How to Build a Proper Cryptocurrency Trading Portfolio

April 27, 2018

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Coins, Coins Everywhere

When starting cryptocurrency trading, the vast number of coins to choose from can be overwhelming. From the thousands out there, how can you possibly decide which few to keep in your portfolio?

Although there are an endless amount of strategies when choosing coins, there are a few different tactics you should follow to minimize your risk. In this guide, we’ll teach you the tips and tricks on building your portfolio, so you have a more successful cryptocurrency trading experience.

Diversify Across Market Caps

A great way to minimize your downside risk when cryptocurrency trading is to diversify your holdings across different market caps.

In case you don’t know, the market cap of a cryptocurrency is its price multiplied by its circulating supply. Usually, the higher the market cap of a coin, the less volatile it is. A properly diversified portfolio contains a mix of large (>$5 billion), medium ($250 million to $5 billion), and low (<$250 million) market cap coins.

Large market cap coins like Bitcoin and Ethereum may not experience the same 40-50% runs that smaller altcoins do, but their price typically holds better in bear markets.

How you diversify among these classes depends on your risk tolerance. If you think that investing in cryptocurrency is already a gamble, a portfolio that consists 95% of large-cap coins may be appropriate for you.

Maybe you have disposable income, though, that you wouldn’t be too upset losing. In that case, it may be worth putting over half of your portfolio in small-cap cryptocurrencies. Coins in this class have a high probability of being worth nothing down the road, but the ones that end up growing 100-200x could make the risk worth it.

In the end, you should do a serious evaluation of your risk tolerance as well as the amount of money you’re willing to lose and choose your market cap split based on that.

Consider the Industry

Another thing to consider when building your cryptocurrency portfolio is the industry that each coin is targeting. There are a couple of different ways you can approach this.

Diversify Across Industries

Once again, diversity is key. Because blockchain is still young, it’s difficult to predict which sectors will be most accepting of the new technology. To hedge against this risk, it’s recommended that you invest in coins across different industries.

You can group the most popular cryptocurrencies into a few different categories:

Currencies: Bitcoin, Bitcoin Cash, Litecoin
Dapp Platforms: Ethereum, NEO, EOS, Cardano, Lisk
Financial: Ripple, Stellar, OmiseGO, Wanchain
Privacy: Monero, Dash, Zcash
Media: Steem, BAT

These are just a few of the categories in which you can place coins, and you’ll quickly find that there’s plenty of overlap for some of them. The idea of this strategy is to avoid investing too heavily in any one category. If for some reason that category ends up bombing, you don’t want to be left holding the bags.

Double-down on Your Favorite Industries

Even when holding coins across a diverse set of industries, you should consider putting additional capital in the industries that you’re most confident in.

There’s a popular notion in the cryptocurrency industry that only one coin per category will win out. But, that just isn’t the case. Take a look at any other business sector. Delta, American, Southwest (airlines), AT&T, Verizon, T-mobile (cell carriers), Chase, Wells Fargo, Bank of America (financial institutions) – and the list goes on and on. People have their preferences and categories are large enough for multiple cryptocurrencies to survive.

For example, if you think blockchain and file storage is inevitable, you may invest in Sia, Filecoin, and Storj. Or, if you’re a big believer in supply chain projects, VeChain and Waltonchain could take up a considerable amount of your portfolio.

Look for Hidden Gems (if you have the time)

The best coins to have in your portfolio are oftentimes the ones that not many other people have. There’s wisdom in going against the crowd.

Finding coins that haven’t haven’t become popular yet is a time-consuming process, though. It usually involves days (or even weeks) of research and slogging through a bunch of white papers. Even reviewing fifty projects may only lead to one or two that you deem worthy to invest in.

However, these one or two coins could be the key to an uber-successful portfolio. Let’s look at some examples:

Early investors in AntShares (now NEO), have seen ~160,000% return on their investment.
An investment in Bitquence (now Ethos) would have brought you a 4,300% return.
And, your portfolio would’ve grown by almost 4,000% by finding OmiseGO early.

As you can see, there’s immense value in finding coins early. If you have the time to research and enough money to take the risk, it could really pay off.

Cryptocurrency Trading is All Trial and Error

As you build out your cryptocurrency trading portfolio, you’ll probably find other tactics that also fit in well with your trading strategy. Additionally, you’ll most likely try out advice that sucks. You may even find that you don’t agree with the tips listed here.

And, that’s okay. Becoming a cryptocurrency trader is a learning process, and each investor inevitably molds their own unique style as they become more experienced. The important thing to remember is to keep an open, yet skeptical, mind and enjoy the ride.

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