Lots of investors are learning how to build a wallet with tough choices to choose from such as Ethereum, Bitcoin, and other cryptocurrencies. To have an attractive return and limit the risks, you need to have a strategy for the construction of a portfolio. So, in this article, we present some methods or strategies on how to build a cryptocurrency portfolio strategy.
Cryptocurrency Portfolio Strategy: Does The Dumbbell Strategy Work?
What is the best way to build a cryptocurrency portfolio?
Across the cryptocurrency industry, many investors build portfolios in different ways, for different reasons. The dumbbell strategy was the main topic of discussion for our best pick of cryptocurrency portfolio surgeries.
Plus, the riskiest assets may include tokens or shares in early-stage startups. Remember, stock investments in Coinbase, Gemini, BlockFi, Strike, Kraken, Binance, etc. all outperformed Bitcoin.
Combining conservative with risk is a great way to reduce overall portfolio risk, while taking advantage of the significant upside that is being generated and captured by a new technology industry disrupting a multi-billion dollar market.
Cryptocurrency portfolio strategy 1: Choose the right mix of storage.
Investors will either go for hot (online digital wallet) or cold storage (offline wallet, typically stored on a hard drive). To keep your cryptocurrency safe, store the majority (80%) of your cryptocurrency in a cold wallet to stop hackers from gaining any access. On the other hand, keep some crypto (20%) in a hot wallet online so crypto traders can move in and out of positions quickly aka short term movements.
Cryptocurrency portfolio strategy 2: Prioritize liquidity.
Liquidity is important as when the market moves fast, crypto traders need to move in and out of positions quickly. With demand for cryptocurrency, the market participants can buy at the best price and when the time comes to sell holdings, investors can secure a profit.
Never go for an asset that maybe has great potential is at the mercy of the market where it is not being traded and you’re sitting on it.
Cryptocurrency portfolio strategy 3: Remember, today is still early.
While there are about 120 million investors in cryptocurrencies today, cryptocurrency experts predict this metric to grow 10x over the next five years.
Cryptocurrency portfolio strategy 4: Harness volatility.
There is still speculation and hype surrounding the emerging asset that is cryptocurrency. In this class of assets, demand can lead to heightened volatility but daily volatility is normal and healthy for the crypto market and is actually an opportunity to make profits.
Since mainly large price movements are typically seen as a risk, it is in fact, good for smart traders to manage their volatility risk effectively.
To manage the market’s price swings, pay attention to what is happening in the market with news updates and with the traded asset itself for all things related to blockchain updates as well as identifying emerging patterns through historical charts.
Cryptocurrency portfolio strategy 5: Invest ONLY what you can afford.
What is the dumbbell strategy? How does it work with Ethereum?
The dumbbell strategy in cryptocurrencies refers to investors who invest in short-dated and long-dated bonds, but refrained from investing in intermediate-dated bonds. We keep the terminology and replace the duration with the risk profile.
The majority of a portfolio that follows this strategy is invested in the safest and most conservative asset in the industry – Bitcoin. There is no need to worry about bitcoin hacking. There are no worries about seeing the value of Bitcoin drop to zero. There are no worries that Bitcoin will lose favor with investors or holders. This digital currency has the longest track record in the industry. It is completely transparent regarding the various fundamental elements and parameters of the chain. As long as the situation remains healthy, Bitcoin is the least risky asset you can own in this new digital financial system.
The other side of the dumbbell strategy is made up of investments that fall into the riskiest category in the industry. These are assets that have a very low probability of performing, but if they do, early investors will be able to earn 100-1000x returns. While 100x to 1000x returns may seem outrageous in the traditional financial system, they are quite common in this high-risk category of the crypto industry. The objective is to balance the overly conservative allocation to Bitcoin with an allocation to the most asymmetric assets.
Are you wondering about Ethereum in a cryptocurrency wallet?
We haven’t mentioned Ethereum because, in the dumbbell strategy, it is not necessary to hold any. Why? Ethereum is the second-largest asset in the industry, but it remains significantly riskier than Bitcoin to most investors.
Ethereum is also more conservative than long-term, high-risk assets. But in this strategy, there is no need for two conservative assets in the portfolio. Mainly because Bitcoin provides the exposure needed both from a risk and return perspective.
It would not be surprising to see Ethereum increase in percentage faster than Bitcoin until the end of 2021. But this additional return is in exchange for the additional risk that investors and holders take on. In a conservative basket, you need the most conservative asset. You don’t need something that’s a little conservative. Either it’s the most conservative or it’s not. This leads to Bitcoin. It is equivalent to cash which then allows exposure to the riskiest assets in the portfolio without fear of total loss.