Set Goals and Determine Your Risk Tolerance
As mentioned, investing in crypto is anything but a walk in the park, given the volatility of the market.
When building a crypto portfolio, determining your investment goals and risk tolerance is a critical first step. Understanding your investment goals will help you decide which type of cryptocurrencies to invest in and how much to allocate to each project or coin. Simply put, determining your risk tolerance will help you decide how much risk you are willing to take on for the potential reward.
Therefore, you need to set investment goals while considering your financial situation, time horizon, and overall investment objectives.
Ask yourself questions such as: What is the purpose of my investment? How long do I plan to hold this cryptocurrency? Am I investing for short-term gains or long-term growth?
Simply put, establishing a clear understanding of your investment goals will help you choose the right cryptocurrencies for your portfolio.
Choose the Right Proportion To Invest
Once you have your goal set and are ready to make a move, be sure to allocate no more than 5% of your total investment portfolio. This will help you minimize the potential risk of losing all your investment in one fell swoop.
Established crypto investors use various scenarios and techniques when picking the coins they want to hold in their portfolio. However, as a beginner, Bitcoin, Ethereum, and top-ranking alternative coins (altcoins) will make up a good portfolio.
Three popular scenarios you can consider include:
- 100% BTC
- 60% BTC, 40% ETH
- 50% BTC, 40% ETH 10% ALTs
Each of these scenarios has its unique benefits and risks, and choosing the right one for you will depend on your investment goals, risk tolerance, and portfolio complexity preferences.
Easy Street: A 100% BTC Portfolio
The 100% BTC scenario is the easiest and arguably safest portfolio to build. If you are just getting your feet wet in the crypto space, Bitcoin is the best option, as it is a tried and tested cryptocurrency that pioneered the entire crypto and blockchain revolution. When the crypto market moves, Bitcoin tends to lead the way. However, if you’re curious about other secure investment options beyond Bitcoin, check out our guide on the safest crypto to invest in to diversify while keeping your investments safe.
This scenario is recommended for beginners who want to get started with cryptocurrency investing but are not yet ready to venture into altcoins or even Ethereum. This portfolio is considered the least risky, yet it provides a potential for steady long-term growth. However, this scenario is also the most limited, with all investments focused solely on Bitcoin.
The New 60-40: 60% BTC and 40% ETH
After you have conducted some due diligence on Ethereum and researched the fundamentals that make Ethereum a good investment, you can now look into this portfolio with a 40% allocation to Ether and 60% to BTC.
This scenario is a slightly more complex portfolio. It is a good move for beginner investors who are willing to take on a bit more risk in exchange for potentially higher returns.
Since its launch, Ethereum has grown to become a foundational blockchain for developers looking to build decentralized applications, tokens and NFTs. Some time back, demand for the Ethereum blockchain had skyrocketed so much that the network’s transactional fees shot through the roof.
By including Ethereum in the portfolio, investors can benefit from the growth potential of both Bitcoin and Ethereum. However, the addition of Ethereum also adds complexity to the portfolio as Ether is more volatile than Bitcoin.
Diversification: 50% BTC 40% ETH and 10% ALTs
This scenario is the most complex portfolio of the three scenarios, and for a good reason. Adding a 10% allocation to altcoins is a risky move as most altcoins are more volatile than Bitcoin and Ethereum. As a beginner, the best move is to choose altcoins in the top 10 categories of coins based on market capitalization and trading volume.
You can choose from established altcoins such as Cardano, which has been building its blockchain platform since 2017. At the start, Cardano was priced at about $0.02 per ADA and quickly experienced a price rally to a price of $1.33 in January 2018.
If you had invested $100 in Cardano at the time of its launch in September 2017, you would have been able to purchase around 4,166 ADA at a price of $0.024 per ADA. And if you had sold your ADA at its peak price of $1.33 in January 2018, your $100 investment would have been worth around $5,541, representing a gain of over 5,400%.
Other altcoins that you can look into include Polkadot, XRP, Solana and Litecoin. However, be sure to do in-depth research before investing in any of these altcoins.
Conclusion: Only Invest What You Can Afford to Lose
To wrap up, investing in crypto can be an exciting and potentially lucrative activity, but it is not without its risks. To become a successful crypto investor, be sure to do your research, stay up-to-date on market developments, and develop a sound investment strategy that aligns with your investment goals and risk tolerance.
Some of the main points include diversifying your portfolio based on your risk tolerance, setting goals and plans for your investment, staying up to date and conducting research on the projects you are investing in.
You can also use tried and tested investment techniques such as dollar cost averaging rather than investing large sums of money. This can help you manage risk while growing your portfolio in the long run.
