Everyone knows the saying, "Don't put all your eggs in a basket," well, this saying is very important to the cryptocurrency industry. This sphere is new, it has only just begun to develop, and at this point there are a lot of scams and ventures that simply do not work. So if you want to taste success as a crypto enthusiast, it would be better to listen to the proverb and spread it out. We've already thought about how to pick the best coin for your portfolio, and now it's time to think bigger. We're going to talk about two techniques that will help you develop and maintain your crypto portfolio.
The goal of this article is to help cryptocurrency investors manage the mania to build a well-rounded portfolio that will stand the test of time. These tips will break down the various facets of cryptocurrencies and digital assets that should be weighed when deciding if a specific coin is a promising addition to your portfolio. This list is intended to be a starting block for your Crypto Race and not a detailed guide with every possible detail. In the end, it is up to the person to determine-asset is ideally suited to their portfolio. After you've played with the crypto market, sign up for our trading bot to automate your strategy.
Circulation Supply, Complete Supply, & Cap Sector
One of the first things I 'm looking at when assessing a coin is the market cap. I check to see if the cap on the market is appropriate for the target market to be disrupted. I think how it applies to coins that have a similar market cap, and I imagine what the market cap would be in a year or two. With this approximate estimation, I get a general understanding of how the value of the coin is going to change in the future. Keep in mind how the supply of circulation will expand over this time. The explanation for this is relevant is that if you expect a 10% rise in the overall market cap for the coin over the next year, but the circulating supply is rising faster than 10% per year, the price of the coin will actually fall. Looking at this, we're creating a rough growth target for the coin.
There are a variety of main elements to analyse when looking at the circulation supply. One of the first is how quickly the supply of circulation is expanding. This means at what rate the latest coins would be put into circulation. The sooner the new coins are introduced into circulation, the more difficult it would be for the coin to raise its price. First, remember the portion of the total supply occupied by the supply of circulation. As the output of circulation exceeds the total output, this means that less coins will be put into circulation and could cause a price increase. In the other hand, if the output of production is just a fraction of the overall output, this means that the price will be impacted by the potential demand dilution.
Let us look at a basic illustration of how the rise in prices influences the market cap on the basis of the availability of circulation. Say we have two coins that are both worth $1, but one has a current circulation of 1,000 coins and one has a circulation of 1,000,000,000. If both coins increase their value by $1, that means the market cap of the small circulation supply coin reaches $2,000 and the big circulation supply coin reaches $2,000,000,000. This shows that while a change of $1 in one coin only reduced the market cap by $1,000 in the other, it raised the market cap by $1,000,000. This shows that it can be more difficult to increase the value of an asset with a wide circulation supply.
Full availability of goods
The overall supply of the coin goes hand in hand with the supply of circulation. The total supply indicates how many coins can be minted in total. This value will help you appreciate the long-term future value of the coin. If the overall supply is extremely high, this may mean that, as the supply of circulation rises, the price will stay constant as new coins are put into circulation offset the price increase. Factoring in the overall supply will help solve the issue if it is feasible for the coin to increase its value over the long term. The higher the overall stock, the greater the effect of a slight shift in value on the market cap in the future. This can be seen if we hypothesise a very severe scenario. Let 's assume the current circulation of the new coin is 1,000, the total production is 1,000,000, and the current price of the coin is $1,000 for each coin. Although the current market cap is only $1,000,000, in order to sustain that price as the supply of circulation raises the total supply, the coin will have to have a market cap of $ 1 trillion when the supply of circulation exceeds the total supply. This implies that the price of the coin will decrease as it is diluted.
Market cap diversification means the collection of coins that differ from market cap. A portfolio with a varied market cap will include some high market cap coins (high-cap), mid-market cap coins (mid-caps) and small market cap coins (small-caps). For example, portfolios of 50 per cent, 30 per cent, 20 per cent split between high, mid and small-cap coins are popular. It will allow you to see great short-term and long-term growth without taking too much risk. One question I've been asked recently is, "What is high , medium, and small-cap? "While this varies depending on who answers the question and the current state of the economy, the basic measure is to regard the top 10 coins as big market caps, the next 20 coins as mid-caps, and the remaining coins as small-caps. At the time of writing, this means that coins over ~$1B in the market cap would be large-cap coins, coins below ~$1B and over $500 M would be mid-cap coins, and coins below ~$500 M would be small-cap coins. As the demand expands and evolves, coins that are considered big, medium and small can also change.
