Choosing a cryptocurrency for investment portfolio

January 6, 2020   Bitcoin

Experienced users of virtual currencies clearly understand that investing in only one cryptocurrency is risky and adventurous. Particularly if the chosen crypto is not bitcoin. The fact is that the cryptocurrency industry so far can barely be called reliable, and any altcoin can easily fall by several hundred per cent in no time or just disappear at all. In the second half of 2018, many crypto experts prophesied the death of Bitcoin itself. One of the things that help to earn on cryptocurrencies on short periods is automatic trading. For longer investment horizons a cryptocurrency portfolio is to be contemplated.

The simplest version of a cryptocurrency portfolio


If you do not want to engage in short-term automatic trading, you have to accumulate cryptocurrencies. To do this, you need to decide how to form a cryptocurrency portfolio.

The standard portfolio to advise is:

  • half of the investment is to be allocated to bitcoin,
  • 15% ETH,
  • 10-15% - Ripple,
  • 10% Litecoin and Zcash.

Surely, the rest of the cryptoportfolio is of primary importance. You can change shares of major cryptos in the portfolio, that is buy less bitcoins or more XRP tokens. Some crypto experts recommend to pay more attention to ethereum as long as it is believed that the rate of this digital currency can rise up to 1 thousand US dollars. But such forecasts have no sound basis.

Anyway, it is not worth composing your cryptocurrency portfolio from bitcoins only or, moreover, another cryptocurrency. It is vital to diversify your investments. However, this should be done wisely. This is where we will try to help you - choose the right portfolio composition.

True, one thing needs to be understood: the cryptocurrency market has fairly modest trading volumes. It may completely “collapse” at a certain moment. Then it is possible that all investments will be lost. It is no accident that Bitcoin is considered a high-risk asset in the financial system. Currently, the BTC exchange rate exceeds 7 thousand dollars, but nobody can be sure that in the middle of the year 2020 it will not collapse to three thousand, as it already happened two years ago.

Even if the main cryptocurrency does not downfall, it may simply stop at the current mark of 7 thousand dollars. Then investing in Bitcoin solely will not bring an investor any profit. That's why the cryptoportfolio needs to be filled with other altcoins, based on how promising they are.

On the contrary, there is certain share of investing optimism caused by the fact that now only percent of people in the world ownsone or another cryptocurrency. But it is safe to forecast that the number of cryptocurrency users and holders will increase in the future. This will lead to a rise in the price of most altcoins. If investors buy a range of different altcoins now, they may possibly get significant profit in the future.

There is no necessity to invest the last money in cryptocurrencies, or even take a loan from a bank. Some careless investors do that, and eventually they suffer their whole lives because of debts generated by their wrong decisions. But if you spare funds, let it go.

It should be understood that an investor needs to trade cryptocurrencies with the goal of making a profit. Otherwise, trading is not much different from gambling. An investor should set investment goals and try to achieve them.

If you want to make a profit quickly and not wait for the cryptocurrency portfolio to increase in value, you should earn on short-term fluctuations in the cryptocurrency rate. For this, we advise you to use some auto trading service available in the industry. This method will possibly give you excellent passive income.

What risk is acceptable when investing in cryptocurrencies


It is generally accepted that risk is directly proportional to profit, and this is so. Over the past six months it was possible to make 100-200% profit on bitcoin, the shares of classic major international companies barely gave 10-15% per annum. Moreover, the bank deposit gives 1-3% maximum. It is clear that a bank deposit is very reliable. And it is almost impossible to lose money when investing in the shares of major companies such as Apple or Microsoft. On the other hand, bitcoin’s and especially altcoins’ investments are risky because of their instability. After all, who knows what happens to the cryptocurrency industry in the future. It may have a serious competitor, such as Libra or JPMorgan, and then it is possible that all cryptocurrency savings will go into the pipe.

Interestingly, in the cryptocurrency industry, there is a gradation of the risk of altcoins. There are three major groups according to investing risks:

  • lowest risk - Top 10 tokens by capitalization, such as Bitcoin, XRP, Ethereum
  • medium risk - the Top 30 altcoins by capitalization,
  • high risk - the Top 100 altcoins.

Everything beyond Top 100 is to be considered extremely risky and should not be included in the portfolio.

