The vast majority of crypto investors, one way or another, use the principles of portfolio investment in cryptocurrency trading (according to the buy & hold strategy). Almost no one only stores bitcoins, ignoring the rest of the coins. Therefore, we offer to figure out how to correctly create and manage an investment crypto portfolio.
Rate of return
The main goal of any investment is to make a profit. But before talking about profitability, you need to decide how to conduct the calculation. Here is what, today, most often traders do:
- record profits in fiat money. This is primarily due to the underdevelopment of the cryptoeconomics itself. Many use USDT crypto-dollars and other stable coins pegged to the American dollar for this purpose. If the final calculation of the portfolio will be carried out in fiat, then its yield should exceed the yield on BTC for the same period. In this case, bitcoin acts as the main crypto index and benchmark for profitability, by analogy with the S&P 500 and similar indices.
- accumulate a deposit and record profits in BTC. Trading altcoins, traders try to get more BTC. Bitcoin is used as a means of accumulating crypto capital, which is not fixed in fiat.
- give preference to ETH (or another altcoin) for accumulating a deposit. This is a rarer case.
Regardless of the currency of profit taking, its value must be determined / calculated in advance before purchasing a portfolio. For example, $ 2000 or + 50% in BTC. Upon reaching the set values for profitability, the portfolio will need to be closed.
Acceptable Risk Level and Portfolio Diversification
As you know, risk and profit are always in direct proportion – the greater the risk, the greater should be the potential profit and vice versa. Investing in cryptocurrency is no exception.
To reduce risks, the principle of diversification is applied. The investment portfolio can be divided into several key categories according to the degree of risk:
- Low-risk assets (ON). TOP 5 coins by capitalization.
- Mid-risk assets (CA). The remaining TOP-30 by capitalization
- High-risk assets (VA). The remaining TOP-100 by capitalization.
Of course, there are many categories of risks and ways to determine it; the simplest way is given above, in relation to capitalization. Based on the percentage of risky assets, it is customary to distinguish 3 types of investment portfolios:
- Conservative. Contains about 5-10 coins. Asset ratio 75% / 25% / 0% (ON / CA / VA). Most likely, it will not bring big profit, since highly capitalized assets grow in price more slowly.
- Moderate (balanced). It makes sense to distribute the increased risk of the entire portfolio to a larger number (10-20) of coins. Asset ratio 25% / 50% / 25%. The most common type of portfolio.
- High-risk. Asset ratio 25% / 25% / 50%. The emphasis here is on assets with increased risk, which can bring large profits. Some investors made such portfolios only from ICO coins in 2017-2018. It is believed that if the projects are selected competently, then one out of 10 will pay off losses on investments in the remaining 9 (the principle of investing business angels).
At the moment, there is a general recommendation for all crypto portfolios: the share of BTC in it should be from 25 to 50% for additional purchases / rebalancing of the portfolio.
Diversification of a higher level can also be carried out: to distribute all capital into several investment portfolios. For convenience, you can store each portfolio on a separate cryptocurrency wallet / exchange.
It is possible to create a beta-neutral portfolio in relation to bitcoin: half of the coins should directly correlate with BTC and grow with its strengthening, and the second half, on the contrary, grow with its fall. Proper compilation and rebalancing of such a portfolio will generate income regardless of the general trend in the market. However, it should be remembered that assets do not always correlate equally with BTC at different time periods.
So, we decided on financial goals, risks, it remains to choose specific assets for investment and portfolio creation. One of the key parameters for selecting assets is its liquidity. It is recommended to invest only in highly liquid assets with the highest trading volume in the last month.
- market interest in the asset, which directly affects volatility;
- the ability to operate in large volumes on a given asset.
To make a final decision on the choice of assets, it is recommended to look for undervalued coins by technical and fundamental analysis and invest only in those projects that you understand.
One of the most important points at the stage of portfolio formation is to determine its investment horizon. It can range from a few days to decades and directly affects profit targets.
The shortest work interval is speculation and intraday trading. A fairly aggressive type of trading that requires a lot of concentration and a long stay of the trader in the market. It also requires the constant presence of assets on the cryptocurrency exchange, which is an additional systemic risk. When speculating, it is recommended to take short-term gains for small coins, and losses must be taken into account in advance and set stop orders before you get into a position.
Higher horizons can conditionally be called investing in crypto assets. Compared, for example, with the stock market, the investment period of a crypto portfolio will be several times shorter and can be several weeks, months, quarters and half-years (instead of several years on the fund). With long-term investments, it is possible (and necessary) to reduce systemic risks and store coins not on the exchange, but on secure wallets, preferably cold ones, from which there are private keys.
