Guide to Crypto Portfolio Management
Wondering about investing in one cryptocurrency vs. a diversified portfolio of different assets? Discover the benefits of crypto portfolio management to create a well-balanced portfolio to suit your investment needs. From owning only one popular cryptocurrency like Bitcoin or Ethereum to keeping smaller proportions of altcoins with a large share of ETH and BTC, the choice of your crypto portfolio depends on your risk tolerance, investment goals, and the current state of the cryptocurrency market.
What Is Crypto Portfolio Management
Crypto portfolio management is the process of selecting and overseeing a mix of crypto asset investments with the goal of achieving your financial objective. The goal of crypto portfolio management is to achieve this objective while considering factors like risk tolerance and time horizon.
The goal of every crypto investor is to get the best reward with the least possible risk. However, with many crypto investment classes providing varying risk-to-reward ratios, the responsibility becomes a bit more demanding.
There are a million ways to allocate funds in crypto assets and manage your crypto, and differences in risk tolerance and investment personality will ensure that no two people get the same reward. Are there valid reasons you should have a portfolio of different cryptocurrencies instead of having just one? Let’s see.
Understanding Crypto Asset Classes
Cryptocurrencies come in many different shapes and sizes, meaning that they can also be categorized in many different ways. However, for the purposes of crypto portfolio management, we will be categorizing cryptocurrencies into the following asset classes:
- Coins
- Tokens
- Non-fungible tokens (NFTs)
- Stablecoins
Coins
Coins are cryptocurrencies that use their own blockchain to operate. While they may have numerous use cases, one of the most common ones is that they are used to pay for gas fees whenever a transaction occurs on their blockchain.
The most famous examples of coins are the two largest cryptocurrencies by market cap, namely Bitcoin (BTC) and Ethereum (ETH).
Tokens
Crypto tokens are digital assets that are built on top of existing blockchain platforms, such as Ethereum. Tokens usually serve a specific purpose within a particular ecosystem. Some could be used to access certain features or services on a platform, while others may represent an ownership stake in a company or project.
There are several types of crypto tokens, including utility tokens, security tokens, and asset-backed tokens. Utility tokens provide users with access to a platform's services, while security tokens represent an investment in a company or project and are subject to regulatory oversight. Asset-backed tokens are tokens that are backed by a physical asset, such as gold or real estate.
Non-Fungible Tokens (NFTs)
Non-fungible tokens (NFTs) are unique digital assets that are stored on a blockchain. Unlike coins and tokens, which are interchangeable with others of the same type, NFTs are one-of-a-kind and cannot be replicated. NFTs are typically used to represent digital art, music, and other types of creative work.
One of the most significant advantages of NFTs is that they allow creators to monetize their work in a more direct and transparent manner. NFTs can be sold on blockchain-based marketplaces, and the ownership and transfer of the token can be easily tracked on the blockchain.
Stablecoins
Stablecoins are digital assets designed to maintain a stable value relative to a particular asset, such as the US dollar. They are typically used as a medium of exchange or store of value, providing users with the benefits of cryptocurrencies without price volatility.
Several types of stablecoins include:
- Fiat-backed stablecoins, backed by a reserve of fiat currency or cash equivalents
- Crypto-backed stablecoins, backed by other cryptocurrencies
- Commodity-collateralized stablecoins, backed by commodities such as gold or silver
We also distinguish between fully collateralized, overcollateralized, undercollateralized, or algorithmic stablecoins, based on the amount of collateral they hold.
In the case of fully collateralized stablecoins, the token supply is backed by an equivalent amount of reserves. Overcollateralized stablecoin reserves exceed the total token supply, on the other hand, the equation is reversed for undercollateralized stablecoins, which hold less reserves than the total token supply. Last but not least, algorithmic stablecoins use an algorithm to maintain their peg by adjusting the token supply based on demand.
Styles of Crypto Portfolio Management: Active vs. Passive
To achieve your financial goals, you must choose one of the following portfolio management styles based on your investment goals and risk tolerance:
- Active crypto portfolio management
- Passive crypto portfolio management
Active Crypto Portfolio Management
Active crypto portfolio management is a hands-on approach to managing your crypto investments. To actively manage your crypto portfolio, you must keep up with everything crypto, including news and narratives, market conditions, and fundamental metrics.
Active portfolio managers make frequent adjustments to their portfolios, trying to capitalize on short-term trends. By actively managing their portfolios, they can respond quickly to changing market conditions and take advantage of price movements.
It’s important to note that active portfolio management and trading aren't exactly the same thing. Trading involves buying and selling assets sometimes within minutes or hours to profit from short-term price movements.
If you're relatively tolerant to risk and want to get involved in crypto investing without trading cryptocurrencies full-time, then active crypto portfolio management may be the right thing for you.
Passive Crypto Portfolio Management
On the other hand, passive crypto portfolio management involves taking a more hands-off approach to investments.