According to this gradation, an investor can diversify cryptocurrencies in the investment portfolio. It is evident that if altcoins from the Top 10 by toral market capitalization are included in the portfolio, then doubling of the investments value may possibly be waited for a very long time. Major cryptos - Bitcoin, Ethereum and XRP can stagnate at the same level for a very long period without bringing any profit to an investor.

A balanced cryptoportfolio with relatively acceptable risk usually consists of 70% of the Top 10 cryptocurrencies and another 30% of the Top 30 altcoins. As it was noted above, such a portfolio can double its value for a long time.

Therefore it is more reasonable to compose a cryptoportfolio in various shares, even adding tokens from the Top 100 to it. For instance, a portfolio containing only 25% of Top 10 digital currencies, 50% of Top 30 antcoins, and 25% of Top 100 cryptocurrencies can be considered quite risky but potentially profitable. Such proportions are mostly used by experienced crypto investors, who want to make profit in relatively short timeframes.

Of course, sometimes an investor can take risks to get even more. For example, how do you like the 25% Top 10/25% Top 30/50% Top 100 ratio? That is, in the portfolio we take 50% of cryptocurrencies from the Top 100 by total market capitalization. If an investor has funds he is not scary to lose, why not?

Tokens of potentially successful ICOs can also be added to the portfolio. The latter can grow by 1000% in a short time. Of course, it is very difficult to guess which ICO project will grow and which one will fail. It is believed that if at least one ICO project of the ten invested in is successful, it will recoup the losses of the other nine projects.

It is useful to use the following method: adding to the cryptoportfolio half of the virtual currencies, which usually grow together with bitcoin’s growth, and fill the rest with altcoins, which usually decrease in price with the growth of bitcoin. But such a portfolio is more suited for saving funds, it is not likely to bring you significant profits.

What to expect from the cryptocurrency industry in the future?


Will cryptocurrencies grow in the foreseeable future? After all, if bitcoin surpasses the bar of 20-40 thousand dollars, then it is worth buying right now. However, who can guarantee such growth?

There are some reasons for investing in cryptocurrencies. Already, many major financial institutions are starting to use blockchain technology to accelerate cross-border payments and for other purposes. A typical example is the JPMorgan bank, which created its JPM token. Facebook's Libra project will also help shake the entire digital industry. As a result, we will see Ethereum at 1 thousand dollars, and Bitcoin at 40 thousand dollars. Major corporations, such as Microsoft and Amazon, are actively implementing blockchain-based logistics projects. There is clearly the development in the industry, and it hints at a prosperous future for cryptocurrencies.

Another thing is that not all the existing cryptocurrency projects will be successful. That's why you need to invest not in a single cryptocurrency, but in several of them at once.

According to statistics, 80% of startups in general, not only in the cryptocurrency area, go broke. Of the 20% remaining, only 10% achieve real success and grow rapidly in price. If we take this assumption, 80% of the funds invested in cryptocurrencies will simply disappear.

Let's take it. We will lose 80% of investments, another 10% of funds will remain unchanged. However, the remaining 10% can grow 10 times. It is not difficult to calculate that we will receive a profit of 10%. If some startups grow 100 times, we will win even more - from 200% to 1000%. This is the fact that should attract cryptocurrency investors.

Liquid assets


If everything is clear with the calculation of benefits, let's move on. An important criterion for a good financial asset is its liquidity. An investor should monitor the trading volume a digital currency generates monthly. Thus, an investor can understand how interesting one or another coin is to traders in general, because the traders’ interest determines the change in the cryptocurrency price.

At the same time, a profitable portfolio should, if possible, contain the so-called "undervalued" cryptocurrencies. However, separating the chaff from the digital market is not so simple. To do this, a trader will have to master various tools of market analysis.

Experienced traders are advised to invest in the cryptocurrencies that are well known to the investor. To do this, you need to follow the development of cryptocurrency projects, understand their prospects and difficulties. You can invest in a project at the growth stage in order to make a profit in the future.

Cryptocurrencies and projects suitable for investment


Cryptocurrency projects are usually divided into three categories: utility tokens, cryptocurrencies and platforms. There are also the so-called "investment tokens", but this thing, which is usually used by large players, so we will not talk about it here.

