Why you should allocate diversified assets to your portfolio
Creating a truly successful portfolio takes time and experience. Still, it’s safe to say that despite numerous tips and tricks, the only best thing to do with your crypto portfolio is to diversify it.
This means investing in more than Bitcoin and Ethereum. These two cryptocurrencies are the most stable, so why choose anything less safe in regard to something more powerful?
Investing as a crypto user means being aware of the game’s rules at all times. Sure, depending on the price of Bitcoin from Binance, you can decide you don’t need another coin because this is the most valuable on the market and has proven stable over a long time.
However, like any other crypto asset, Bitcoin is extremely volatile, an aspect that gets more intense as the coin is more famous. So, when the price drops, the impact is pretty significant. On the other hand, if you also invest in altcoins, your portfolio will take the shock better. Here’s why.
Each crypto portfolio has a unique risk tolerance
A portfolio’s risk tolerance is based on a few things because even though crypto is decentralized and blockchains are not controlled by governments, investors’ sentiments can change depending on a series of events. For example, the crypto market is closely tied to the stock market, and any market swings, economic circumstances and regulations going on can affect crypto prices and trends.
Analyzing your risk tolerance is essential for making the next step safely. There are three types of investors in regard to risk tolerance:
- Aggressive ones are usually not afraid to put everything on the table to get the most out of their crypto
- Moderate users don’t want to lose too much of their coins because they want to grow them by weighting opportunities and risks
- Conservative investors never risk their investments and are approaching a short-term investment strategy
While there’s no way of saying which approach is better, we can advise beginning crypto investors to be moderate and allocate funds properly by adopting a long-term strategy. There are numerous ways to organize your crypto funds, such as the following method.
The 60/40 portfolio allocation strategy
Bitcoin maintained a relatively thriving development over the years, despite some moments of high volatility. But adding it to any kind of portfolio is surely to add significant value to it. For example, after a few trials, investors concluded that adding Bitcoin investments to a 60% stocks and 40% bonds type of portfolio, with an average between 1% and 2.5% of BTC, will translate with similar annual returns over a period of a few years.
Still, this strategy is leveraged only by buying and holding Bitcoin, but it provided benefits even when Bitcoin’s price increased or fell considerably. That means that a crypto asset can provide real value to a portfolio of stocks and bonds despite volatility.
Regarding only crypto portfolios, Bitcoin and its competitor, Ethereum, are added to balance the whole system. The most promoted type of portfolio contains the following elements:
- Stablecoins backed by fiat currency that are less volatile but don’t ensure high returns
- Governance tokens provide investors the ability to govern a particular system and have a share of the revenue
- Security tokens are similar to stocks and bonds and are issued by firms, allowing for transferred ownership rights to the user
- Utility tokens ensure different types of utilities that apply in the real world
- Crypto financial products, like MNFTs and insurance products
Balancing a portfolio means investing in bigger cryptocurrencies like Bitcoin and Ethereum, which are sure to enhance high returns but are volatile, and stablecoins, which are safer, but not that profitable. By implementing this strategy, anyone can face high volatility but still get a certain level of returns, making it easy to transform crypto investments into passive income for the long term.
Still, managing the portfolio constantly is more important
Of course, properly allocating your assets in the first place is crucial, but what keeps the portfolio alive and ensures your real value is constant monitoring. This includes rebalancing it when the market shifts, so analyze it and detect deviations to rearrange them in a profitable way.
At the same time, tracking the market by watching historical returns through an analytical tool will help you have better expectations. It’s also important to read the news on crypto and follow the journeys of some of the most important decentralized companies and exchanges to be prepared for the next step.
For example, many were not ready for the FTX collapse, which left a lot of investors without their money. Experts reminded people that investing in crypto means being prepared to lose money, which is indeed true, considering volatility concerns and lack of regulation.
Investors should expect more crypto regulation on the way
Although cryptocurrency and blockchain work through decentralization, governments are trying to introduce a broader regulatory framework for these assets as a way to protect investors and add more taxation. Bitcoin, for example, is closer to regulation, being the first crypto on the market and considered suitable for global adoption.
Regulations might impose some limits to investing in cryptocurrencies, which is why people should diversify their portfolios. Having as many decentralized and high-tech coins in your portfolio will ensure long-term income without the government’s involvement.
At the same time, regulation might pave the way to global acceptance, which will get Bitcoin to be easily accessed by anyone. Many users from different countries are trying to make it easy to use Bitcoin as a way to help people have control over their money and also a chance to earn income, especially in developing economies.
Africa, for example, found a way for people to buy and sell Bitcoin without an internet connection, requiring people to own only a regular cell phone with a SIM.
A diverse portfolio ensures long term success
Allocating diverse crypto assets to a portfolio ensures safety and long-term success to leverage income. The perfect portfolio includes cryptocurrencies with high risk and increased return that balance coins with less value but more stability.
