Today, we will talk about what factors and metrics a beginner should consider before investing in crypto assets. The goal is to give long-term investors an idea of how to create a well-balanced cryptocurrency portfolio that meets their needs and goals.
TABLE OF CONTENTS
Why It Is Important to Diversify Your Investment Portfolio
For many beginners, investing in crypto means hodling BTC in the hope that Tim Draper’s bold price prediction will come true. But, with all due respect to the industry influencers, some of their forecasts might be wishful thinking. So, it’s very important not to put all your crypto eggs in one basket.
Instead, diversify your portfolio. It will help manage potential gains and losses more effectively. Remember that the crypto market is still unstable, especially in times of crisis. So, relying on a single asset may endanger your investment goals.
On the other hand, if you know how to create a diverse cryptocurrency portfolio, you can distribute potential risks across multiple coins. If some of these coins fail to stand the test of time, others will meet or exceed your expectations.
Advantages of Long-Term Investment In Crypto
If you invest in a traditional asset, “long-term” means that you buy some stocks and then wait for years or even decades. The crypto market is much more volatile — in the best-case scenario, you may need a couple of years to reach your financial goal. On the other hand, you run higher risks.
Picking Investment Cryptos: Metrics and Factors to Consider
Before you start building your portfolio, it’s important to select the right cryptos for it. To evaluate the investment potential of a coin, focus on the key metrics and some other factors.
- market cap
- target market
- team and its leaders
- funding and investors
- your risk tolerance level
Now, let’s consider each of them in more detail.
Market Capitalization (Market Cap)
Market cap refers to the total value of all issued coins. For instance, if the price of 1 coin is $10 and the number of issued coins is 10,000,000, its market cap is $100,000,000.
This metric gives you an idea of how popular a coin is. Currently, the champion is Bitcoin, with its impressive market cap of $168,682,803,053. It’s followed by Ethereum ($25,116,784,335) and Tether ($9 216 474 375).
Roughly, all coins fall into 3 big categories:
Such coins have a market capitalization of over $10,000,000,000 (though some classifications set this bar lower, at $5,000,000,000. Anyway, a large-cap coin is a relatively safe investment, but they are few.
The market cap of such a coin is smaller than $10,000,000,000 but is over $1,000,000,000.
These big category includes the currencies with a market cap under $1,000,000,000.
You can check the market cap of any coin on the CoinMarketCap website.
These numbers are important as they reflect the volatility of a coin. The giants like BTC or ETH are rather stable, though they may experience significant price fluctuations, compared to traditional assets. On the other hand, the coins with a small market cap are more sensitive to market moods. Therefore, they are seen as high-risk investments. The balance between these three types largely depends on your risk tolerance.
Your personal risk tolerance strongly affects your investment portfolio composition. So, if you have now idea of how to create a good cryptocurrency portfolio, start with measuring this parameter.
Your risk tolerance depends on your psychological profile, lifestyle, financial goals, age, time available, and other things.
Why is it important? Imagine that you are a single man under thirty. You have a well-paid job and see investing in crypto as gambling or fun. Even if you lose this “fun money”, it will have little impact on your financial health. In this case, you can invest everything in small-cap coins that look promising.
A middle-aged family man who invests to buy a bigger house and pay for his kids’ college, has less time and lower risk tolerance. This man, too, sees investing in crypto as gambling, but he is aware of all attendant risks. It makes him select coins with caution. In his portfolio, large-cap coins take up over 80%, and it’s a smart decision.
In fact, many people have moderate risk tolerance. If you belong to this category, you can invest in all three types, evenly distributing your money between them.
Remember that, though the market cap is helpful, it’s not the only indicator of a coin’s investment value. There are some hidden gems among small-cap cryptos that may yield high returns sooner or later.
To spot these gems, you should focus on several important criteria. The first of them is utility.
To understand if the coin of your choice is going to survive and succeed, answer the question “How useful is this coin, potentially?”
First, make research to see what issues the project addresses, and if these issues are important for many people. For instance, Bitcoin seeks to solve the problems of the centralized banking system and make payments direct, fast, cheap, global, and secure. Ethereum provides a platform for creating and running dApps, and it could change the way many sectors work. Obviously, the bigger the cause, the more potential the coin has.
On the opposite, an overhyped shitcoin is useless, at a closer look. Instead, it thrives on a dream of fast money and feeds investors with empty promises and visions of Lambos.
One of the best strategies for building a portfolio is to select the coins that seek to improve the industries/activities you support.
Say, you believe that very soon most people will be working remotely, or pay more attention to recycling, or take better care of their health. Ask yourself what new needs this shift in lifestyle will develop and what new challenges it will create. For any industry, there are several game-changing cryptos. Some of them will be the winners. Others will die. Your task is to determine which is which, at an early stage.
So, if you have a deep understanding of some industry, use this knowledge to pick the right coin for your portfolio. Note that it doesn’t need to be the leader of the list — a crypto ranked 10 may still bring you good profits if it offers unique benefits.
Technology: Challenges and Solutions
Another important factor helping to assess the investment value of a coin is the technology this coin stands on. Does it use a public or private blockchain? Is it a PoS or a PoW system? If it’s a Proof-of-Work system, what hash algorithm does it apply? How these features may impact the development of the network and the adoption of its crypto?
Explore the advantages and limitations of the core technology to have an idea of what challenges it faces or will face soon. Check if the team is doing something to overcome these challenges. For example, Ethereum will apply sharding to solve the problem of scalability, common for many popular blockchains. Bitcoin’s approach to this problem is the Lightning Network.
Why these issues are important? Every tech has its pros and cons. At some point, the market may vote for a specific type of technology. This shift may affect the value of your investments positively or negatively, depending on which tech they use.
Team and Advisors
A good team is essential. If it includes experienced developers, marketers, UX designers, and other necessary specialists, it’s half the battle. Therefore, visit the project website to see who stands behind it. Google these guys to see what they had been doing before they joined the startup. Explore their social media pages and blogs to understand what they contribute to the project and if they sound enthusiastic about it.
Also, check if any crypto influencers support the project and what reasons they give. It could be Bitcoins pioneers and blockchain advocates, prominent investors and economists, famous authors, financial journalists and podcasters, well-known developers. If they give good reviews, it’s a signal.
Funding and Investors
Funding may be a good indicator of what the team is capable of. After all, ideas and technologies may be great, but if there is no money to fuel the project, it will die off.
Also, it’s important where this funding comes from. When it comes from well-known investors who know how to make money work, it’s a good sign. It means “whales” trust the team and you can follow their example, on a smaller scale. Of course, generous funding by prominent investors and companies does not guarantee the coin will go “to the moon”. We all remember the stories of Libra stablecoin and TON platform: both projects attracted a lot of investment but then terminated for regulatory reasons.
Crypto Portfolios: Examples
Below are three crypto samples for low, middle, and high risk tolerance investors.
Low risk portfolio: BTC (80%), ETH (7%), EOS (5%), Tezos (5%)
Moderate risk portfolio: BTC (50%), ETH (30%), EOS (5%), Tezos (5%), BCH (10%)
High risk portfolio: BTC (35%), ETH (35%), EOS (15%), Tezos (15%)
How to Create a Cryptocurrency Portfolio: Final Thoughts
Investing in crypto is still rather risky, but it may be exciting, too. It’s a new asset that can bring you a lot of surprises.
If you know how to create a balanced cryptocurrency portfolio, good surprises are likely to prevail. Hopefully, this short guide will be helpful here!