptocurrencies can be divided into three main categories:

• Large Cap: Cryptocurrencies with a market capitalization exceeding $10 billion are typically classified as large-cap cryptocurrencies. These digital assets are generally considered to be more stable investments than mid and small-cap cryptocurrencies, as they tend to exhibit lower volatility. Notable examples of large-cap cryptocurrencies include Bitcoin and Ethereum
• Mid Cap: Cryptocurrencies with a market capitalization between $1 billion to $10 billion are typically classified as mid-cap cryptocurrencies. These digital assets are known to be more volatile than large-cap cryptocurrencies but also have a higher growth potential.
• Small Cap: These have a market capitalization of less than $1 billion and the volatility of these coins is very high. They are generally considered risky investments, as they are prone to strong price fluctuations (But often also present the opportunity for high returns).

Diversify by Use Case

This method of diversification suggests that you should consider adding different types of tokens with various use cases to your portfolio. This requires considering Tokenomics before investing. Some use cases include:

• Store of Value Assets: These are assets that appreciate over time, they do not lose value for reasons such as limited supply and they may even benefit from inflation, unlike fiat money (e.g., the U.S. dollar) which loses value due to inflation.

This is the number one reason why Bitcoin often occupies a large portion of most investors’ portfolios, because of the way Bitcoin is programmed to become a store of value, with a limited number of Bitcoins that can be mined and also the Bitcoin halving events that reduce the amount of BTC mined over time.

This, along with high adoption rates and high market capitalization, is why most people consider Bitcoin to be a store of value.

• Payment Currencies: Most of these coins need no introduction as most people consider them the first generation of cryptocurrencies, examples include Bitcoin, Litecoin, Bitcoin Cash, etc. Their main use case is for making payments.
• Stablecoins: These are coins whose value is fixed or pegged to a fiat currency, usually USD, gold… This option could be the savior for traders and cryptocurrency investors in bear markets when prices fall, you can quickly swap some of your other cryptocurrency assets into stablecoins.
• Utility Tokens: These are tokens on smart contract blockchains, serving as the key to a service or product. They can be used to pay transaction fees when interacting with Decentralized Applications (DApps) built on that blockchain or specific ecosystem.

Many projects issue their utility tokens to raise funds in an Initial Coin Offering (ICO). Theoretically, the value of the token should be directly linked to its utility value. BNB and ETH are both utility tokens.

• Security Tokens: It represents traditional securities like stocks and bonds but on the blockchain, which means they must comply with regulatory body rules, like the SEC in the U.S., and meet their principles before being issued. Often in the U.S., they are more popular, while Vietnamese people rarely access them.
• Governance Tokens: These are types of cryptocurrencies that can be used to vote on the direction and development of the protocol, the main purpose of governance tokens is to decentralize decision-making power and give owners a say in how the project is operated.

Most Decentralized Finance (DeFi) tokens are governance tokens; examples include Aave, Uniswap, and Compound.

• Other Tokens: Non-Fungible Tokens (NFTs), Privacy Coins…, Note, you may often encounter many cryptocurrencies with multiple use cases: for example, it can be both a governance token and a utility token, and can also be used for staking, yield farming…

Diversify by Industry/Sector

The underlying technology that cryptocurrencies run on is the blockchain. Ethereum revolutionized this technology with the introduction of smart contracts, facilitating the execution of agreements without the need for a third party and allowing dApps (decentralized applications) to be built on its platform. This has opened up the gateway of Blockchain now; it can be used in various industries. You may have heard of Decentralized Finance (DeFi) taking over the financial industry and bringing it onto the blockchain eliminating third parties.

Beyond Ethereum, there are numerous blockchains focusing on security, scalability, and efficiency. All these blockchains with what they provide and support are what make up Web3. Therefore, each of these blockchains has protocols built on them, and these protocols may have their native tokens.

=> This makes diversification among industries, sectors a smart idea, as you will be in a very good position if some of the industries you’ve invested in lead the next surge in cryptocurrency prices.

Some typical sectors, industries, trends you can consider:

• DeFi: Decentralized Finance
• DEX: Decentralized Exchange.
• Web3, SocialFi, NFTfi…
• Layer-1, Layer-2, Omnichain…
• GameFi, Metaverse, XtoEarn…

Key Considerations When Building a Quality Crypto Portfolio

This section is about researching coins to invest in, updating your investments, and managing your portfolio.

For me, this is the most important part of creating your crypto portfolio. Research and evaluation of any project is utterly essential.

When looking for investment options, here are some guiding questions to help you sift through projects:

• Does the coin have the resilience to withstand a prolonged bear market?

• How large is the token’s Fully Diluted Valuation (FDV) – Total Max Supply * Current Price, and is it likely to be inflated as more tokens are unlocked in the future?

• Does the project team still have the motivation to build? (Community, publications, how they respond to failures, roadmap)

• Does the project’s story fit with the next surge in price?

• Is it a leader in the ecosystem, or one of the top names in a specific field?

• Is it growing in adoption and/or usage?

Examples of Crypto Portfolios ($1,000 to $100,000)

Let’s build some crypto portfolios, please note that all projects here are just examples and are not financial advice.

Portfolio for Beginners ($1,000)

This is a safe crypto investment portfolio, slightly leaning towards BTC and ETH – the two market-leading cryptocurrencies. It includes 3 large-cap coins (BTC, ETH, BNB), and 3 mid-cap coins (FIL, UNI, ATOM). There are no small-cap coins, as this portfolio should limit the degree of risk.

The investment portfolio is also diversified across industries, for example with DEX, CEX, Layer-1, and the decentralized Web 3.0 service provider Filecoin.

The reason for choosing Filecoin is that it has reached its FDV, meaning its maximum supply is currently in circulation. BNB also has less than 25% left to reach its maximum supply.

Intermediate Portfolio ($10,000)

Here, we will add two more projects to our portfolio, STX and AR.

• Stacks is bringing more use cases to Bitcoin, now imagine if Bitcoin could be utilized for DApps and Smart Contracts, potentially unlocking over $500 billion in market capitalization.
• Meanwhile, Arweave acts like a hard drive on the blockchain. They provide storage services, and both STX and AR are coins with a slightly higher market capitalization, just over $1 billion, indicating that they are the riskiest investments in the hypothetical portfolio.

Premium Portfolio ($100,000)

This portfolio is a bit more aggressive with 50% in the market-leading companies and further diversified into Web3 gaming and social media. We should also hold 7.5% in stablecoins in case other quality projects emerge to invest in.

• MASK acts as a bridge between Web3 and the internet, allowing users to send encrypted messages on Twitter and Facebook, ensuring privacy.
• While GALA is a game developer, it will contribute to the low-cap token selection as their market capitalization is all below $1 billion.

You will notice that even with more capital, it’s best if your investment portfolio does not exceed 10 series. It could be fewer. The broader the portfolio, the harder it is to manage and the harder it is to stay informed. So the best approach – Be as concise as possible.

*** Again, the choices mentioned above are hypothetical, you can choose other coins to replace those in the sector mentioned above, but it’s still best to allocate according to market capitalization and diversify across sectors ***

These are the insights on how to build the most effective crypto investment portfolio. You can also consider pairing it with Dollar Cost Averaging (DCA), by regularly purchasing small or equal amounts of cryptocurrency assets weekly, monthly, or quarterly. However, it is crucial to stay updated with news, trends, and the latest updates about the coins you have invested in and the market in general. Most importantly, always strive to diligently appraise and evaluate a project before deciding to invest in anything. Wishing you success.