An in-depth look at how to do crypto portfolio allocation successfully

Do you own a lot of Ethereum? Or maybe your portfolio is more weighted toward Bitcoin. You might even have no crypto at all in your portfolio, and this is the first time you consider investing in digital currencies. 

It’s risky to leave your portfolio undiversified, but luckily, you can choose from numerous alternatives when it comes to digital currencies. The blockchain offers the ideal opportunity to diversify within the sector and broaden your exposure to emerging projects. Crypto projects are the most popular investment solutions because they increase returns. Digital currencies are much more volatile than traditional commodities, but they offer unique diversification opportunities and usually a higher profit. If you’re still in doubt that cryptocurrencies are volatile, track Etherum price over a longer period. 

Keeping this in mind, let’s have a look at some recommendations on how to allocate your portfolio. 

Search for crypto projects with different use cases

A great strategy to diversify your investment portfolio with cryptocurrencies is to put your money into projects with different purposes or use cases. Digital currencies can be used for asset transfer, but they also have other purposes. Bitcoin is one of the most popular stores of value people use these days because it allows them to increase their wealth. Ethereum works as a platform that enables the creation of decentralized apps and has smart contract functionality. Furthermore, the transition to Ethereum 2.0 exemplifies the blockchain industry’s dedication to ongoing development, where stakeholders collaborate to address challenges and unlock new potential for decentralized applications and smart contracts on the Ethereum network. Countless other digital currencies have unique use cases, but you must research the market and identify those that would provide you with the best benefits. Blockchain technology powers several exciting projects, and allocating small portions of your portfolio to multiple cryptocurrencies is recommended. 

Combine popular cryptocurrencies with new projects

When diversifying your investment portfolio with crypto, you must select projects of different sizes. This will help you lower the risk associated with these volatile assets and help you produce different returns. For example, Ethereum and Bitcoin are market leaders, so you should add both to your portfolio. Then, it would help if you looked for new projects with extended communities that continue to grow daily. This is a great strategy to optimize your portfolio’s risk return. 

If you have a high-risk tolerance, you could also invest in projects in the pre-sale phase. Most of these assets are listed at low prices in the presale stage, but they generate a high profit if they turn successful after launch. Investors should always take a little extra risk to boost their earnings. 

Buy cryptocurrencies created on different blockchains

If you’re reading this article, you probably know that blockchain is the technology that supports the development of cryptocurrencies. However, the term blockchain is also used to refer to the multiple networks created to power digital currencies. Each blockchain platform has a series of unique features. While Bitcoin and Ethereum are the most popular networks, numerous others are available, and you should learn more about the technology behind them to identify the most suitable for your portfolio. You want to buy cryptocurrencies based on different blockchains when you diversify your investment portfolio to cover a wide range of purposes. Cardano, for example, focuses on efficiency, scalability and security, while Ethereum specializes in smart contracts and decentralized apps. 

Diversify the portfolio across different areas of the market

Another strategy to follow when diversifying the portfolio using cryptocurrencies is diversifying across multiple market areas. As mentioned earlier, not all blockchain networks are the same; some are specialized for particular purposes, and you should decide in what sector you want to produce return to pick the cryptos that operate in that area. 

It would help to research the top-performing digital currencies to invest in from multiple areas to achieve a well-balanced portfolio. The most important areas you should cover when investing in crypto projects are:

– Artificial intelligence

– Decentralized finance

– Blockchain gaming digital currencies

– Metaverse tokens

– Peer-to-peer payment solutions

– Non-fungible tokens

As expected, each of these projects has different use cases. Their contrasting nature lowers the risk associated with your portfolio and allows you to increase your profit. 

Consider market capitalization

Before picking the list of digital assets you’ll add to your portfolio, it’s advisable to check the top of the largest cryptocurrencies by market capitalization. It’s easy to find online because most exchange platforms offer information about it. Since its launch, Bitcoin has maintained its position as the largest cryptocurrency by market capitalization. While altcoins like Ethereum have gained ground over the years, Bitcoin continues to occupy the largest market share. However, when you strive for portfolio diversification, you can invest in the most prominent projects by market cap, even if the difference between the first place and the following ones is notable. Cryptocurrencies with larger market capitalization are more stable, allowing you to limit the level of risk you expose your investments to. 

Diversify according to risk level

We already mentioned that cryptocurrencies are high-risk assets, so it’s essential to identify your risk tolerance before even considering adding a digital currency to your portfolio. The principle that should guide the allocation of funds from your portfolio is similar to when investing in traditional commodities. It would help if you started by purchasing more stable cryptocurrencies like Bitcoin and Ether. Then, you can manage the level of risk by adding some digital currencies with a higher risk.

Identify your investment goals

All the assets found in your portfolio must help you achieve your investment goals. After establishing your goals, you can identify the steps you must follow and the time frame necessary to go in that direction. 

When establishing investment goals, consider goals like ideal return, risk tolerance, investment horizon, and experience in the sector. Depending on your preferred strategies, you may even invest solely in cryptocurrencies that serve a particular use case or from a specific geographical region.