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Blockchain & Crypto Analysis

How to Build a Diversified Cryptocurrency Portfolio

Sunday, July 22, 2018

In this post, you’ll learn how to build a diversified portfolio in the cryptocurrency market. Please keep in mind that this article is not intended to be financial or investment advice. Its goal is to teach you about the various opportunities in the cryptocurrency market and how to maintain safe investment practices based on your risk profile.

The Importance of DYOR (Do Your Own Research)

The cryptocurrency market is a young and unregulated market. It’s full of misdirection, hidden agendas, and scams. With that said, it’s important to realize that there are quite a few legitimate projects in the space, and the best way to find those gems is to do your own research. Here are a few tips to get you started if you come across a project that interests you.

  • If you’re interested in a project, take some time to think about their goals and if they seem reasonable. If their proposition sounds outlandish, stay away.
  • The next step is to visit the project’s website and read their whitepaper. Don’t blindly follow a Twitter personality’s advice on the project because he or she may have bad intentions.
  • If you’re satisfied with the website and whitepaper, go check out the project’s online communities on Reddit, Telegram, Discord, and other social platforms. Blockchain is an emerging technology, and there is no way you don’t have questions after reading the whitepaper. So, do some inquiring on the project’s social channels to gauge the community’s sentiment, helpfulness, and professionalism. If the group’s administrators and frequent contributors seem like they’re trying to dodge specific questions, stay away.
  • Lastly, if something sounds too good to be true, it probably is. History has shown this to be the case many, many times.

Bitcoin & Altcoins

Today’s cryptocurrency market is a very diverse one, and Bitcoin is no longer the only investment vehicle in the market. In addition to Bitcoin, the cryptocurrency market is comprised of many “altcoins”, a popular term used to describe alternatives to Bitcoin. If you take a look at CoinMarketCap’s coin listings, you can see hundreds if not thousands of altcoins. The truth is many of these are likely scams, but many legitimate cryptos do deserve your attention as well.

Determining Your Risk Profile

When building a cryptocurrency portfolio, it’s important to stick to your risk profile. Here are a few questions you should ask yourself before investing.

  • How much can I afford to invest without losing sleep?
  • Should I diversify on the asset class level by buying stocks and precious metals as well?
  • What level of inter-market risk am I comfortable with? Should I invest in riskier (lower market cap) coins for potentially higher rewards, or should I stick with more stable and less volatile coins?
  • Do I view cryptocurrency as a short term or long term investment?

Based on the answers to these questions, you’ll be able to determine your personal risk profile. Here are a few examples.

Ultra-Conservative Long-Term Investor

Tyler is a businessman who’s close to retirement and has already invested in stocks, precious, metals, and real estate. He’s a traditional but open-minded investor and wants to have some exposure to this new asset class called cryptocurrency. He has a family to take care of, so he has to maintain a very strict risk profile. Tyler chooses to allocate 5% of his total investment capital between the top ten cryptocurrencies.

Risky Short Term Investor

Josh is a college student who’s looking to invest his “beer money” into cryptocurrency. When he’s not in class, he’s always keeping a close eye on the newest hyped coin on the market. Since he’s still young, Josh figures the best way to make quick gains is to jump on the latest pump and get out before the dump. Josh chooses to allocate 75% of his beer money between relatively unknown and extremely volatile cryptocurrencies.

Risk-Neutral Long-Term Investor

Catherine is a recent law school graduate who is also interested in cryptocurrencies. She managed to land an excellent paying job at a law firm and is learning about crypto in her free time with the hopes of providing legal consultations to blockchain firms in the future. Since it’s so difficult for young people to invest in real estate nowadays, Catherine figures she can invest in cryptocurrencies along with her current stock investments. She has an above average paycheck, so she figures it’s okay to invest 50% of her investment capital into the cryptocurrency market. Her law background has given her the analytical ability to see through the many scams in the market. After a few days of research, she decides to allocate her capital between the top ten cryptocurrencies and a select few other altcoins with real business partnerships and ventures.

Different Types of Cryptocurrencies

In 2008, Bitcoin, the world’s first blockchain-based electronic money, was born. Ten years later, Bitcoin is still around, but many other projects are competing in the space. Blockchain and cryptocurrency are no longer just about creating electronic money. Today, projects are applying blockchain technology to distributed computing, privacy, supply chain, interoperability, and more. As an investor in an ever-evolving market, it’s important to know about some of these projects which can help you build a diversified portfolio.

