How to Build a Well-Balanced Crypto Portfolio
Hello everyone, we hope you are well. Today we're going to explain how we would go about building a balanced crypto portfolio starting from zero. We'll take the sum of 10,000 dollars as an example. This is a question that is asked a lot by beginners and so today it's time for us to present to you a type of portfolio that we believe is balanced and most importantly we're going to present to you the reasons and philosophy behind each of our choices.
Are you ready? Let's go!
The main investing principles
Before starting to build the portfolio we would like to remind you some basic principles to invest sensibly in crypto currency:
1 - Invest for the long term. Optimally, in projects that have a real utility, assuming that we will create our portfolio and that we will not touch it again for at least 5 years. The crypto-currency revolution is just beginning and it will certainly take years before it matures. So we have to be patient and also accept the fact that we are not here to trade on the short term. Trading can be a winning strategy in the short term but in this article we are presenting a long term strategy. We are here to capitalize on the big long-term trend. Our main hypothesis is that the overall size of the crypto market will grow at least 20x or even 50x in the next 5 to 10 years.
2 - We only invest money that we are willing to lose completely. So that means that in this hypothetical situation, we have 10,000 dollars to invest in crypto and that 10,000 dollars is not all our money. Yes, we are betting that this investment will certainly increase tenfold over 5 or 10 years but in exchange, we also accept the risk that if we are wrong, in the worst case scenario, we can also lose the entire 10,000 dollars.
3 - We invest at the speed of our understanding of cryptos. This means that we take the time to do our own research to form our own convictions about each crypto we buy and that we don't invest in a crypto we don't believe in just because someone recommended it to us.
4 - Finally, we invest with the objective of maximizing our potential gains while limiting the risks. Unfortunately, there is a law that we cannot really escape, which is that the higher the potential return on investment, the higher the risk. We consider cryptos to be a risky investment with high potential gains. So it's not worth tempting the devil by choosing to invest only in the riskiest cryptos.
Now that we've seen the basics, let's get down to business.
The pyramid structure of the portfolio
We believe that the most reasonable way to invest and achieve a balanced portfolio is to represent it as a pyramid of risk and potential return.
The bottom of the pyramid will be the part that should be the most solid and therefore, be the least risky investment in which we will place the largest part of our portfolio. Then, the higher up the pyramid we go, the more we invest amounts lower than the base and therefore choose riskier cryptos. A possible distribution would be for example:
- 40% in the least risky investment
- 30% in slightly more risky and speculative cryptos
- 20% in even riskier cryptos but with very high potential gains
- Finally, 10% in very risky cryptos with very high potential gains
We could therefore have the following breakdown:
- 40% BTC
- 30% ETH
- 20% altcoins high/mid cap
- 10% altcoins low cap
Why 40% in BTC?
To understand why we are making this choice, it is important to understand the big difference between BTC and all other cryptos. Bitcoin, to our knowledge, is the only crypto that cannot be stopped. There are no companies behind BTC and no foundations. Unlike BTC, all other crypto-currencies should be seen as investments in companies or teams. The other cryptos are like if we were venture capitalists and decided to invest in a number of startups and innovative projects. We are not saying that one is good and the other is bad but we think it is important to be aware of the difference between the two. Bitcoin does not have a worthy competitor and may never have one. BTC is the first open, decentralized and incorruptible registry. By the way, we really invite people who don't see why Bitcoin is the most important invention since the creation of the Internet to study it further, and we assure you that spending ten hours studying it will not be a waste of time.
Why 30% in ETH?
Let's move on to the second floor of our pyramid. For us, this second floor must be linked to an investment in the second revolution that has begun to prove itself: decentralized application platforms. Indeed, these have a great chance to become the automated machines that will run the great applications of tomorrow's Internet. We believe that smart contracts will be used almost everywhere in the future. Will Ethereum remain the biggest platform or will it be dethroned? We can't say for sure. However, mainly because of our budget of 10,000 dollars, we are forced to make a choice and for us the most sensible bet is to bet on the platform that is already the leader in terms of users, number of developers and adoption. Ethereum is therefore the strongest today in its category.
Why 20% in high/mid cap altcoins?
This is where it starts to get interesting. We recommend choosing a selection of altcoins that already have a medium to high market cap, i.e. altcoins that are already in the top 100 crypto market caps. These projects have already proven their usefulness to the crypto ecosystem and we therefore recommend choosing the projects that have the best chance of being key players in the crypto industry in the next 5 to 10 years. Basically, projects that the rest of the crypto ecosystem can't really do without and therefore should become exponentially more and more useful as the crypto industry grows. Chainlink and The Graph are two candidates. ChainLink because other blockchains need to integrate information from the outside world and TheGraph because decentralized applications need to leverage data from different blockchains.
Why 10% in low cap altcoins?
We would choose a selection of altcoins for the top tier of our pyramid that are not yet established in the market. That is to say, altcoins that are outside the top 100 but have a great chance of exploding in the next few years due to their potential usefulness or revolutionary character. And there it is much more complex because it is necessary to determine the cryptos that have the most revolutionary aspect when there are several thousand cryptos on the market. So these are much riskier bets that may well come to nothing but it is also the kind of investment that can potentially make a x100 or even more if we have chosen the right projects. So the question to ask is: can this crypto, if it succeeds in its bet, revolutionize something in the industry? There are quite a few potential candidates and we would pick Ultra, which is looking to become a sort of decentralized Steam and is evolving in the gaming world.
Summary and comments
This gives us the following breakdown:
- 4,000 dollars in BTC
- 3,000 dollars in ETH
- 1,000 dollars in Chainlink
- 1,000 dollars in The Graph
- 1,000 dollars in Ultra
We have therefore invested most of our capital in BTC and ETH, which have already proven themselves.
Is this distribution perfect? Certainly not, and everyone has their own optimal distribution. That said, the allocation you have proposed today limits the level of risk by trying to optimize the famous risk/reward ratio. Only time will tell if this allocation was a wise decision. Anyway, we hope this article has helped you understand how it is possible to build a crypto portfolio with a reasonable level of risk while still being able to expect fairly high gains.
Disclaimer: All products and projects listed in this article are not endorsements and are provided for informational purposes only. This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
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