Digital currencies


Cryptocurrencies can be purchased in exchangers from individual sellers and on major cryptoexchanges for dollars, euros and other cryptocurrencies. This is quite simple to do, in some cases registration is not even required. Some digital currencies are suitable for storing funds in them. Other altcoins are profitable to trade in the market. In the event that you already have enough money, you could try auto trading, likewise at Forex.

If you want to increase your funds through long-term investment, you definitely need to add bitcoin to the portfolio. 25-50% BTC - this is quite enough. In addition, BTC is currently absorbing an increasing share of the digital currency market, so you definitely need to buy it.

The portfolio should include Bitcoin Cash, which is very similar to BTC and therefore very promising. You can also add Dash and Litecoin. These cryptocurrencies prove their reliability year after year, so they should be noted. Take Monero, Zcash and Zcoin into your portfolio also.

Ethereum and other platforms


Ethereum can be considered very beneficial for investing in cryptocurrency. This is not just a digital currency, but an entire platform. Based on Ethereum technologies, one can develop “smart” contracts, applications, and even conduct secure elections on the Internet. In other words, the platform has a great future, and therefore it is profitable to invest in Ethereum. Some traders are convinced that ETH in the coming years will grow to 1000 US dollars. However, no one has firm confidence, others, on the contrary, talk about the decline of this platform and the emergence of a large number of competitors.

However, the developers of Ethereum have gained worldwide fame. For example, the founder of the network, Vitalik Buterin, has a popularity not much less than Satoshi Nakamoto - the mythical father of Bitcoin. At least that's why Ethereum should be added to the portfolio.

Of course, Ethereum based platforms are not exhausted. Ethereum is full of competitors, including successful ones such as EOS and IOTA. Some traders are confident that EOS or IOTA will eventually overtake Ethereum, so these cryptocurrencies should be added to the portfolio too.

XRP and other utility tokens


Invariably, the third largest cryptocurrency in terms of capitalization, XRP, leads the third class of digital assets - utility tokens. Ripple uses its cryptocurrency to accelerate cross-border operations on its network. By the way, there are already more than 200 banks among the company's customers, and this number continues to grow. XRP has enormous prospects in this sense. Only the development of competitors, such as the financial giant JPMorgan’s cryptocurrency, can throw Ripple off its pedestal. So far, XRP has no particular problems, so we advise you to invest in this coin without any doubts.

Another attractive utility cryptocurrency is Stellar. Some time ago, a startup got the support of IBM, so it’s doing well. The Stellar project is interesting in that its tokens are used to pay rewards to users. That's why XML is worth adding to the basket, because it has a real use, it is useful to people.

A few more promising cryptocurrencies in this section: OmiseGO and SALT. OmiseGO does the same as Ripple - develops its payment system. The project was recently supported by the founder of the Ethereum Buterin network, so OmiseGO is worth a closer look.

Regarding SALT. This is a very ambitious project. Its founders are developing a system for issuing loans based on blockchain technology. Such a system can contribute to the development of microfinance in the poorest countries of the world. SALT can be successful, which is why it must have a place in the portfolio.

Investment horizon and investment rebalancing


When creating a cryptocurrency portfolio, investors should understand what their investment horizon is. If it is a month or a year, they are recommended to add certain cryptocurrencies to the portfolio. If investments are long-term, for example, for a decade, it is better to contemplate completely different altcoins.

Or even a trader can "invest" funds for one day, that is, simply trading on the cryptoexchange on short timeframes, similar to Forex, and make profits from the fluctuations of the prices. But this must be considered is a real job which requires a lot of effort, knowledge and time.

In this article, we are considering long-term investments and a portfolio of at least one year investment horizon. If the investing period is chosen, it is important to adhere it in the future, that is, the portfolio must be closed the scheduled time to go into profit.

Another thing that needs to be talked about is the cryptocurrency portfolio’s rebalancing. Depending on the market state, an investor has to get rid of some crypto assets and buy other altcoins to add to the portfolio. This is required to to comply with predetermined proportions of reliable and risky cryptocurrencies. The fact is that with long-term investment, altcoins can move from one risk category to another.

The portfolio balance should be checked at least on a monthly basis: new promising cryptocurrencies must be bought on time and unreliable assets are to get rid of.

Author: Kate Solano for Сrypto-Rating.com
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