Cryptocurrencies are financial assets based on Blockchain Technology, which are mostly decentralized and have many features to function in many fields and have emerged primarily as a solution to the cumbersome nature of traditional finance. The price movements of cryptocurrencies can occur over a wider range in a shorter period of time compared to many financial products. In other words, cryptocurrencies are volatile assets. Although they are used in many areas in many parts of the world, the adoption rates of cryptocurrencies are still low. That is why cryptocurrencies are more volatile than other financial assets.
Diversification is one of the key factors to consider when building any type of portfolio. When building a cryptocurrency portfolio, asset diversification is the most important step. Let’s look at some of the factors to consider when building a well-balanced cryptocurrency portfolio:
Diversification
Diversification is of the utmost importance when building an investment portfolio. The concept of diversification in portfolios changed in the second half of the 1900s. Previously, only stocks from different sectors were included to have a diversified investment portfolio, but with the introduction of Modern Portfolio Theory, correlations and relationships between stocks have also started to be taken into account. By ensuring that financial assets with negative correlations are included in the portfolio, it is possible to avoid project or sector-based declines.
When building a portfolio, an investor should consider adding projects from different areas. For example, building a portfolio consisting solely of NFTs when NFTs are in high demand will result in a loss in all assets in the portfolio if NFTs lose their popularity. For this reason, an investor should consider including assets with future potential and low positive correlations. Rather than just keeping DeFi projects in the portfolio, keeping DeFi, NFT, Artificial Intelligence and Blockchain projects as well as Fan Tokens, Platform tokens, and DEX tokens is considered much more beneficial in terms of diversification.
Project Research & Fundamental Analysis
Cryptocurrencies have their own characteristics. Each project can be supported by a different technology and have a different TPS capacity. Each project has a different field, sector, solutions to problems, and potential. Therefore, it is critical to research projects and conduct fundamental analysis well. When performing a fundamental analysis, an investor should examine the token economy of the project he is interested in. Knowing when and how much of the project’s crypto asset will be traded on the market gives us an idea of possible future price movements.
Taking Risks
Each individual has a different perspective. Some prefer an exciting journey through life, while others value tranquility and order. Our characters also determine our approach to investments. Investors who do not hesitate to take risks prefer to invest in assets with high volatility, while investors who do not want to take high risks prefer assets with low volatility. While risk and return have a highly positive relationship, high-risk investments don't always lead to high returns.
Portfolio Distribution
As an investor, you need to decide how much of which cryptocurrency you will have in your portfolio. When building a cryptocurrency portfolio, preference is usually given to projects with a high market cap. Ranking first in terms of market cap, Bitcoin (BTC) is the asset of choice in many cryptocurrency portfolios.
Secure Storage
Secure storage is more important than any investment option, asset diversification, and the overall structure of a portfolio. At Bitexen, we store your assets in a highly secure manner. However, you may still want to have a cold wallet or hardware wallet.
Tracking the Markets: Following the News
The cryptocurrency market is open 24/7. Due to the constant trading in the market, a development can occur at any time. To keep track of developments and market movements, you can go to the News Feed on our website or to the Research section in the Bitexen mobile app.
Further Readings:
Modern Portfolio Theory & Portfolio Management in Cryptocurrencies
