More than a decade ago, the launch of Bitcoin marked the start of a fast-growing industry and a new asset class that has attracted many institutional investors, including banking giants like Goldman Sachs.
Billionaire Michael Novogratz, CEO of Galaxy Investment Partners, was recently cited in a Goldman Sachs report as saying:
"We've now hit a critical mass of institutional engagement [in crypto]. Everyone from the major banks to PayPal and Square is getting more involved, which is a loud and clear signal that crypto is now an official asset class."
Despite its volatility, the crypto market is here to stay, and it pledges to transform the global financial system. For those who believe in the potential of bitcoin and cryptocurrencies, building an investment portfolio dedicated to digital assets makes sense.
In this article, we’ll discuss the basics of building a well-diversified crypto portfolio, and several approaches that blockchain investors might take.
Before we begin, it's important to have at least some understanding of blockchain and cryptocurrencies. Legendary investor Warren Buffett might not be a crypto fan, but one of his quotes is relevant for any investor:
The Types of Digital Asset Classes
To start investing in cryptocurrency and building a solid crypto portfolio, it helps to understand the main categories of digital assets. While there are several ways to classify cryptocurrencies, some of the most important groups are:
- Cryptocurrencies – also called coins or tokens, these are the digital currencies built for their native blockchain networks (despite the name, most don’t act as “currency” in the traditional sense). Bitcoin is the largest cryptocurrency by market cap. Alternative coins (known as altcoins) include Ether (ETH), the native token of Ethereum, Litecoin (LTC), Bitcoin Cash (BCH), and Stellar Lumens (XLM), among others.
- Utility tokens – Utility tokens are used to pay for goods or services offered in the ecosystem, something like an in-game currency within their own virtual economy. These tokens are often sold during the project's launch as part of a fundraising mechanism, making them something like buying shares of stock. Some examples of utility tokens are Basic Attention Token (BAT), VeChain (VET), and Cardano (ADA). However, it's worth noting that there can be a grey line between cryptocurrencies and utility tokens.
- DeFi tokens – DeFi is a crypto movement promoting decentralized systems for financial services. For investors, DeFi offers new opportunities to earn interest (or “yield”) on your existing crypto holdings, but instead of being managed by a bank, it’s all managed from within your browser wallet. DeFi tokens are the digital assets fueling their underlying DeFi projects (again, think of it like buying “stock” in these projects). Some of the most popular DeFi tokens are Uniswap (UNI), Chainlink (LINK), Aave (AAVE), Compound (COMP), and Synthetix (SNX).
- Stablecoins – stablecoins are pegged to fiat currencies like the U.S. dollar. They are designed to keep stable prices in relation to their respective fiat currency, making them a good choice to “park” your money during periods of crypto volatility. Tether (USDT) and U.S. Dollar Coin (USDC) are the largest stablecoins by market cap today.
- Security tokens - these tokens are digital representations of real-world assets, such as company shares, commodities, real estate, or funds. Buying these tokens is equivalent to buying a piece of the asset itself (i.e., part of a real estate investment).
Building a Balanced Crypto Portfolio
One popular approach is to put half your crypto portfolio into well-established coins that can survive bear markets, and lead the crypto industry long-term. Some prefer to allocate 50% to Bitcoin, while others divide this slice between Bitcoin and Ether (25%/25% or 30%/20%).
Investors who aim for greater returns can allocate more to well-established DeFi tokens. Many investors are bullish on DeFi: this data shows that the total value locked (TVL) in DeFi projects increased from about $1 billion in June 2020 to a peak of $87 billion in May 2021.
If you are willing to take on more risk, well-established DeFi tokens such as UNI, COMP, and AAVE might also make a good chunk of your portfolio. Be sure to do your due diligence with DeFi projects, because the space is new and rapidly evolving.
An ambitious portfolio would allocate at least 30% to Bitcoin, 30% to Ether, and 20% to DeFi tokens.
The rest can be invested in altcoins based on the industries that you prefer, including blockchain infrastructures (IOTA, Cardano, NEO, Stellar), financial (Ripple, Nexo, 0x), services (Binance Coin, Siacoin, Revain), or non-fungible token (NFT) projects (Decentraland, Axie Infinity, Origin, Chiliz).
