Steps to Manage a Crypto Portfolio Effectively

Cryptos have become a divisive topic of conversation among hardcore investors and lay people with no investing interest, as the future of these forms of virtual money gets hotly debated nowadays in all circles. Bitcoin, the world’s first digital coin, debuted in 2009 as a byproduct of the housing market crash and global recession that hit the planet at that time without much fanfare. And loads of things have changed in the cryptocurrency sphere since its inception. Once viewed with skepticism and uncertainty, cryptos have become a wildly popular investment in recent years for many, despite demonstrating just how volatile they can be. For example, in 2021, the value of one Bitcoin unit surged over $60,000, only to drop into the sub-$20,000 territory in 2022.

According to some statistics, over twenty thousand cryptocurrencies now exist, with Tether and Ethereum sitting behind Bitcoin in value in a market worth around a trillion dollars. Per a nationwide poll, 21% of American adults felt comfortable diving deep into this sector as of 2022, with 57% of all US crypto owners being millennials, even though this group only represents 30% of the country’s overall population.

After the rough patch experiences in 2022, the crypto market is witnessing a bullish momentum fueled by cooling inflation and relaxed global macroeconomic headwinds. Bitcoin demonstrated a sharp rebound of almost 40% in January 2023, and various altcoins have made waves, with Solana and Cardano demonstrating growth of 20% in 2023. Overall, the decision of whether people should invest in the crypto landscape depends on the degree of danger they stand to take, as these assets have a famously volatile nature. Per William Procasky, a professor of finance at Texas A&M University-Kingsville – “Those who know how to cope with risk can find a place for crypto.” And Lauren Niestradt, a portfolio manager at Truepoint Wealth Counsel, adds – “It is best to stick to mainstream options, as there is a bit more safety surrounding them.”

What follows is a set of tips for managing a crypto portfolio successfully, which also can get applied broadly in investing as an instrument to reach long-term financial goals.

Set Goals & Divvy Assets

Everyone’s relationship with money is sensitive, as many of our opportunities in life depend on how much funds we have. Regardless of what some may say, money is the window to possibilities, and as time passes, the connection between investment and lifestyle becomes more sophisticated. Without question, life and investment goals intersect, with the latter often getting divided into three branches depending on outlook, income, and age. Income sets the starting point of anyone’s investment goals, as no one can invest what they do not have. Outlook describes the playing field in which we operate during life, and age can get separated into young, family-building, and self-directed (old).

It is vital to grasp that investment goals for many become moving targets because life happens, roadblocks appear, and chances arise out of seemingly nowhere. But goals aid in everyone deciding their asset mix. So before adding cryptos to a portfolio, everyone must ask themselves – what are they putting money towards at the end of the day? When will they look to enjoy the fruits of their wise decisions? And what do they need to achieve their long-haul objectives? The answers to these questions are the foundation of a solid strategy. Also, effective asset allocation consists of the right mix of investment types that get included in a portfolio. These get decided on factors we already discussed. They are age, goals, timeline, and risk tolerance, seeing as they rule the balance of fixed income vs. equity.

Do Research & Limit Emotional Involvement

Of course, people get lucky sometimes. Yet, to have a continuously decent chance of turning a profit from investments, individuals are always better off having first-hand information before making any. Concerning cryptos, these digital assets publish white papers when they first pop up. These serve as research reports that provide insight into their intrinsic value and potential durability in the market. They outline the technology implemented while also depicting a development plan. It is essential to read these papers and not rely on hearsay regarding what coins to track and pour money into.

It is common to get swayed by emotions, as we are not always rational beings but ones that sometimes make reactional responses, affected by biases and various sentiments. If possible, everyone should look to suppress feelings regarding investments. A traditional problem with investors is the syndrome of rushing into crypto opportunities out of the fear of missing out and hype. However, the best course of action is to always rely on analysis and ward off emotions as they can often lead to investing in what get popularly called these days shit coins.

Understand How Many Risks You Are Willing to Take

90% of traders agree that risk management is a mandatory approach en route to profitability. It involves identifying risk, assessing it, taking insurance to prevent its 100% impact, and monitoring the possibilities of feeling its entire or partial wrath. Staying informed is the key to effective risk management, as data affects the likelihood and consequence of incurred risk and your decisions on handling emerging levels of it.

Before making any investment, it is crucial for everyone to figure out if they are low, medium, or high-risk traders. As a rule of thumb, those without experience should never opt for high-risk investments. They should also never put in money they have set aside for dire times or urgent needs. Understanding one’s risk appetite is a necessary tool for avoiding strategic management errors, avoiding financial uncertainties, and staying clear of legal liabilities. To reduce risk, investors must apply the resources at their disposal to minimize, oversee, and control the influence of negative events while maximizing positive ones.

Use a Crypto Portfolio Tracker

The heart of any wealth-building endeavor today involving investing revolves around optimizing one’s portfolio. Thankfully, an almost endless sea of options live online that can help investors pick assets, allocate resources, and set goals using relatively inexpensive, in-depth analysis tools.