There are a number of sectors that cryptocurrencies are seeking to address. Anything from publishing (Po.et) to storage (Storj) to lending (ETHLend) is threatened by cryptocurrencies. This does not mean that any of these markets will thrive. In order to prevent your portfolio from collapsing when one of these markets shrinks, it is ideal to diversify your investment across a wide variety of industries. Instead of investing in a single sector, select a diverse range of promising industries. Some of the industries to be considered include: decentralised storage , computing, lending, development networks, micropayments, privacy, distributed networking, advertisement, and social media.
Not all coins use the same technology and not all innovations are the same. Coins can be divided into a number of technology types with various advantages and disadvantages. There are several different mining hash algorithms, such as SHA256, Scrypt, and X11. Then there are various systems of proof, such as proof of job, proof of interest and proof of operation. All these discrepancies in cryptocurrency innovations have an effect on their potential to be adopted. When designing a diverse portfolio, it is important to note that each of these innovations has advantages and disadvantages. When the market changes, it will begin to prefer a certain form of technology, this can have a dramatic effect on your investment if it is not considered when constructing your portfolio. That's why it's a smart idea to choose a range of coins that use various technologies.
Simply put, diversification is a way to reduce losses by spreading the funds across various assets. But when are we going to need to diversify?
Of course, it doesn't make much sense to use this technique if all of your assets cost around $200. You should stick to the most common currencies like BTC, XRP, ETH, etc., and just hodl. There are three major diversification types traditional, moderate and risky, and their names speak for themselves.
Conservative is the best approach that includes old coins with a strong reputation like Bitcoin , Ethereum , Litecoin, etc. (depending on your preferences) and essentially consists of the top 10 cryptocurrencies. These coins have already proved worthy of use-cases, working technology, etc.
Moderate here come a few altcoins in active development stages, coins that have at least a solid first version of their product and are listed on one major exchange. It would be perfect if they had true, direct relationships with well-known companies. You may want to look at Vechain's VET and Enjin's ENJ coins or other coins in similar locations.
Risky this style is sort of like gambling. You can win or you can lose-it may be an escape scam or a big price leap. They used to be ICOs, often they're called IEO ventures. They might outperform the market.
Using these three strategies, you can align your portfolio with a variety of healthy and more offensive styles.
Rebalancing strategy: the crypto industry is still young and things are still changing. You should change your portfolio on a regular basis as the business situation is always evolving. Rebalancing is a technique to decide the sum of assets you want to assign for each. The properties in crypto are coins and tokens. Let 's take a look at an example.
You bought 10 different cryptocurrencies in equal shares of 10% of your capital.
And they've been leaving for half a year. Six months later, you find that the price has changed; some of them are more expensive, some cheaper and, as a result, your portfolio is very unbalanced. Let 's assume that the most depreciated of your shares is now just 4 per cent of your portfolio, while the asset that increased most is 18 per cent. In order to balance the portfolio, you must sell off a part of the asset that increased to purchase the asset that decreased to the point that you ended up at the original 10% ratio. That's portfolio balancing in a nutshell.
But what's the point of the process, why would I sell the coins that go to the moon?
Using this method, you adopt the key trading concept, "Buy low and sell big."
Fair allocation allows us to prevent additional risks. If, for example, LTC has risen in price and has started to take up to 30% of the overall value of the portfolio, this is still very risky. If something had happened to this asset, the crypto user would lose a very real share of his portfolio.
These two fundamental techniques are commonly used in the management of stock portfolios. They also refer to cryptocurrencies. But you should realise that the risks here are far greater than those in conventional markets. This article should not be regarded as a financial advisory and is intended to act solely as educational content. The demand for cryptocurrencies suffers from high volatility and regulatory uncertainty. Every crypto enthusiast should discuss different points of view and be aware of local regulations.