It is necessary to choose an investment horizon based on expected profit and risk, as well as your own trading psychology, but ceteris paribus, preference should be given to long-term investments.
Portfolio rebalancing will change depending on the horizon. An important point will be the discipline – when the goal of portfolio profitability is achieved, it must be closed and positions must be turned to cash.
Rebalancing is the main method for risk management: it allows you to increase profitability or reduce losses from investing. But there are two things to keep in mind. Firstly, this method will work only with proper use. Secondly, rebalancing is not a panacea, but only an investor’s management tool. If the entire cryptocurrency market falls, it will not save the situation. How exactly to carry out rebalancing is also the choice and responsibility of the investor.
Ideally, rebalancing should be done according to a previously thought-out scenario:
- Preservation of the current percentage of groups of assets (or each asset separately). For example, you have a risk-moderate portfolio with proportions of 25% / 50% / 25%, and you want to keep it until the expiration date. If there is a skew, then it must be leveled by selling / buying the relevant assets until the original proportion is restored.
- Or a change in shares – an increase in the share of assets that bring large profits, and a decrease in the share of unprofitable ones.
Do not forget to decide what to do with a positive imbalance as a result of rebalancing – withdraw, or leave in the portfolio, reinvest?
|Method||Current financial result||Investor actions|
|Profit withdrawal||Positive||Investor restores the original asset ratio and at the same time withdraws part or all of the profit from the portfolio|
|Additional Investments||Negative||Investor introduces additional cash into the portfolio and acquires the required number of assets, the percentage of which in the portfolio has decreased.|
|Redistribution of funds||Positive / negative||An investor sells cryptocurrency, the percentage of which is too high, and buys cryptocurrency, whose share in the portfolio has decreased. Also, in case of uncertainty in the market, you can redistribute funds in USDT / USD.|
The main difference between the cryptocurrency portfolio and a portfolio of securities
Of course, the choice of assets (cryptocurrencies) is the cornerstone in compiling a portfolio. When a portfolio of stocks is being assembled, they try to make a breakdown of the various economic sectors (medicine, IT, etc.) on the stock exchange so that movement in one of the sectors does not affect other portfolio securities. Ideally, a so-called beta-neutral portfolio is created. It consists of 2 conditional parts with inverse correlation – when one grows, the second falls, and vice versa. Redistributed profit reinvested in the unprofitable part will bring even greater income over time. A kind of swinging swing.
Unfortunately, almost all cryptocurrencies have a positive correlation – all assets grow or fall at the same time, just at different speeds. The only option is stablecoins (USDT, TUSD, etc.). It makes sense to keep part of the portfolio in tokenized dollars for fixing / redistributing income or reinvesting. It turns out a synthetic position using stablecoins. But this swing will work only if we take into account the yield in fiat.
When to rebalance
The time of the rebalancing procedure directly depends on the investment horizon: for long-term portfolios (six months, a year or more), this procedure can be carried out once a month or once every 3 weeks. For medium-term – once a week. And so on – the shorter the term, the more often the rebalancing. One of the pitfalls is commissions – if you redistribute assets too often (especially for short-term and small portfolios), commission costs can greatly spoil the final result.
The frequency of rebalancing depends on:
- Horizon of investment. For long-term portfolios (from a quarter to a year or more) it makes sense to carry out this operation once a month. For medium-term – once a week.
- With a strong change in proportions. For example, there was a portfolio with an asset balance of 50/50, and became 60/40.
- Individual news background for each asset. For example, a fork of a coin will take place soon, you can take part of the profit before the fork and buy more coins after holding it, when the price drops. And if it is very negative, it is better to get rid of such an asset, even with a loss. In no case should you redistribute profits into it: on the cryptocurrency market there is always a risk that the asset will cease to exist.
That is why it is not recommended to do too much diversification – it is very difficult to simultaneously monitor a large number of projects. In any case, the portfolio must be watched. To track changes, it makes sense to use specialized resources, one of the most famous is cryptocompare.
Having considered the main points of portfolio investment, we can conclude that here, as in trading, you must adhere to a clear trading plan that will describe most trading situations from opening the first positions to closing the entire portfolio and calculating profit / loss. Many traders neglect this crucial aspect of trading when trading unstructuredly. But it should be remembered that with this type of trading, the result will be the same.
It’s important to understand that creating an investment portfolio is akin to creating a trading strategy. There are no perfect, “golden” combinations. They must be created individually, based on each traders own experience and understanding of the market.