Due to its highly volatile and speculative nature, investing in crypto still carries a lot of risks. Risk management is therefore a very important matter. Risk management has different facets, and one very important aspect is discussed in detail in Chapter nine There is no question that keeping your private key secure and staying safe online are immensely important to reduce the overall risk. But there are other very important points that help increase the chance of staying in the game, even if we encounter a year-long bear market. The first point we are focusing on is portfolio management and why diversification is so important.
Note: There is not one single way to build up your portfolio. Every investor has a different level of risk they are willing to take, and your portfolio management will most likely change upon your own experience. The following tips are based on some long-term experience in the space and are quite conservative. This will help you, especially if you are totally new to crypto, invest or perform risk management. It is mostly aimed at helping you stay in the game, even in some rough times. This is especially important, as you will most likely make more losing trades or decisions at the beginning of your journey. But be assured that this is totally normal and nothing to be afraid of. It takes some time to execute the investments or trades properly. You might not make insane gains at first, with this more conservative method, but you have a higher chance of increasing your wealth over time.
Disclaimer: The coins proposed below for your portfolio are no direct investment advice. Those are solely suggestions to diversify your portfolio. You always invest on your own risk.
First of all, you should think about the total amount you would like to invest in cryptocurrencies. The amount will vary greatly, depending on your personal financial situation. You should feel comfortable with the amount you would like to invest, because that will benefit you in many different ways. Risk tolerance of some is higher than that of others. Therefore, there is no one “right” amount or percentage to invest. Choose your amount wisely and see it as some gambling money that you definitely don’t need for your everyday life. The safest way to invest is sticking to traditional assets—like real estate. You might not make huge gains over the years, but at the same time, the chances of your investment vaporizing are relatively small. For example, your portfolio could look like this:
Traditional assets: 30%
So a lot depends on your financial situation. If you are relatively set in life and have extra income, you may be willing to risk more than the proposed 40 percent. If you don’t like to invest in traditional assets, or your starting capital is too low, you can adjust your portfolio accordingly. No matter what, I would still try to keep at least 30 percent of your portfolio in cash to have some liquidity if needed. This is especially important for being able to omit the direct need of cashing out some crypto in case of some unpredictable events.
Now let’s have a detailed look into the crypto allocation of your portfolio. I will try to do this as generally applicable as possible, but you will still hear infinitely various opinions on what the “right” portfolio is. Many people, especially the more unexperienced ones, will always try to shill you one of their holdings. They might have done a good pick (most probably by luck) leading to 50x–100x gains and are now more than overconfident with this certain coin. It doesn’t matter whether the coin is pure Pump & Dump (P&D) or without any fundamentals. They will always try to convince others that their one coin is the best out there and will even replace Bitcoin soon. It’s easy to fall in love with a coin increasing the value of your whole portfolio multiple times, but you still have to stay as objective as possible. One of the first things you need to learn is to not let your feelings interfere in crypto and trading in general. Alternatively, the chances of losing money will skyrocket. Hence, you should always try to keep your percentage distribution the same. If one of your coins takes off, re-allocate the gains to the whole portfolio. A possible allocation can be seen below:
40%: Lowest risk possible (Bitcoin/Fiat)
25%: High caps (ETH, LTC, XMR, DASH, XEM…)
15%: Passive Income (Masternode, POS)
10%: Micro/small caps, “Gems”
As you can see above, most of your portfolio should be in Bitcoin—no matter what other people tell you or what coins they try shill to you. You should always have a long-term bag of Bitcoin stored as safe as possible. This is the bag you should not use for any trades. You can always increase its size with some gains from your other trades, but try not to decrease this bag for any reason.
Regarding your holdings, it’s very helpful to set a plan or a target to accomplish in the future. Maybe your long-term target could be owning one whole Bitcoin. Others might aim for 2.5 or 10 BTC. The experienced ones will most likely aim for the magical number of 21 (since the maximum number of Bitcoin ever possible will be 21 million). Setting a target helps you (1) think twice about any investment and (2) keep track of your portfolio as a whole.
You may have noticed some additional cash or fiat allocation in the portfolio above as well. The reason for it is simple. It is always wise to have some extra liquidity, no matter how bullish you are on crypto in general. This is especially useful if there is a dip or correction in the market. Some will, for example, sell a certain percentage of coins for fiat every week to lock in profits and minimize the effect of market changes. Always remember that as long as you don’t cash out your holdings, all the gains are just so-called paper profits. Crypto made countless people millionaires—on paper. You could therefore sell 1 or 2 percent of your portfolio every Sunday, for example, and increase your fiat position. No matter how bullish you are, if the market sentiment turns, you will be happy about every profit you’ve locked in.
Remember that you can always re-enter the market if you want to, which can be very rewarding if you have a nice amount of cash to buy the dips or the bottom. As mentioned earlier, it is not necessary to buy the exact bottom. You can always average down if you have some extra capital left. That’s why, it is always good to have some extra income coming in. If done right, it really helps to minimize the risk of losing too much money on a single coin of project. Most paper millionaires go broke fast as well, as they never cash out or diversify.
When it comes to handling your portfolio, keeping the distribution percentage steady nearly all the time is very important. If, for example, one of your “gem” projects takes off and the value of your bag goes 50 times higher, you should redistribute your gains into all the other allocations of your portfolio.
Always remember to keep about 10 percent of your initial bag, in case there is a moonshot. Slowly sell on the way up to lock in your gains and try to sell as much as possible at a decent profit. Do not get overconfident or euphoric with your bag. Always try to be as rational as possible. The chances that the coin will drop are far greater than that the rally continues for a longer period. That’s why it’s always good to take some profits, even if you did fell in love with the project. The chances that you will be able to increase your holdings by buying back in later on are pretty good, as the price will almost certainly drop to lower levels.
Try to redistribute your profits into any of the other allocations to keep the proposed ratio as good as possible. Since your overall portfolio wealth increases, you should be able to increase your position in every one of the other coins as well. That will lead to some bigger gains next time you find your gem, and the risk of jeopardizing your overall portfolio will be minimal.
Most traders will set a time frame for each trade or investment they make. If it does not play out as planned in the given time frame, they give up their position and switch over to the next one. I would advise picking some long-term holds at first rather than setting some strict time frames, as impatience could hereby easily lead to overtrading. Without the necessary experience, you would most likely lose more and more money. But there is still a valuable lesson to learn from it. These traders decrease some of their assets first and then invest in another project rather than use more and more of their backup or long-term funds. That is something you should always do. Since you always try not to chance the total distribution scheme of your portfolio, you will need to sell a certain bag to invest in another. This should always be done for each of the certain allocations of the portfolio. It may be very annoying to see some of your bags pumping after you sold them, but you simply can’t always avoid that. This happens to all of us, and even the most experienced investors will have to admit some failed trades from time to time.
Always remember that even with TA, market psychology, and a lot of experience, some of the pumps in crypto happen without a logical objectifiable reason. You won’t be able to catch all the pumps. But the good thing is that you won’t need to at a certain level. Just always make sure not to chase the pumps. Whenever possible, I try to further increase my long-term BTC bag. This is the holding I am most relaxed about, and I am not planning to touch it anytime soon. The longer you in the space, the more you’ll read about what “long-term” means and how long “long term” should be. I personally have no problem with keeping some of my holdings for years. You shouldn’t have any problem either—especially with your Bitcoin bag. But as with everything in life, aim for what suits you best. Life is too short to follow blindly.