Understanding the Importance of Asset Allocation in Cryptocurrency

No matter what kind of investment ventures you involve yourself in, the last thing you want to do is put all your eggs in one basket. To hedge against any risks your investments might face, it’s crucial to diversify your portfolio. Diversification involves investing in different kinds of assets, so that the growth of particular investments can balance out those that end up depreciating in value. This gives you better chances of still turning a profit even if certain investments don’t perform well.

Portfolio diversification also involves the smart allocation of assets of the same type. If part of your investing portfolio is devoted to cryptocurrency, for example, it’s always a wise move to invest in different kinds of crypto coins. You might balance big players like Bitcoin and Ethereum, for example, with hyper-specialized coins such as the privacy-focused coin Monero. This coin in particular promises to facilitate fully untrackable, anonymous transactions for any two users via a complex crypto algorithm coupled with a highly secure Monero wallet, making it a go-to asset for investors with compelling privacy concerns.

Want to have a deeper understanding of asset allocation in crypto? Looking for helpful tips on how to diversify your crypto portfolio? Read on for a comprehensive explanation and some key diversification tips below.

Asset Allocation Explained

When building your portfolio, one of the biggest challenges you’ll likely face is finding the perfect mix of assets that suits your budget, needs, and long-term investment goals. One of the major factors you’ll want to look at is your risk appetite. Needless to say, the more high-risk assets you add to your portfolio, the higher your potential gains and losses will be. In most cases, it’s sensible to counterbalance these assets with more stable ones to hedge against losing too much of your capital.

In the last few years, cryptocurrencies have become an increasingly profitable and, therefore, highly sought-after investment option, outstripping many traditional assets in terms of the returns they deliver. The growing popularity and technological advancement of blockchain technology in general also stand to boost crypto’s value all the more in the near future.

Financial experts do recognize, however, that cryptocurrency remains a volatile asset even given the current boom in crypto trading. The rapidly fluctuating values of even the highest-performing coins make crypto an asset class that’s still deemed to have a high-risk profile overall. It’s also worth noting that greater regulatory scrutiny in jurisdictions all over the world could affect the value of certain coins over time. These risks should be top-of-mind for investors looking to create a balanced crypto portfolio.

Depending on your risk appetite, a sensible fraction of crypto to include in your portfolio can fall anywhere between 1% and 30%. Newcomers to cryptocurrency trading are generally encouraged to start with smaller and more conservative investments, observe how these perform over time, and adjust accordingly. Even the smallest investment, however, should incorporate different kinds of cryptocurrency, which in turn begs the question of how investors can choose the right coins.

Building the Best Crypto Portfolio

There are thousands of cryptocurrencies currently available, and many more are being created every day, which can make it challenging to figure out where to begin and what coins to focus on. Above all, doing your research is essential to building the perfect crypto portfolio for your particular investing goals and risk tolerance. If you’re just getting started as a crypto investor, try the following tips:

Work with a Well-Regarded Crypto Exchange

Most people make their crypto investments by choosing a particular coin and purchasing their desired amount of that coin from a cryptocurrency exchange. Start your research by looking into prominent exchanges, examining their regulatory status, and comparing the terms and conditions they offer.

Unless you have a very high appetite for risk, it’s most reasonable to choose an exchange that’s recognized and regulated within a financially reputable jurisdiction such as the US or the EU. These exchanges are likely to enjoy a high daily turnover, levy reasonable fees, and focus on high-performing cryptocurrencies, excluding obscure or dubious coins from their roster. Working with such institutions reduces your chances of running into any trouble with tax authorities or banks down the line.

Read the Research on Coins You’re Interested In

If you find yourself interested in a particular coin, it’s always a good idea to read up on it at length before putting any money behind it. Many cryptocurrency developers will publish whitepapers or other research reports on their projects, which will often be free for potential investors and other interested parties to access and read. These reports tend to explain a particular cryptocurrency’s intended use or purpose, how it works, and what its developmental roadmap looks like.

Monitor Current Crypto Values

Even the biggest and most well-established cryptocurrencies are not immune to rapid and dramatic fluctuations in value. Platforms like Live Coin Watch and CoinMarketCap provide real-time updates on what coins are available for purchase and their current trading value. Staying up-to-date on this information can help you make smarter decisions about which cryptocurrencies to include in your investment portfolio.

Building a balanced crypto portfolio may take some time and effort, but it’s possible for anyone to do. As with more traditional investments, the key is to bear your individual goals, budget, timeframe, and risk tolerance in mind as you research. That way, you’ll be able to put together a portfolio that’s well-tailored to your particular needs and investing style.