Modern tracker apps consider the needs of a wide diverse range of investors, from sophisticated ones to beginners. Their users can check out the summary report on the app of their choosing. It gives an overview of their portfolio’s performance. Plus, activity details for a specified period. That is info laid out in a manner that is almost identical to the one that brokerages provide in accounts statements. It lists performance metrics, standing and ending holdings, benchmark comparisons, and more.

Anyone would be hard-pressed to find a highly prosperous crypto investor not utilizing technology to gain an edge. Crypto’s popularity and prosperity rest on innovations. So why shouldn’t those funding their rise take advantage of all the tech at their disposal to thrive financially?

Balance with Diversification

We all have heard the saying – do not put all your eggs in one basket. That particularly holds when it comes to novel investment opportunities that have not stood the test of time because of the uncertainty surrounding them. As mentioned above, thousands of cryptocurrencies are floating around the digital sphere, and the market share of Bitcoin keeps dwindling year-on-year as new players appear. Holding onto one crypto likely to maintain and grow can allow for sizeable profit accumulation. Though, it may also leave an investor prone to experiencing inevitable peaks and valleys. Dramatic downturns can cause panic and make crypto prices fall even more, as these are still largely speculative investments.

That is why it is super important for everyone to diversify their portfolio, spreading the risk among multiple assets to escape the hazards of massive price fluctuations and the dangers of looming volatility associated with cryptos. Most sphere experts advise obligatory grabbing a share of Bitcoin, Ethereum, Tether, and maybe options like Litecoin and USD Coin as the most stable forms of virtual money. But it is smart to put something towards coins like Ripple, LUNA, and Solana, as these have been making record gains as of late. Remember, diversification adds cushion to your portfolio, offsetting losses. Multiple financial mathematical explorations have proven that by incorporating adequate diversification strategies, investors boost the overall expected returns on their investments while reducing riskiness.

Dollar-Cost Averaging

Dollar-cost averaging is applicable in every investment sector, and it entails putting in the same sums of money in a targeted security at fixed intervals over a set period. The train of thought here is that by using this practice, investors may be able to reduce volatility’s impact on their portfolios and lower their average cost per share. In short, the primary benefit of the strategy is that it eliminates the effort it takes to try and time the market so that investors snag assets at the best prices possible.

Opinions on dollar-cost averaging remain divided, but most believe it is a viable long-term tactic that can help anyone grow a sustained and ever-expanding crypto portfolio. It is a sensible, emotionless approach. Instead of someone investing, let us say, $10,000 into a crypto asset at once. With cost averaging, they can spread their investment over time, allowing themselves a bail-out option before they risk their entire allocated investment amount.

Develop Exit Strategies

On the subject of bailing out, it is necessary that everyone understands that investing in any asset is in many ways similar to gambling. There is a level of unpredictability in play also here, given that no one can predict how things will turn out with a 100% degree of regularity. Hence, it is paramount that everyone pooling in and pouring substantial sums of cash into the crypto sector has an exit plan in place if things go south.

The crypto landscape will get significantly influenced by impending regional regulation. These can make or break this domain, and no one can be sure what laws specific countries will pass and how these will affect the industry. Often price corrections are temporary, and coin prices bounce back. Nevertheless, investors must be ready for a worst-case scenario and not stay aboard a sinking ship. Portfolio managers are largely successful based on their instincts and knowledge of when to enter and exit a trade. Not having a set exit strategy will often cause individuals to maintain a position for prolonged periods, despite mounting losses.

Explore Borrowing/Lending & Staking/Yield Farming

Yes, crypto lending is an option, and this is a form of decentralized finance that works virtually identically to how traditional banks lend funds in exchange for interest payments. Crypto loans provide access to digital assets via collateralized loans or cash. They get paired with high rates (up to 13%) and are inherently risky on account of potential margin calls if asset prices fall. Another drawback of this possible management step is that a majority of exchanges do not offer the same protections banks do because no one regulates them.

Staking and yield farming go hand in hand, with staking being nothing more than locking idle assets, thereby contributing to market liquidity for a reward, and yield farming being a more complicated strategy that mixes lending/borrowing and staking to maximize profits. It can supply ample gains but also has drastic risks attached.

Parting Thought

Loads of differences between successfully managing a traditional and a crypto portfolio do not exist. Many of the same principles presented above apply. Know that while the steps laid out work for the most part for all investors, there is no one-size-fits-all approach. No one can hand over a manual that details a road to success. That said, researching cryptocurrencies and taking a rational approach to an investing style while diversifying will go a long way into growing it and mediating risk. Keep emotions out of decision-making, and look to keep things simple. Dollar-cost averaging is a smart way to go about things for those who do not wish to invest all their savings at once and want to take a more secure method of building wealth.

Photo by David McBee