A disciplined, strategic approach is what should be adopted when establishing a cryptocurrency portfolio, given the market’s volatility.
Is it your first time building a crypto portfolio? But don’t know what steps to take and what to avoid? To help you stay on the right track, check out the dos and don’ts mentioned below.
Dos of Building a Crypto Portfolio
Do Your Own Research (DYOR): You should never invest based on hype or another person telling you to. Study the whitepaper, technology, real-life usage case, experiences within the team, and community support of the project to build your own beliefs.
Diversify Your Investments: Do not keep all your eggs in a single basket. Diversify your capital across assets with varying market capitalisations (e.g., a combination of Bitcoin/Ether, medium-cap altcoins, and a small slice of high-risk projects) and diverse fields (DeFi, NFTs, or infrastructure).
Invest Only What You Can Afford to Lose: This is the golden rule when it comes to investing in volatile assets. Ensure that the money that you invest in crypto is not necessary to cover your living costs or emergency savings, as any losses will not have severe financial implications.
Apply Dollar-Cost Averaging (DCA): Do not attempt to invest at the best market price. Instead, invest the same amount of money regularly (e.g., weekly or monthly). This will help mitigate volatility’s impact on your average purchase price.
Keep Your Assets Safe: Keep large amounts in a secure hardware wallet (such as Trezor or Ledger) or with a trusted custodian, instead of holding them on an exchange.
Create a Simple Plan and “Stick with It: Before you invest, you should have a clear plan of what you want to invest in, the length of time, and the risk level you can take. A rules-based, systematic framework will help avoid making decisions based on emotions during market swings.
Rebalance Periodically: Once every month, track your crypto portfolio to ensure your investment proportions match your initial plan. When one asset has increased rapidly, you might need to prune it and redistribute to maintain balance.
Don’ts of Building a Crypto Portfolio
Don’t Invest More Than You Can Afford to Lose (Worth Repeating): Finance experts tend to suggest that you limit crypto exposure to a low percentage (i.e., 1-5%) of your total investment portfolio.
Don’t Trade Emotions: Do not fall into the trap of fear of missing out (FOMO) when the market is advancing, or panic when prices drop. The wise approach is to research and stick to an investment strategy for the long term.
Do not overrule the importance of security: Do not share your private keys or recovery phrases. Use a very strong password and two-factor authentication (2FA) on all accounts and devices.
Don’t Fall for Scams or “Guaranteed Returns:” Be cautious of projects with an anonymous team, promise of easy transactions, or anything that seems too good to be true, because it usually is.
Do Not Over-Diversify: Diversification is essential, but having many assets will over-dilute your returns and make it hard to keep track of each investment. So, go with a sizable number of assets that you can easily keep track of.
Don’t Forget Fees and Taxes: Remember to factor in exchange and withdrawal fees imposed by the exchanges, which may accumulate. Additionally, anticipate any tax payable on realised gains; seeking advice from a tax professional is the only way to make it happen.
