Becoming a cryptocurrency investor entails buying a digital currency like Bitcoin, Ethereum, or any other coin or token. Although some crypto investors stick to purchasing the biggest digital currencies to perform mt4 crypto trading, others like to try out cryptos with smaller market caps.
Typically, these altcoins with lower trade volumes offer better returns on investment (ROI) than the top 10 cryptocurrencies. Nevertheless, every investor’s dream is to make the biggest profit. The best way to hedge your risk is by diversifying your crypto portfolio consistently.
Whether you’re a risk taker or averse to risk, there are ways you can go about this. Balancing your digital currency portfolio isn’t difficult; engaging in it can maximize your returns efficiently.
Understanding Cryptocurrency Portfolios
A cryptocurrency portfolio can be defined as a set of digital currencies that an investor has in their possession. In conventional finance, portfolios contain financial instruments across several asset classes, from bonds to stocks. However, when referring to a crypto portfolio, we’re talking about different digital currencies owned by an entity.
A virtual currency portfolio can be tracked using a spreadsheet or customized software. The metrics tracked in the portfolio are daily gains/losses, the total value of the trader’s holdings, and the amount of crypto held in different wallets. A crypto portfolio typically includes Bitcoin, altcoins, and other crypto financial products.
The usual types of traders that use crypto portfolio software include day traders and scalpers. Nonetheless, long-term traders like swing traders sometimes leverage crypto portfolios for analysis.
Types of Digital Currencies
Today, it isn’t easy to classify a coin that exists solely as a means of payment. Nevertheless, the whole reason for creating the first cryptocurrency, Bitcoin, was to serve as a payment method.
Bitcoin remains the most prominent instance of a payment coin. Still, others include Bitcoin Cash, the result of the well-known Bitcoin fork, and Litecoin, the currency that supported faster payments than the Bitcoin network.
Stablecoins track existing assets like the US dollar or Euro in a system called a peg. For instance, stablecoins like Tether are pegged to the US at a 1:1 ratio. Another stablecoin, PAX Gold, is pegged to the price of one ounce of gold.
Typically, stablecoins hold an equivalent amount of the financial assets they’re tracking in their reserves. Holding a stablecoin for most investors isn’t to make any profit. Instead, it is bought by most traders to hedge the value of their currencies during a downtrend in the cryptocurrency market. Typically, stablecoins hold an equivalent amount of the financial assets they’re tracking in their reserves.
The digital currency market has been rated the most volatile in the world. Attempting to hedge the value of your crypto against the occasional price drops in the market can only be successful when you use a stablecoin.
While you can hedge your cryptocurrency in the US Dollar, Euro, Yen, or some other fiat currency, changing from crypto to fiat takes a long time.
A utility token allows a user to access a particular service or product. The best-known utility token is Ethereum which will enable you to access services on Ethereum’s platform.
Ether can be used to make payments when charged for a transaction on the Ethereum network. You can also use it when utilizing a decentralized application.
Building your Crypto Portfolio Efficiently
Classify Your Coins
You need to divide your crypto portfolio between high, medium, and low-risk digital currencies. You’ll need to perform some analysis before categorizing the coins.
An investor with a crypto portfolio that has too many high-risk coins can most likely make a higher reward. On the other hand, if the market swings the other way, the losses would be huge.
If you’re a risk-taker, you can divide your portfolio between high and medium-risk coins. A risk-averse investor would best stick to low and medium-risk coins.
Although stablecoins aren’t likely to provide profit to an investor, it’s best to hold them for liquidity reasons. They remain the best way to enter and exit trading positions in the crypto market. Lacking a stablecoin could be why you miss out on a trading opportunity.
A coin previously classified as low-risk could become more volatile due to certain reasons and then move to medium or high risk. You need to constantly analyze your crypto portfolio to determine whether you should rebalance your risky coins. In the same vein, if you’re holding several coins that are classified as low-risk, it could lead to lesser returns.
Although it is very easy to become a cryptocurrency trader, maximizing your returns depends on how well you balance your crypto portfolio. You can choose different coins to include in your portfolio, like payment coins, stablecoins, and utility tokens.
To balance your portfolio, you need to own stablecoins, classify your coins based on risk, and practice asset rebalancing.