Passive portfolio managers often dedicate less time to investing. They utilize the buy-and-hold strategy, limit their trading activity, and rarely rebalance their portfolios.
Instead of actively researching and analyzing specific market conditions, these investors may simply buy a basket of cryptocurrency assets, or invest only in Bitcoin as the main driving force of crypto movements.
Passive crypto portfolio management can be a good option for you if you believe in the potential of the cryptocurrency sector but don't have the time or expertise to actively research and trade cryptocurrencies.
Crypto Portfolio Management: Where to Start?
If you are still unsure about how and where to start your crypto portfolio management journey, these are the starting steps you need to take:
- Define your investment goal
- Define your risk tolerance
- Develop an investment strategy
Define Your Investment Goals ??
Before investing in the crypto market, it is essential to determine your investment goals. Investment goals can be short-term, such as saving for a down payment on a house, or long-term, such as building a retirement nest egg. Your investment goals will help you decide how much money you need to invest and for how long.
To determine your investment goals, consider your financial situation, lifestyle, and future aspirations. Are you saving for a down payment on a house or a child's college education? Do you want to retire early or build a legacy for your children? Answering these questions will help you define your investment goals.
Define Your Risk Tolerance ??
Risk tolerance is another essential component of crypto investing. It refers to the level of risk you are willing to take on to achieve your investment goals. Risk tolerance is a personal preference and varies from person to person. Some investors are willing to take on more risk for the potential of higher returns, while others prefer to invest in safer options.
To determine your risk tolerance, consider your age, financial situation, and investment goals. Younger investors may be willing to take on more risk because they have more time to recover from potential losses. Investors with a higher net worth may be willing to take on more risk because they have a larger financial cushion.
Develop an Investment Strategy ?
Once you have determined your investment goals and risk tolerance, it is time to develop an investment strategy. Your investment strategy should take into account your investment timeline as well as the aforementioned goals and tolerance.
If you are a young investor with a fairly large income, you can afford to take on more risks, buy multiple assets, make mistakes, and rebalance your portfolio often. It would not be a surprise if high-risk crypto assets comprise a large part of your portfolio. For older investors or those without a large income source, making too many mistakes can be costly in the long run.
When developing an investment strategy, you need to pay attention to:
- Diversification of Risk
One of the most important things to pay attention when creating an investment strategy is the way you diversify your investment risk. A crypto portfolio that is heavily invested in a single digital asset is exposed to a greater risk of loss if that asset underperforms or experiences a decline in value.
A balanced crypto portfolio can help mitigate this risk by spreading investments across several different cryptocurrencies. A good performance from other crypto holdings will cover up the lagging performance from one crypto.
However, it’s important to note that there’s one crypto asset that is usually the driving force behind most crypto upturns and downturns: Bitcoin. If you choose to invest in only a handful of cryptocurrencies, make sure to have some BTC in your portfolio.
- Exposure to Different Market Trends
Each crypto asset has its own unique characteristics and follows slightly different market trends. By investing in a balanced crypto portfolio, an investor can gain exposure to different market trends and potentially benefit from the growth of multiple digital assets.
This allows investors to capitalize on the strengths of different cryptocurrencies and avoid being overly reliant on any single one.
- Mitigating Volatility
Cryptocurrency markets can be highly volatile, with prices often fluctuating wildly within a short period. A balanced crypto portfolio can help mitigate this volatility by spreading investments across multiple cryptocurrencies.
This approach can help to smooth out fluctuations in the market and provide a more stable return over the long term.
- Hedging Against Uncertainty
The crypto market is notoriously unpredictable, with prices often fluctuating due to unexpected events. A balanced crypto portfolio can help investors hedge against this uncertainty by diversifying investments across different cryptocurrencies. Hedging can be done by short-selling a cryptocurrency you hold if you expect a short-term move in the opposite direction, investing in crypto futures, and many more strategies.
This approach can help to reduce the overall risk of loss and provide a more stable return over the long term.
- Maximizing Returns
A balanced crypto portfolio can also help investors or portfolio managers maximize their returns. By investing in multiple cryptocurrencies, they can take advantage of potential gains from each one.
This approach can help to balance out the risks and rewards associated with each cryptocurrency, providing a more stable return over the long term.
Tips for Managing Your Crypto Portfolio
Once you have created your initial portfolio, you will need to pay attention to what’s happening to the crypto industry and beyond in order to maximize your gains while minimizing potential losses. Here are some tips for managing your crypto portfolio:
Keep Track of Your Investments
The first step in monitoring your crypto portfolio performance is to keep track of your investments. This includes the cryptocurrencies you have invested in, the amount invested, the purchase price, and the current value. This information will help you to determine the performance of your portfolio over time.
It's important to review your crypto portfolio regularly to ensure that it is performing well. You can do this on a weekly, monthly, or quarterly basis. During these reviews, you can assess the performance of individual cryptocurrencies in your portfolio, as well as the overall performance of the portfolio. If you do not have the time to do this, employing a portfolio manager might be your best bet.
