Good portfolio management can help crypto investors to safeguard their investments from risk and optimize them for returns. Learn how diversification, budget allocation, and performance monitoring can help to build a strong portfolio, and how charts and technical analysis can be used to provide insights into the performance of your investments.
Investors looking for long-term success in the crypto market must learn how to manage their portfolio in line with their investment goals and risk tolerance. It is important for crypto investors to understand how to use risk management strategies and performance indicators to optimize their portfolio and navigate the volatility of the market.
What is a crypto portfolio?
A crypto portfolio refers to the collection of cryptoassets that an investor holds, usually as part of a larger portfolio of investments spread across various asset classes. A crypto portfolio can be held across several cryptocurrency exchanges or within a crypto wallet.
How does crypto portfolio management work?
Crypto portfolio management involves the strategic selection, allocation, monitoring, and management of cryptoassets with the intention of optimizing returns and managing risk. The dynamic and volatile nature of the crypto market makes it incredibly important to manage a crypto portfolio effectively.
The way in which an investor manages their crypto portfolio will depend on their investment strategy. Some investors prefer a longer-term buy-and-hold approach, while others prefer to actively trade their holdings.
Regardless of the investment strategy, it is essential that investors have a carefully considered and well-managed portfolio.
Successful crypto portfolios
Successful portfolio management does not necessarily need to be incredibly time-consuming, but it does start with careful planning and a clear, established cryptocurrency investment strategy.
An investment strategy will depend on which type of investor a person is, as well as their goals and risk profile.
Efficient planning will also include an exit strategy, with investors knowing the price at which they will close a trade, both in situations of profit or loss. This allows investors to manage potential losses and monitor potential profits. Investors should seek to use stop-loss and take-profit orders as a means of safeguarding against price shocks and emotional investing.
Risk management
Cryptocurrency investors should consider the risk-return of their investments before committing real funds to trade. Risk management is one of the most important aspects of investing.
Crypto investors should aim to create a well-balanced and diversified portfolio to try and minimize the volatility that comes from individual cryptoassets and the market as a whole.
Diversification
Portfolio diversification allows investors to increase their portfolio’s stability by spreading their crypto holdings, and, therefore, their risk, more evenly across the market. It is never recommended for investors to commit all of their available capital to a single asset class, especially one as volatile as crypto, so consider allocating a large percentage of your portfolio to stocks, ETFs, and bonds to mitigate risk.
It is also possible to diversify within crypto as well. Typically, cryptoassets with a larger market cap have less volatility than those with a smaller market cap. Balanced portfolios should include different types of coins and tokens with varying utility, as well as cryptoassets built upon different blockchains.
Tip: Regular rebalancing can ensure that a portfolio remains diversified and continues to meet an investor’s overall aims.
Budget allocation
Within a crypto portfolio, determine how a new position relates to the size of your overall portfolio. This can help investors to avoid over or underexposure to a particular coin or cryptoasset.
Decide how many cryptoassets you want to invest in, and then consider how much capital you want to allocate to each one. Remember, the more assets you invest in, the harder it will be to actively manage your crypto portfolio.
Many investors choose to invest a large percentage of their capital in bitcoin and Ethereum. Although the potential for returns is arguably less than it might be for smaller coins, these two assets will provide additional stability compared to some smaller-cap cryptoassets.
If an investor has $10,000 to invest, they may choose to invest $2,000 in crypto. This could be broken down in the following manner, although it will depend on the investor in question:
- Large-cap cryptoasset: $750
- Large-cap cryptoasset: $500
- Mid-cap cryptoasset: $250
- Mid-cap cryptoasset: $200
- Small-cap cryptoasset: $150
- Small-cap cryptoasset: $150
Choosing the right time to invest is also important. Investors should consider dollar-cost averaging into long-term positions to better average their buy-in prices should the market fall.
Tip: Experienced investors will typically avoid allocating more than 10% of their capital to a single asset or position.
Market monitoring
Staying informed about current news and upcoming events relevant to the crypto market is also important. Changes in market sentiment can cause sharp price movements, either to the upside or the downside.
Investors should regularly review and adjust their portfolio in line with changes in the regulatory landscape and the global geopolitical context. This is often referred to as fundamental analysis.
Performance monitoring
Managing a portfolio should also include a level of performance monitoring. A good broker will offer the ability to track profits and losses, price movements, and market changes. Investors will use technical indicators to monitor the performance of investments to help predict volatility and trends, see performance patterns, and adapt a portfolio depending on previous results.
Understanding crypto charts
Reading and understanding crypto charts is important for investors hoping to make well-informed decisions based on technical analysis. Some investors use technical analysis to try and predict the probability of future trends and identify market opportunities. This insight can be used to limit emotional decision-making and effectively manage a portfolio.
- Candlestick charts show past price movements and can be used to identify potential support and resistance thresholds. This can help investors to time trades and gauge trends, such as bullish or bearish trading patterns.
- Trendlines and moving averages enable investors to see past price fluctuations and plot the course of a cryptoasset’s price over time. This can help to establish long-term trends and highlight potential market entry and exit points.
- The relative strength index (RSI) is a momentum indicator that helps investors time trades by measuring the relative strength of a crypto at a given time against its price history. It can be used to identify overbought and oversold market conditions.
Final thoughts
Investors should look to incorporate market insights, technical analysis, and diversification into their investment strategies. This combination, alongside active management and the willingness to adapt, will help to optimize a crypto portfolio while effectively managing risk in a volatile market.
Learn more about investing in crypto by visiting the eToro Academy.
FAQs
- What are the different types of investors?
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It can be useful to determine what type of investor you are before you start opening crypto positions. Investors are generally categorized as either active or passive, depending on how much hands-on control they take over their assets. There are other types of investors such as value investors, growth investors, income investors, momentum investors, and index investors.
Understand what you are hoping to get out of your crypto investments, and how you want to achieve your investment goals.
- What are the different crypto use cases?
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When diversifying your crypto portfolio, it is important to consider the different use cases that are available. Sometimes, certain narratives within crypto can lead to a particular sector outperforming the rest of the market. Some of the key crypto use cases include:
- Payment tokens: used to send money quickly and affordably around the world
- Layer 2 tokens: used to help scale larger, slower networks such as Ethereum
- Decentralized finance (DeFi) tokens: used to provide alternative solutions to traditional financial services
- Gaming coins: used within blockchain-based games
- How much should I invest in crypto?
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The amount you should invest in crypto will depend on your income, budget, and risk tolerance, among other factors. Some investors, interested in creating a portfolio with a higher risk-return, will allocate more than 50% of their available capital to crypto. However, for beginners looking to gain exposure to the crypto markets, some experts would suggest not allocating more than 10% to cryptoassets.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments.
This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.