Top 10

The Top 10 cryptocurrencies by market capitalization are the ones that have withstood the test of time. When creating a diversified cryptocurrency portfolio, it’s important to have adequate exposure to these large caps because they tend to be less volatile in times of uncertainty. Currently, the Top 10 cryptocurrencies include Bitcoin, Ethereum, Ripple, Bitcoin Cash, EOS, Stellar, Litecoin, Cardano, IOTA, and TRON.

Recently, we’ve even seen cryptocurrency index funds enter the market. These products are designed to expose investors to top cryptocurrencies without having to worry about constant portfolio rebalancing and management. Coinbase Index Fund, which is currently only available for accredited investors in the USA, gives exposure to all of Coinbase’s listed assets weighted by market capitalization. Huobi Pro, a Singapore-based exchange, has also launched a similar product called Huobi 10. This index fund enables investors to buy into the Top 10 traded assets on Huobi Pro weighted by market capitalization. The introduction of index-based products is a sign of a maturing market and shows the importance of maintaining portfolio exposure to the top-ranked coins in the market.

Interoperability

Interoperability blockchains are focused on connecting different blockchains to enable cross-chain communication. Connecting purpose-specific blockchains can result in innovative business opportunities that were not possible before. ICON, Wanchain, AION, Cosmos, and PolkaDot are examples of interoperability blockchains.

Privacy

Privacy coins are focused on giving users the power to make transactions that cannot be traced or linked to their physical identities. Monero, Zcash, and DASH are examples of private cryptocurrencies.

Supply Chain

Supply chain and business logistics is a ripe industry for innovation through blockchain. Projects in this space are focused on reducing the costs of doing business by providing tracking and authentication tools powered by blockchain. Vechain and Waltonchain are two examples of blockchain projects targeting the supply chain industry.

Exchange Tokens

Cryptocurrency exchanges are becoming some of the most profitable businesses in the world. In Q1 2018, Binance announced net profits of $200 million. By comparison, Deutsche Bank, one of the world’s largest banks, recorded a profit of $146 million. As a result, many investors in the cryptocurrency space are buying up exchange tokens because their price appreciation shows a strong correlation with the success of the exchange. Exchange tokens also give users access to reduced trading fees and other special promotions. QASH, Binance Coin, Huobi Token, and Kucoin Shares are examples of exchange tokens.

Computing, Networking, and Storage

Incentive-based distributed computing is a popular use case for blockchain technology. Most projects involved in this niche are building tools to enable users around the world to contribute their computers’ processing power, storage, and network connection in exchange for tokens. Substratum, SIA, Maidsafe, and Golem are examples of distributed computing projects.

Low Caps

Cryptocurrencies with low market caps ($8-12 million) have more potential upside but are usually very risky plays. Sometimes it’s not possible to tell if a project is an undiscovered gem or merely a scam. Furthermore, low cap coins are often listed on smaller exchanges and can easily be manipulated by bigger players, so they may not be suitable for long-term investment. If you’re interested in gambling on low caps, be sure to maintain a strict risk profile and only use a small fraction of your capital.

Conclusion

After you’ve determined your risk profile and sufficiently researched the cryptocurrencies you’d like to invest in, it’s time to learn how to buy them. We’ll cover how to purchase cryptocurrencies in another post, but here are a few tips to kickstart your research process.

  • Where can I purchase the cryptocurrency?
  • Can the cryptocurrency be bought with fiat? If not, where can I buy Bitcoin or Ether first?
  • Where do I store the cryptocurrency after I buy it? Is there hardware wallet support? If not, is there a safe desktop wallet?
  • Is there an upcoming mainnet token swap?

If you don’t know the answer to these questions, it’s best to do a bit more research before jumping onto a cryptocurrency exchange with your hard earned money. Remember, always do your own research and stay safe in the Wild West of Crypto. We hope you found this post to be helpful on your journey to building a diversified cryptocurrency portfolio.

Disclaimer: This post was sponsored by QUOINE, a leading fintech company that provides trading, exchange, and next generation financial services powered by blockchain technology. Click here to learn more about QUOINE.


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