How to build a smart crypto portfolio

FOMO (fear of missing out) is a powerful emotion when it comes to crypto.

Many quickly bought Bitcoin without knowing much about cryptocurrencies hoping to make a quick profit during one of its many ascents. Not only do you need to be comfortable with the level of volatility of Bitcoin, but you need to ask yourself how it fits into your investment portfolio.

When it comes to your overall portfolio, financial advisors often recommend that cryptocurrencies comprise only a small portion. Figures vary but range from as low as 0.5% up to 10%, depending on your appetite to risk.

Alex Chehade, a crypto and blockchain expert, told The Crypto Radio: “It's generally accepted that allocating around 5% of your portfolio to cryptocurrencies appears to offer the best balance between potential returns and risk management for most investors seeking to optimize their risk- adjusted returns.

“While individual circumstances and risk tolerance may vary, my portfolio is extremely crypto focused. This is similar to founders of businesses where most of their net wealth is in their business.”

Joe David, founder of the Nephos Group, agrees that it all depends on your risk tolerance, investment goals and time horizon.

“A conservative approach might be 1-5% for diversification, while a more aggressive investor who believes in the long-term potential of blockchain technology could allocate 10-20%.

“Ultra-high-risk investors may go beyond that, but it’s essential to balance crypto with traditional assets like stocks, bonds and real estate.”

Balanced portfolio

Bitcoin isn’t the only cryptocurrency available and there is an argument to diversify your digital assets into other coins and tokens. Some are happy to just hold Bitcoin and nothing else. They are known as Bitcoin maximalists.

Anything that is not Bitcoin is called an alternative coin (alt coin), but among the millions of these there are what are commonly known as “the majors” or “the blue chips”. These are well-established coins that generally run on their own blockchains. Yes, there are multiple blockchains out there. 

A traditional diversified investment portfolio typically includes a mix of stocks and funds covering multiple regions like the US, Europe and Asia, and across sectors (such as technology, healthcare and financial services).

Starting out in Bitcoin allows you to have ‘skin in the game’ to understand how to buy and sell cryptocurrency, monitor how the price fluctuates and educate yourself in market dynamics. You may then start to see other cryptocurrencies on your radar such as Ethereum, Solana and XRP.

Into the Ether

The second biggest crypto is called Ethereum (ETH). Ethereum is more than just a currency as it allows developers to build decentralized applications (DApps) and execute smart contracts. Ethereum is a foundational blockchain for non-fungible tokens (NFTs) and decentralized finance (DeFi). 

Next up is Binance Coin (BNB) which is the native coin of the Binance cryptocurrency exchange, the world’s biggest such platform. Then there’s XRP which is used mainly for cross-border payments, and is being integrated into some banking systems.

Cardano (ADA), like Ethereum, offers smart contracts and decentralized applications, making it a popular choice for developers, while Solana (SOL) is known for its high transaction speed and low fees, and is the platform of choice for both memecoins and innovative projects.

Then you have stablecoins such as Tether, which are cryptocurrencies pegged to stable assets like the US dollar that can offer liquidity and reduce overall portfolio volatility.

As you can see there are plenty of big cryptocurrencies (in terms of their market cap) out there all offering something a little different, and presenting opportunities to add to a crypto portfolio.

Smoothing strategy

When it comes to crypto investing, advisers normally speak about starting small and then building as your understanding grows. For beginners, it's prudent to start with a modest investment. As you get more familiar, they suggest building your exposure.

In investment, there is a well-known strategy called Dollar-Cost Averaging (DCA). This is where you invest a fixed amount regularly, normally monthly, which can help smooth out the impact of market volatility and reduce the risk of making large investments at inopportune times.

In other words, rather than putting in a single lump sum and risk buying at the top of the market, drip feed your money into the market which averages out/smooths the price peaks and troughs.