High volatility is an important feature of cryptocurrency market. Even the most stable coins change their price constantly. Sometimes, daily currency fluctuations reach 20–30%! In such conditions, lots of traders stopped investing in one particular cryptocurrency and switched to cryptocurrency portfolios. What do such portfolios look like? How do they differ from traditional investment tools? How to from a cryptocurrency portfolio? Let's investigate it in this article.
Cryptocurrency portfolio is an aggregate of investor's cryptocurrency assets which he has gathered together for some purpose. It's obviuos that this purpose is to make money from increase of the rate of chosen cryptocurrencies.
In fact, cryptocurrency portfolio is a kind of investment portfolio. And major logic of formation of both portfolios is to diversify own investments. It means that money should be invested in various assets in order to decrease risk of losses after their price decreases.
If you invest 1000 dollars in one asset, you'll lose all your investment in case of decrease of its price. And if you divide your investments into three, five or even ten assets, you'll lose only that sum which you've invested in the failed asset. Or you'll mitigate your losses thanks to profit from other assets.
But there are some distinctions between cryptocurrency portfolio and conventional investment portfolio:
High volatility of cryptocurrencies allows to gain profit even after minimal initial investments. The main thing is to form the cryptocurrency portfolio in proper way. Nowadays there are about 1000 various cryptocurrencies but it's obvious that not each of them has good investment prospects.
We've already made it clear that main rule of balanced cryptocurrency portfolio is a high level of diversification. Experienced traders advise to add from three to nine cryptocurrencies into the portfolio. They specify major criteria of selection.
According to experts, the main rule of cryptocurrency portfolio formation is a proper proportion between famous and expensive, and cheap but prospective cryptocurrencies. There are lots of properly operating investment schemes.
It's better to use the so called conservative portfolio for novices. It's less risky hence more safe for investor. It's formed in the following way:
Using such scheme, you minimize investment risks because you invest major part of your capital in proven assets. Only 5% of your investments consist of risky projects and you won't lose a lot in case of their failure.
So called agressive portfolio is good for experienced investors. Proportion of proven cryptocurrencies is decreased in it and ICO investments which represent a very popular but very risky tool of cryptocurrency market are added:
Many investors prefer to use Buy & Hold strategy. It's simple: you have to buy cryptocurrencies with prospect of long-term increase and to hold them until their prices reach their peak values.
Experts state that now it's worth investing in so called "protocol coins". There is a good reason to believe that cryptocurrencies will integrate into real economy alongside with active development of blockchain technology.
Those cryptocurrencies which offer not only another coin but new model of economical interaction on the basis of blockchain are developing rapidly. They include NEM, NEO, EOS, IOTA and others.
Most of traders advise to invest in the most popular coins which are in great demand among users. Such tokens are included in top twenty of world cryptocurrency rating.
But pay attention: while choosing a cryptocurrency, you need to look not up to cryptocurrency exchanges ratings (they often overprice the tokens) but up to information from reliable sources. For instance, it's convenient to use analytics of CoinMarketCap.
The easiest way is to create a portfolio using cryptocurrency exchange. Actually, the list of your assets in the exchange is exactly your investment portfolio.
But it's much safer to keep your assets in cryptowallet. Specialists advise to use hardware wallets from Trezor and Ledger. Just choose cryptocurrencies for your portfolio and choose a multicurrency wallet supporting your chosen coins.
If work with your investments using cryptocurrency exchange is more familiar to you, it's a good practice to use additional software. For example, Satoshi Pie software will help you to distribute money between your assets and will keep track of cryptocurrency volatility in real time.
Forming cryptocurrency portfolio, you should be maximum cautious and try not to make typical mistakes of unexperienced investors:
Is it really necessary to form a cryptocurrency portfolio?
Of course, it is.
In conditions of high volatility of assets, investment should be diversified. And cryptocurrency portfolio is the best way to make money from cryptocurrency rate fluctuations, to minimize financial risks and to understand how cryptocurrency market works.
Our calculations used the exchange rate of the cryptocurrency from December 2016 to January 2017 year, according to CoinMarketCap.