For a new crypto investor, figuring out which coins or tokens to buy can be an intimidating experience. There are thousands of projects to choose from and with so much noise in the crypto space, how does an investor build a balanced portfolio?
Research each potential investment
Building a balanced portfolio begins with an investor doing their due diligence and making sure that each investment is thoroughly researched. This helps avoid any possible scams, pitfalls, or herd behavioural tendencies that could otherwise hurt a portfolio. Solely relying on the research of others isn’t a good idea because it can be difficult to tell if the person providing that research has a conflict of interest or if they’re being completely truthful about the fundamentals of a project.
Understand risk and reward
Another important step in building a balanced portfolio is to understand the risk and reward levels of various crypto assets. Broadly speaking, cryptocurrency is a risky investment, but the level of risk varies between different coins and tokens. When building a portfolio, an investor should first consider their appetite for risk and how to manage it. This will help when breaking down where their funds are going to be allocated. Lower-risk crypto portfolios tend to have larger positions in bitcoin and stablecoins, while higher-risk portfolios may contain more altcoins and NFTs. It’s essential that an investor learns about the risks associated with any crypto asset. A portfolio full of meme coins may result in nice gains every now and then, but the potential for huge losses is much greater than with a balanced portfolio. Creating a balanced crypto portfolio means splitting investments between high, medium, and low-risk assets.
The role of stablecoins when building a balanced portfolio
Stablecoins have been in the news lately for all the wrong reasons – just look at UST. Despite having ‘stable’ in the name, stablecoins aren’t 100% risk-free. That said, including a reputable stablecoin in a portfolio helps for moments when liquidity is needed or when an investor needs to rebalance their portfolio. Stablecoins are useful for locking in gains or quickly exiting a position. They can also help a portfolio sustain some of its value during bear markets.
Don’t over-invest
At the end of the day, no matter how bullish an investor is on crypto in general, they should never invest more than they’re willing to lose. Having a balanced crypto portfolio is great but it shouldn’t come at the expense of an investor’s other financial obligations. Over-investing in an asset can also lead to stress and anxiety – two emotions that can greatly affect an investor’s ability to make good decisions.