Choosing Cryptocurrency Investments
Once you’ve sketched how your crypto portfolio should look in terms of digital asset categories, it’s time to pick tokens. It’s not an easy job considering the multitude of options (over 700 tokens with a market cap of more than $10 million). To improve your decision-making capabilities, here are the main aspects to consider when picking DeFi or utility tokens:
- Use case – like investing in a company, a blockchain project should have a real product that solves a real problem. Ask yourself, “What does this token do?” and “Does it do it well?”
- Website and documentation – as a rule, the blockchain projects worthy of attention have well-designed websites reflecting their mission. Also, they should offer relevant documentation, including whitepapers, guides, FAQ, fee structure, and roadmap.
- Team and institutional backers – Institutional investors don’t invest large amounts of funds in projects they don’t believe in, so it makes sense to consider blockchain projects and DeFi protocols backed by reputable funds, venture capital firms, and other investors. As of today, some of the most popular blockchain investors are Blockchain Capital, Digital Currency Group, Fenbushi Capital, Kenetic, Pantera Capital, Dragonfly Capital, Multicoin Capital, AU21 Capital, Polygon, a16z crypto (Andreessen Horowitz), Union Square Ventures, Sequoia Capital, Coinbase Ventures. Look closely at the founding team and their backgrounds.
- Market cap – crypto projects with a larger market cap are more resilient to price manipulation. Generally speaking, larger market cap also means more users, which means the crypto project is more likely to last.
- Tokenomics - within the project’s “virtual economy”, understand how tokens are distributed, inflationary metrics, token governance, monetization scheme and fee structure.
- Audit – look for code audits by third-party firms, such as OpenZeppelin, Quantstamp, or Certik, among others. Hackers can easily exploit loopholes, so try to make sure the code is resilient.
- Security – Analytics firm CipherTrace said that more than $156 million was stolen in DeFi hacks in the four months of 2021, which is already more than DeFi protocols lost in all of 2020. When building your portfolio, make sure the projects haven’t suffered from major hacks.
- Social media and community – the online presence of a blockchain project reflects its demand. If the ecosystem has an activity community, that’s a big plus.
Tips to consider
If you want your crypto portfolio to be lucrative in the long term and have its risks reduced to the minimum, consider the following tips:
- Money management – stick to the golden rules of money management and don’t invest more than you can afford.
- Do your due diligence – thoroughly research every project you add to the portfolio.
- Invest for the long term – cryptocurrencies are extremely volatile. While short-term price fluctuations might be relevant for active traders, you should only be interested in the general trend. Ignore the price noise.
- Regularly follow the news – Bitcoin and altcoins are sensitive to any major events affecting the market. Any news related to regulation, adoption, partnerships, and comments from politicians, investors, and tech experts can have an immediate impact on the price.
- Rebalance your portfolio from time to time– take some of the profit if specific assets have done well and buy new assets with growth potential to keep your portfolio updated with the latest trends. (Consider doing this twice a year, on January 1 and July 1.)
Building Your Portfolio with SMART VALOR
Finally, it helps to pick a reliable investment platform that will enable you to build a crypto portfolio with individual goals -- like SMART VALOR, a Swiss-based crypto-oriented investment platform. We have an integrated digital asset exchange, custody solution, and we offer a full suite of wealth management services aimed at high net worth individuals (HNWIs), family offices, and other individual investors.
With SMART VALOR, you can build several types of portfolios, including Bitcoin-focused, cryptocurrencies-focused, hedge funds and manager selection, blockchain technology investment (investing in blockchain stocks), and multi-asset portfolios.
Also, you can choose to have complete control over your portfolio or hand its management to expert managers. Our platform offers several degrees of management, including:
- Discretionary mandates – you set the goal, SMART VALOR does the rest;
- Advisory mandates – SMART VALOR advises you make transactions;
- Execution only mandates – you decide, and SMART VALOR executes.
If you want to build a well-diversified crypto portfolio, join SMART VALOR now!
Risk Disclosure: Cryptocurrencies can fluctuate widely in prices and incur permanent loss of capital and are therefore not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework. Past performance does not guarantee future results. Trading history presented is less than 5 years and may not suffice as basis for investment decision. More information is available under Risk Disclosure.