Bitcoin outperformed all other conventional assets last year. BTC investors ended up with a better ROI in the form of a 95 per cent rise in value in 2019, considering the exceptionally high output of stocks , bonds, and commodities. Not unexpectedly, increasingly investors include crypto in their broader portfolio. But it's not stopping there. Especially because crypto is volatile, it's important to diversify your crypto portfolio. Let 's discuss some of the approaches.
Why is it critical that your Crypto Funds be diversified?
Allocating the money to different assets that react to the same event in a different way helps investors not only to minimise their risks but also to increase their Return on Investment ( ROI). Let us send you two examples to help you understand this better.
Alice is seeking to invest in crypto. After studying a wide variety of digital assets, she found an altcoin with a small market cap but a high growth potential. She invests all her money ($1,000) in the expectation that it will produce substantial returns in the near future.
But her luck is running out, and the team behind the coin is abandoning the project. As a direct result of this unfortunate occurrence, the holders panic-sell the coin, causing the price to fall by 50 per cent.
Bob also knew the huge growth potential of the coin that Alice had invested in. But only a small portion of his funds (10 per cent) was used to obtain publicity. Bob uses the remaining (90 per cent) of his funds to purchase nine other digital assets that represent various business sectors and uses within cryptospace.
Although Bob was also negatively impacted by the crash, only 10% of his funds (-$50) were impacted, the other nine digital assets in Bob's crypto portfolio witnessed an average increase in value of 30% (+ $270) during the same span. As a result, Bob closed his crypto investment positions with a profit of $220, marking a 22 per cent ROI.
Although diversification does not guarantee protection against losses, it is one of the most critical components of a long-term plan to reduce investment-related risks.
Diversification of assets is already a common strategy for general market investors. And it's a universal technique that you may (and should) extend to your crypto portfolio as well.
Risk factors must be considered before investing in cryptocurrency
In this segment, we will discuss the most important considerations that you should consider before investing in a digital asset.
The first metric that you can know is market capitalization, which reflects the existing market share of cryptocurrencies. A general agreement within the crypto industry is that the higher the market cap of the coin, the less risk it poses to investors.
A digital asset with a large market capitalization might imply a crypto project that has already built up a decent infrastructure and ecosystem, featuring a large community of active users who keep, trade and use it for a variety of activities.
The risk of project abandonment is lower for cryptocurrencies with a greater market capitalization than for digital assets with a smaller market share of crypto. You can exchange these properties more quickly, too.
Moreover, price fluctuations of large market cap digital assets (such as Bitcoin and Ethereum) can impact smaller coins that are connected to them (e.g. price movements of ETH might affect the value of some ERC-20 tokens). On the other hand, it is popular in crypto space that the larger the market cap a coin has, the less growth potential it has.
Although this is not true in every case bitcoin, for example, outperformed most digital assets last year altcoins (especially those with small to medium market caps) often outperform BTC in bull markets.
Transaction Amount: Analyzing the cryptocurrency transaction volume gives insight into the real use of a digital asset to investors. This measure is useful when a coin has a reasonable market capitalization, but its volume of transactions is very poor. With those properties, you should be very careful. Low trading and transaction volumes may mean a dead project, no real-world use, reduced liquidity and lack of active supporters.
Utility: While we've seen some crypto companies claim to disrupt whole industries with disruptive technologies, not all of them have been able to achieve their initial goals. It is therefore necessary to evaluate the real-world usefulness of cryptocurrency from an analytical point of view in order to gain insight into its long-term viability.
Ethereum, for example, is the starting point for crypto projects to develop Decentralized Applications (DApps) and run smart contracts. And ETH, the platform's native currency, is used in large amounts for daily transactions by a large community of active users.
News and Reviews of Related Industry
Researching the potential of a cryptocurrency does not stop with a project whitepaper review. You can also start searching third-party websites for related reviews and input from users.
Screening crypto (and even mainstream) media sources for recent project news could also help to recognise past, existing, and future developments that could affect the value of a digital asset.
Market Sector: Before making an investment, it is also necessary to see which market sector cryptocurrency belongs to.
We've got two reasons to say so.
Second, there are sectors where crypto ventures have proved to be especially disruptive, with many ventures trying to solve the same issues. This may mean that this particular sector has a potential for growth. Second, evaluating the business sector of cryptocurrency is particularly useful when you assign your funds to various coins to create a well-diversified crypto portfolio.
