Wouldn't you agree that having a strategic plan gives you a much better chance of success than having no plan?
Professional investors agree that having a strategic plan for diversifying your investment portfolio is essential to investment success. Diversifying your assets helps to lower your risk and hedge against major losses. With this in mind, finding a strategy that is right for you is of utmost importance and there are thousands of ways you can do it.
Here are some questions that you can ask yourself in order to strategically build your crypto portfolio.
How Risky Do You Want To Be?
Aggressive (high risk) vs Passive Portfolios (low risk):
More aggressive portfolios include new companies or startup cryptocurrency projects and may include assets such as Small Cap Coins, ICO's, IEO's, and STO's. With these type investments you are basically betting that this project is going to be wildly successful. However, many of these projects fail leaving you with nothing.
Low-risk accounts would include proven, high market cap type coins including Bitcoin, Ethereum and Stable Coins. Stable coins have no volatility and also give you the potential to earn interest through some Defi companies.
How Do You Want To Spread Your Risk?
There are literally thousands of different types of cryptocurrencies that you can invest in. Diversifying your money across the different "sectors" can help to balance your portfolio. A few different sectors you may consider would be: Exchange Tokens, Utility Tokens, Stable Coins, Non Stable Coins, Decentralized Finance Coins, Protocol Tokens, and Dapps. If one sectors price is falling, while another sector is gaining, you have effectively offset some of your risk.
What Percentage Of Risk Do You Want To Take?
Let's say you have $1000 to invest. It is important to know how risky you want to be with your money. Dividing your $1000 so that it is split across different sectors may help eliminate some risk. If you decide you want an aggressive portfolio, you would put a higher percentage of your $1000 into less proven assets. On the other hand, more conservative portfolios would have your $1000 spread across several different crypto projects and sectors.
What Type Of Growth Do You Want To Have?
Income vs Capital Gains
Do you want to earn income through your crypto investments? Or do you simply take profits as prices go higher? If you are looking to earn income, Decentralized Financing and "Staking" your coins would be the way to go. Several projects allow you to earn interest and "dividends" if you are willing to keep your investment tied with their service. Accruing enough of these assets would help you make steady and consistent income, however in some cases you may miss out on the income growth potential.
On the other hand, investing for capital gains allows you to take profit when the price goes higher. There generally is no consistent payments, and no guarantee that price will go up. However, if price goes up a lot you can pocket the gains.
How Long Are You Willing To Risk?
Long-Term versus Short-Term
Remember that tax considerations should also be included with you are portfolio. For instance short-term trading has higher capital gains tax than long-term buying and holding. Generally, If you hold an asset for more than a year it is considered a long term investment. (Check with a financial advisor. Crypto tax laws are constantly changing) P.S. Token Tax is a great resource to help you keep track of your cryptocurrency transactions.
What Kind Of Risk Do You Want To Take?
Traditional vs Alternative Assets
Remember that cryptocurrencies are basically a brand new asset class that live outside of the traditional financial market (stock market). Cryptos are barely 10 years old and although they are loaded with potential, they are still relatively unproven over the long term. It may be wise to position your crypto portfolio as a part of your larger overall portfolio in order to offset traditional market risk. One suggestion is to have 5- 10% of your portfolio in crypto assets while having the remaining portion in traditional market or gold.
Can I Make A Suggestion?
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Diversifying your portfolio is no easy task. It takes a solid plan, diligence, and time to create success with cryptocurrency. Taking the time to answer diversification questions will help you be on your way to accomplishing the goals and dreams that you have set out for yourself. I wish you the best on your journey!
*This article is not intended to be financial advice. Just a resource to help you think through your strategy for success with crypto.