What is The Best Structure For a Diversified Crypto Portfolio?
The principles of investing are always the same no matter whether you are investing in the cryptosphere or in the traditional markets. There are certain rules a savvy investor must always apply. These include sticking to your trading plan in order to overcome your own emotions, engaging in learning and practice and using the tools at hand so you can hopefully grow your bottom line and mitigate your risks. Learning to manage your risk is critical to the process of investing.
Perhaps the key way to manage your risk is by making sure your portfolio is diversified. That means having exposure to a wide range of assets across a variety of sectors and regions. If your portfolio consists of one asset or one sector and you encounter a bear market or a sell-off, you are effectively wiped out.
That is where diversification comes into play. With traditional investing, it’s quite obvious how to build a diversified portfolio, but how can you do that with your crypto assets?
Step up All Weather Investing
All weather investing is simply a way to diversify your portfolio so that it is able to deal with storms from bear markets, without you losing your entire bankroll. Everybody knows that the majority of leading crypto assets are highly volatile. Their prices can swing dramatically over the course of a month or even a day in the case of Bitcoin. Bitcoin is regularly tacking on gains of around 10% in a 24 hour period and has even been known to jump 36% in one day. This is why Bitcoin has not necessarily succeeded as a payment method. One day your coffee could cost you $1 and the next it might be $36. That better be the best coffee in the world!
Crypto coins often move on the news. Apart from supply factors is the one major driver of crypto prices. If Janet Yellen or someone else of import makes a negative comment about Bitcoin, the price tumbles. Conversely, the price can jump massively, when Elon Musk talks it up.
Where Bitcoin Goes, the Other Cryptos Follow
It’s well known that Bitcoin is the flag bearer of the crypto market. If something impacts its price dramatically, you find that the altcoins, which are often positively correlated will also follow its moves. However there are several classes of cryptos which don’t necessarily track Bitcoin and these are utility coins, which are backed up by solid projects or protocols behind them and long tail crypto assets, which are not moved in the same way as the leading market cap cryptos.
Long tail assets are those with low liquidity, low trading volume, and low market cap. The problem with these assets historically is that they have low liquidity. However, one protocol is working on reinvigorating this asset class by effectively increasing the liquidity available. Liquidfy, which is built on the Binance Smart Chain (BSC) and Huobi ECO Chain (HECO), offers its own native tokens, Liquidity Accelerator Tokens (LAT) and Liquidify Tokens (LFY) in combination with the Liquidify Long-tail Crypto Assets Pool so users may collateralize any ERC-compliant token. The LAT token price, like an index, tracks the long-tail assets locked inside the crypto-asset pool, and users can then later redeem it to recover the locked assets. This is one way to gain exposure to the longer tail assets.
How to Structure Your All Weather Portfolio?
First you have to establish what kind of investor you are and what are your financial objectives. Do you need some income now, or do you prefer to get growth in a few years, or indeed are you a value investor looking to make steady returns along the way?
If you are looking for growth, payouts along the way and value, then you may consider putting some of your portfolio into the more volatile assets and then having some minor crypto assets which you can then stake for ROI, with a portion dedicated to long tail assets, say on a 50%, 25% 25% model. This would be considered the most diversified crypto portfolio. If however, you are investing for large returns and for the long game, you would allocate more to the higher risk assets. Say 75% and 25% for the long tail.
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