It is common practice for stock market investors to diversify their portfolios in such a way that the shares they have invested in grant exposure to different industries. Theoretically, the correlation of asset prices is higher in the same business sector but lower between two instruments representing different industries.
The Ultimate List of Crypt Business Sectors
Although not common crypto practise, we suggest diversifying the investment through different business segments within the digital asset industry. This way, you will (further) reduce your risks with a chance to optimise your ROI. Below you can see the list of the most relevant market sectors within the digital asset field that you can use to create a diversified crypto portfolio.
Smart Contract Platforms: Ethereum (ETH), EOS, NEO
Smart contract networks form the core of the blockchain ecosystem.
These decentralised networks allow crypto organisations to create DApps and run smart contracts a computer code that enables the contract to run automatically when requirements are met on top of their blockchains.
With each smart contract platform featuring its own native digital transaction asset, these blockchain networks allow developers to bring their ideas to life within a seamless environment that uses a special standard to facilitate DApp-building in a straightforward manner.
Payments and money transfers: Bitcoin (BTC), Ripple ( XRP), Stellar (XLM)
Satoshi Nakamoto provided the very first use of cryptocurrencies when he developed Bitcoin in 2009. As per the original whitepaper, BTC is designed to act as a peer-to - peer electronic payment system that allows users to move funds through a blockchain-powered network, potentially providing an alternative to the conventional banking environment.
By providing a low-cost, fast transaction network as well as continuous operation and high transparency, several crypto ventures aim to disrupt traditional payment networks. For example, Ripple (XRP) and Stellar (XLM) have established the use-cases of cryptocurrencies for cross-border transactions and are running blockchain networks offering their clients near-instant and cost-effective borderless transfers.
Privacy Coins: e.g. Monero (XMR), DASH, Zcash (ZEC)
One of the reasons Bitcoin became popular had to do with the additional anonymity that it provides in relation to bank transfers. However, Bitcoin has never been designed to function as a privacy coin. As a consequence using the new technologies the majority of BTC transactions can now be traced back and the parties involved can be identified. As there is a real need for anonymity within cryptospace, projects like Monero, DASH, and Zcash have therefore emerged on the market.
The underlying technology of privacy coins enables users to move funds in a pseudonymous way, sculpting a major business sector within the cryptocurrency room.
Stablecoins: example: Tether (USDT), TrueUSD (TUSD), DAI, Tether Gold (XAUT)
Critics also claim that cryptocurrencies are extremely unpredictable, which can deter companies from using technology. This led to the birth of stablecoins: cryptocurrencies that are connected to the value of a stable, normally highly liquid commodity.
With fiat currency pegs (e.g. USD, EUR), general market assets (e.g. gold , silver) and other cryptocurrencies, stablecoins enable users to leverage the strengths of digital currencies while restricting the effect of price volatility. In addition, the tokenization of general market assets such as gold and illiquid securities provides a new range of applications for cryptocurrencies.
Exchange Tokens: Examples: Binance Coin (BNB), FTX Token (FTT), KuCoin Shares (KCS) soon AAX Token (AAB)
Since the inception of Bitcoin, cryptocurrency exchanges have functioned as gateways between the digital asset and the fiat world. Now, a number of crypto exchanges have developed their own native tokens to fuel their platforms with additional functionality. Although exchange tokens allow market makers to provide increased liquidity to the marketplace, native coins also give discounts to users as well as new features. As a side note, AAX will soon be releasing its own exchange token.
Among other functions, AAX Token (AAB) can give its users trading fee discounts (up to 50 per cent), loan and borrowing incentives, as well as access to special features (such as trading bots and signals).
Digital Identity: Examples: CIVIC (CVC), PAI (PAI)
As a result of several high-profile data breaches, people are increasingly aware of the importance of their personal information. Although recent legislation (e.g. GDPR) have implemented new initiatives that require companies to treat personal information more carefully, problems remain with the centralised handling of confidential user data.
Decentralized digital identity applications seek to take advantage of the powerful features of blockchain technology to resolve these concerns. While digital identity systems provide users with more control over their personal data and help them validate their accounts more easily, blockchain technologies make it easier for service providers to combat identity fraud.