Set Performance Benchmarks
Setting performance benchmarks will help you to determine whether your crypto portfolio is performing well or not. You can set benchmarks based on market performance, industry performance, or your own financial goals.
For example, if the market is performing well and your portfolio is not keeping pace, it may be time to reassess your investments.
Monitor Market Trends
Keeping an eye on market trends can help you to anticipate changes in the value of your crypto portfolio. By monitoring market trends, you can make informed decisions about when to buy, sell, or hold your investments.
This includes market trends within the crypto industry, but also within the broader industry of finance. Many factors may influence your investments, such as the strength of the stock market, the printing of the US dollar, and more.
Be Prepared to Make Changes
Monitoring your crypto portfolio performance is not just about tracking the numbers. It's also about being prepared to make changes when your investment thesis changes.
This may include selling off underperforming cryptocurrencies or reallocating your investments to take advantage of market trends. It also may include selling off the cryptocurrencies that moved up in order to buy more of the cryptos that didn’t perform as well, if you expect that they will catch up soon.
Rebalancing is the process of adjusting the weights of the assets in your cryptocurrency portfolio to maintain your desired asset allocation. For example, if you originally allocated 50% of your portfolio to Bitcoin and 50% to Ethereum in your portfolio valuation, but Bitcoin has experienced a significant increase in value, you may find that Bitcoin now accounts for 70% of your portfolio. To maintain your desired allocation, you would need to sell some of your Bitcoin and purchase more Ethereum. While some prefer passive portfolio management by using crypto portfolio management software, some others actively rebalance their portfolio.
While this might not be a good exit strategy, rebalancing your crypto portfolio has several benefits, including:
- Reducing risk exposure: By rebalancing your portfolio, you are effectively reducing your exposure to any single asset, which can help to mitigate risk.
- Increasing returns: Regularly rebalancing your crypto portfolio can help you to capture gains from assets that have performed well and reinvest those gains in assets that may be undervalued.
- Ensuring discipline: Rebalancing forces you to stay disciplined and stick to your investment thesis rather than being swayed by short-term market movements.
So, how do you go about rebalancing your crypto portfolio? Here are a few steps to get started:
- Define your asset allocation: Before you can rebalance your portfolio, you need to define your desired asset allocation. This may involve setting specific percentages for each cryptocurrency in your portfolio or using a more complex strategy that takes into account factors like risk tolerance and market trends.
- Monitor your portfolio: Regularly monitor the performance of your portfolio to identify any significant changes in asset allocation. You can do this manually or by using crypto portfolio management software.
- Determine when to rebalance: Decide on a specific trigger for when you will rebalance your portfolio. This could be a specific percentage threshold or a specific time interval, such as every quarter, six months, or any time frame you are comfortable with.
- Execute the rebalance: Once you have identified the need to rebalance your portfolio, execute the trade by selling or buying the necessary assets on your crypto exchanges.
Portfolio Management Tools
Multiple portfolio management tools can help you monitor your crypto portfolio's performance. These tools can help you keep track of your investments, set performance benchmarks, and analyze market trends.
Keeping track of your crypto investments across different exchanges, wallets, and DeFi protocols may be a daunting task. This is where portfolio management tools come into use.
Portfolio management tools empower you to manage your entire portfolio - your crypto, DeFi, and NFTs directly in one place.
The Best Crypto Portfolio Management App
Choosing the best crypto portfolio tracker with unlimited exchange connections will help you manage your entire portfolio, such as cryptocurrencies' real-time data, price history, transactions, etc., in one place.
With over one million users, CoinStats Crypto Portfolio Tracker helps you track your entire crypto portfolio across multiple wallets, trading platforms, and DeFi protocols for free with the click of a few buttons from a single platform. It provides an interactive user interface and responsive customer support, enabling you to set price notifications and create a custom watchlist while keeping your data secure.
Moreover, CoinStats' comprehensive analytics provides users with the latest market insights and technical analysis, including interactive charts, real-time price data, and more. Plus, its in-app tax reporting capabilities enable you to sync your portfolios and generate capital gains, losses, and income tax forms once tax season rolls around!
CoinStats offers the following services highlighted below:
- Web and iOS/Android Mobile versions
- Non-custodial wallet for easily and securely managing your investments
- Cash-to-crypto gateway for buying crypto with your Credit/Debit card
- Crypto swaps for quick crypto-to-crypto trades
- Earn functionality for making your crypto work for you
- NFT floor price tracking for a quick overview of the NFT market
- NFT smart alerts (CoinStats Midas) to help you outsmart the NFT market by keeping track of the “smart money”
- Tax reporting for an easier overview of your investments' tax implications
- Crypto gift cards for surprising your loved ones with a crypto gift.
CoinStats also provides top handpicked news from numerous sources and enables you to set custom alerts based on your preferences.
Connect your portfolio to CoinStats to start your portfolio management journey the right way.
Read more: https://coinstats.app/blog/crypto-portfolio-management/
Text source: CoinStats Blog
