Guide to diversifying and maintaining a crypto portfolio

There are various types of tools/platforms that help investors competently organize the diversification of their crypto portfolio. It is important to decide whether to go it alone or enlist the help of professionals. It is worth remembering that in the world of finance, a mistake in the correct diversification of assets can make you bankrupt. The complexity of distribution concepts lies in their implementation. Can you calculate the diversification factor for your portfolio?

One example would be the use of solutions from Macroaxis and a crypto exchange with a large selection of digital assets. Armed with these two tools, you can manually decide which of the 6,000 crypto tokens to include in your crypto portfolio and run hundreds of portfolio simulations daily to find the sweet spot you want; and then execute those trades on the exchange. In addition, you can connect bots to perform routine tasks, but the final choice will still have to be made by you.

Another example would be using OSOM’s Crypto Autopilot .

OSOM keeps track of crypto assets that can be invested in. The choice is based on a variety of indicators among which we can distinguish the type and quality of the project, technical indicators, market capitalization and liquidity. In total, there are over 200 crypto assets in the updated list, of which only a few dozen are recognized as suitable for investment, and no more than 20 fall into the final diversifiable portfolio. The algorithm looks at price data for crypto assets, compares their movements separately and relative to each other and offers a balanced crypto portfolio for the next 2.5–5 years every 15 minutes. The data is then transmitted via API to the exchange to execute buy/sell orders.

The product is designed to invest in a diversified crypto portfolio created by the algorithm. The goal of the algorithm is to minimize drawdowns (when your portfolio assets underperform and lose value) by looking for assets with little downward volatility. The algorithm does not invest in assets whose prices move in the same way; this achieves the maximization of portfolio diversification.

The results for 2021 outperformed Bitcoin’s hold strategy.

The structure of the crypto portfolio.

The structure might look like this:

  • Versatility: Understanding the risks and risk profile for crypto as an asset class.
  • Knowledge of the diversification of this asset class.
  • Understanding the different types of crypto assets.
  • Choice of asset categories.
  • Selection of assets.
  • By popularity.
  • With research.
  • Asset selection frequency.

Understanding the risks.

Start by understanding the risks and risk profile of crypto as an asset class.

“Risk” is the chance that your investment may be worth less at the theoretical “exit” time than what you originally invested. You can also say that risk is the chance that your investment will be worth less than what you invested, plus what you didn’t earn by investing money in something that didn’t make a loss (”opportunity cost”). There are many reasons why your investment will pay off in the future.We call these different “types of risk.” The types of risk are different for each asset.

Some of the things to consider for crypto might be:

• Cryptocurrency market: the risk that the price will fall when you want to exit. And since cryptocurrencies are very volatile, this risk can be greater than in other assets.

• Regulation: governments can ban or make it difficult to use cryptocurrencies, which will negatively affect the price.

• Technological: smart contract can be hacked.

• Counterparty (crypto-exchange): where you hold cryptocurrency, will go bankrupt and will not be able to return your money, or may restrict your access to your account with your crypto.

Different types of asset classes have different risks associated with them.

Cryptocurrency and smart contracts are subject to technological risk that stocks do not have. Stocks offer a different risk profile than bonds because, in the event of bankruptcy, funds are paid out to creditors first, not shareholders. Some risks also lie with you. Each person has their own risk tolerance threshold. Can you trust yourself not to sell an asset when the market is down 90%? This is a common occurrence in crypto, if you are not ready for this, then it would be wise to limit investments in such an asset.

In addition to the risks listed above that you need to consider for each asset, here are a few questions to help you determine the right combination of “risk types”:

  • How long do you plan to invest? What is risky (probability of losing money) in the short term may not be so risky in the long term. Assets can be very volatile on a daily basis, but often rise in the long run.
  • How stressful is it for you to see your portfolio lose 30% per day (even if you plan to invest that money for 30 years)? If your portfolio is causing you to make mistakes because you can’t sleep at night, then you need a different portfolio.
  • How much money will you need at the end of the investment period and how much can you invest? The risk to you here is not to achieve this goal.
  • How much you invest compared to how much you need at the end will show you how aggressive (i.e. take risk) you need to be with your investments.
  • If you find that you cannot stomach the required level of risk, you need to invest more capital or adjust your goals.
  • How many “total losses” can you afford? If one of your exchanges goes bust and you can’t get your money back, or one of your investment predictions goes blank.

By deciding how much of it you can digest and how likely it is, you will know the maximum you can put into one asset.

For example:

  • Bank accounts are insured up to 100,000 euros, so you can safely invest up to 100,000 euros there.
  • But the future of Bitcoin is uncertain, and if you cannot afford to completely lose more than 2% of your total portfolio, then invest no more than 2% in Bitcoin.

Various types of crypto assets.

You must understand that “crypto” is a vague term. Just as “real estate” includes both apartments in New York and retirement homes in Thailand, there are quite a few different things in the overall crypto ecosystem. There are different types of crypto assets that you can put in your crypto portfolio, just like there are different types of stocks that can be included in a stock portfolio. The main categories of cryptocurrencies are as follows:

Store Value:

A bitcoin digital asset has no intrinsic value or utility, but people buy it the same way they buy gold or diamonds because they want to invest in the event something happens. Bitcoin undoubtedly has advantages over gold and diamonds when it comes to logistics, but in essence they have about the same useful value.