Social Applications: Examples: STEEM, Network Status Token (SNT), ReddCoin (RDD)
Tech giants like Facebook, Twitter , and Google dominate social media space, but crypto ventures have launched a new wave of blockchain-powered social platforms. Social Crypto Sites resolve the problems of traditional social media networks, such as lack of privacy and incentives to produce usable user content.
Steemit, for example, is a social blogging site where users can earn cryptocurrency as a reward for publishing and sharing exclusive, useful material. Other examples include ReddCoin, which provides similar benefits to users in the form of tipping, and Status, a social network that features a private instant messaging programme where people can transfer digital assets to each other.
Digital Advertising: Examples of: Simple Attention Token (BAT), DAD, Bring (CRE)
Cryptocurrency solutions have also emerged on the digital advertisement market. Like other digital asset applications, blockchain advertising-focused networks seek to provide alternative alternatives to conventional services. From a customer viewpoint, digital advertising is becoming increasingly offensive and invasive. Unless you pay for a subscription or use an ad block programme, it's hard to read a news storey, watch a video, or listen to music without ads. That said, users are not compensated for their large exposure to digital advertising.
Projects such as Simple Attention Token featuring its own browser (Brave) aim to bring new standards to the digital advertising market by enabling users to display ads through cryptocurrency rewards.
Data Storage, IoT, and AI Solutions: e.g. STORJ, IOTA (MIOTA), Cortex (CTXC), DxChain Token (DX)
- There has been growing interest in creative industries such as the Internet of Things ( IoT), Artificial Intelligence ( AI) and digital data solutions.
- Multiple crypto projects are developing their solutions to interconnect IoT, AI, machine learning.
Blockchain Gaming: Examples of: Enjin Coin (ENJ), Decentraland (MANA)
In recent years, blockchain gaming has been the next big thing, with prominent publishers such as Ubisoft, Epic Games, Microsoft and Sony piloting the use of DLT technology for their goods and services. And it's no wonder that blockchain technology will bring huge benefits to the gaming industry. Take CryptoKitties as an example of this. This cat-themed blockchain collectibles game became so popular at one stage that it overwhelmed Ethereum 's network at the end of 2017. Blockchain games like CryptoKitties have real ownership, possibly equal gameplay, and an ability to earn coins (play-to-earn vs. pay-to-earn) in-game.
Borrowing, Loaning, and Other DeFi Solutions: Examples: SALT, NEXO, WAVES
Decentralized finance (DFI) is a relatively recent term. And it has created an entire industry by providing blockchain and crypto-powered finance applications that serve as decentralised alternatives to common solutions on the traditional finance sector. Lending and borrowing are one of the most commonly used cases of DeFi DApps that allow users to borrow money using their crypto as collateral or to gain interest on their coins by lending their digital assets to others on the platform.
Healthcare: Examples of: Solve Care (SOLVE), Doc.com Token (MTC), Dentacoin (DCN)
Although the healthcare sector is one of the highest priorities for both governments and people, it faces a multitude of challenges. As a potential solution to (part of) the industry 's problems, blockchain implementations have emerged on the healthcare market, piloting how DLT could help the sector. For example, the Doc.com crypto startup has developed an application that leverages the combination of AI and blockchain technology to provide medical assistance to users. On the other hand, Dentacoin is more focused on prevention, while Solve Care has built a whole blockchain-powered healthcare platform for medical service providers and companies.
Business Sectors: The Latest Way to Diversify Your Investment in Cryptocurrency
When you decide to invest in an asset, it is important to keep your risks to a minimum in order to mitigate your losses and maximise your potential profits. To do this for your crypto portfolio before investing consider evaluating digital assets using variables such as market capitalization, transaction rate, usefulness, market sector, as well as related user reviews and project news to help your financial decision. Although this is not a new idea, the allocation of your funds to cryptocurrencies that together reflect a wide range of market sectors is a decent way to (further) reduce your risks and increase your potential ROI.
In this article, we addressed the foundations of investment in digital assets. In the second part of the series, we're going to dig into the practical specifics of creating a well-diversified crypto portfolio.