Infrastructure (infrastructure):

Like Ethereum, LUNA, Solana. They have utility in the sense that you need to spend ETH in order to use the Ethereum blockchain. Investing in ETH, SOL, LUNA means that you believe that the price will rise because more people want to use these platforms.

Crypto App’s (tokens of centralized or decentralized crypto projects/DAO):

Like UNI, COMP, BNB. These are the “tokens” of companies or decentralized autonomous organizations (DAOs) issued on the blockchain. These crypto projects may or may not be doing something with the blockchain, but they usually do. These tokens are issued on the “infrastructure” blockchain (ETH, LUNA, BSC,…). Sometimes a crypto project’s token will also be an “infrastructure” token if the application has released its own blockchain with a very narrow use case.

Because there are different types of crypto assets, each has a different risk profile:

• Bitcoin, like gold, is worthless and depends on how we collectively determine its value (market risk). It can also be taken out of existence (regulatory risk), subjected to a 51% attack that compromises reliability (technical risk), your wallet can be hacked (loss risk), or your exchange account can be hacked (counterparty risk).

• Ethereum may be worthless if something more useful comes along (market risk). As a platform, it has less regulatory risk than Bitcoin, but is still possible. Technical risk is also present, as are the risks of loss and counterparty.

• Centralized or decentralized applications are like a business, and each token needs to be tested individually to understand what they offer (strong reputation and barrier to entry, strong technical security, governance rights or not, fee sharing or not…).

Choice of asset categories.

  • 80% infrastructure tokens (Infrastructure).
  • 10% Store Value assets.
  • 10% crypto app/DAO (Crypto App’s) assets.

This type of portfolio diversification would make sense if you had the following investment thesis:

  • You think that this new “crypto” infrastructure will replace the current internet infrastructure and be just as revolutionary. You want to have as many contenders as possible to make sure you own the TCP/IP protocol of the future. The good thing is that whatever the “killer app” is, you don’t care, because you still own the basic infrastructure of various crypto projects.
  • As for “store of value”, since it’s about as (ir)rational as owning gold, and most experts recommend spreading 5-10% on gold, so it’s a rational choice.
  • Some of these apps (like Metamask) are really cool and work really well, they could be the next Google or Facebook in their field. Historically, it has been profitable to own the most efficient technology companies, so it is wise to choose a few of them. However, it is very difficult to choose the winners, so we can limit their share in the crypto portfolio.

Selection of assets

You know your risks, you know your categories. Now you need to research each asset to decide what to invest in. There are two ways to do this: selection by popularity or selection through research. By popularity, not the best choice, but you can take the most popular coins in each category. A bit like “index” investing: you take 2, 3 or 10 of the most popular coins. For example:

  • Store Value coins: BTC and XRP;
  • infrastructure tokens (Infrastructure): ETH and BNB;
  • crypto applications (Crypto App’s): UNI and THETA.

You can easily make a top 10 because cryptocurrencies can be split, so you can buy 1/200 Bitcoin and 1/40 ETH. Thus, placing even small amounts is an effective strategy for diversifying a crypto portfolio. This is how most people start their crypto investments. Choice with research. One way to do research could be to use an analytics platform like Messari.io .

Here are some things to look out for when researching various crypto projects:

  • Project Goal: If you don’t understand the meaning, it might not be worth it.
  • Developer Activity: If no one is working on it, it’s not going anywhere.
  • Online Activity: How many people are actually using it? Ethereum has 100 million active wallets.
  • Technology: has it been hacked? Has the smart contract been verified?
  • Finance

Market cap: This will give you an idea of ​​how popular it is because even when doing research you don’t want to invest in something that absolutely no one is watching.

Liquidity: This doesn’t tell you anything about the project, but it gives you an idea of ​​whether you can sell your position if need be.

Volatility: price goes up, price goes down. How much? Has the project recovered from its all-time high and all-time low? Can you support the volatility?

You may not have much time for research, so you can also use a mixed strategy.

  • Take the 2 best coins for “store value” (Store Value).
  • Take the top 3 coins in “infrastructure” and do a little research on another 7 of the top 200 coins. Today, after #200 by market cap, it is rare to find very liquid tokens.
  • For Apps, buy the DeFi index and do a little research to find 3 to 5 others that are not DeFi in the top 200.

DeFi is currently the most common use case for crypto applications on the blockchain. Using an index will save you research time and ensure your diversification.

Tracking your crypto portfolio.

You have now bought the assets you wanted and that fit your investment thesis. You also have an idea when to sell. And you plan to periodically revalue your crypto portfolio.

Don’t keep all your assets in one place. You will have some on ETH wallets, some on BTC wallet, maybe some other cryptocurrency on a couple of reputable exchanges.

You can track your cryptocurrency portfolio in the cryptocurrency tracking app. This allows you to track the balances of your wallets and exchanges in one place. In the OSOM app , it is possible to track the balances of your ETH wallets, BTC wallets and all major crypto exchanges. Other popular options include Blockfolio , delta.app , Zerion.io .

Whether you chose an asset based on its popularity, through research, or a combination, you have made a choice that is valid now. But events are moving fast and you will have to reconsider these choices. Your crypto diversification strategies should always be tailored. What is popular today may not be popular tomorrow, and what works today may not work tomorrow.

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