Crypto Portfolio Management – 5 Key Factors for a Successful Strategy
Crypto Portfolio Management – 5 Key Factors for a Successful Strategy
Everyone knows crypto portfolio management is necessary, and it is what investors think they don’t need but lack the most. Mental models and tools should be the staples of crypto portfolio management for every investor to improve their crypto performance. If you don’t use these, you will get rekt sooner than later.
Despite everything, it won’t impact your financial future but your relationships, mental health, and desire to invest in crypto again. Hence, it is imperative to use proper crypto portfolio management as most investors do.
Introduction to Crypto Portfolio Management
Crypto portfolio management is the skill of using the appropriate tools and mental models to improve your financial returns from crypto investing. Applying some introspective and becoming an improved or professional investor with technology is the overlooked aspect of crypto investing.
The appropriate tools and knowledge are available on the internet for free, and using them is not challenging. Unfortunately, people sometimes get carried away by their emotions when trading or investing and sabotage themselves particularly. Cryptocurrency portfolio management will help you track your performance, keep your emotions in check, as well as identify the strengths and weaknesses of investing.
What is a Cryptocurrency Portfolio?
It simply means your inventory of cryptocurrencies investments, in other words, a basket of digital assets consisting of cryptocurrencies. It can be hosted on exchanges, crypto wallets, and linked to software for cryptocurrency portfolio management that will help you track the performance of your investment and provide you with analytical tools. Multiple portfolio management apps provide live feeds as well as pricing updates from the cryptocurrency exchanges. They will also alert you to some market activities.
Take it as a profit and loss statement of your business, as all the crypto investors use their portfolios to ensure they grow within time.
5 Key Factors for a Successful Strategy
Investors worldwide develop some strategic plans, and they carefully create a vision of their future as well as the strategies required to get to that point. But many of them fail to realize their vision and deliver what is not expected as a result. So, here are the 5 key factors you can know to get a successful strategy for your crypto portfolio management.
First is Dollar-cost Averaging (DCA)
This is a classic investing strategy where you can make small or regular investments throughout the year instead of all at once. Earlier, investors also applied the strategy to stocks, but experts pretend that you can apply it to cryptocurrency investments.
It’s a great strategy and should be applied to something you believe in, and for long-term investors, a steady and slow approach is all they need. That is where dollar-cost averaging gets the role and helps you focus on the benefits with time.
The strategy involves dividing the investment into small segments and investing them in the market regularly. You can set the recurring buys at regular intervals for a fixed USD amount with this strategy.
It is indeed a safe method for crypto investing as it has lower risk but offers the chance of profit from market swings.
So, DCA is a good strategy because you are smoothing out the anxiety resulting from imperfect timing on investment, when the prices are moving higher you are increasing your position in a bull trend, but when prices go lower you will be able to add even more shares as your investment amount in fiat terms remains fixed.
The second strategy is to use a crypto portfolio tracker
One of the biggest advantages of crypto economies is their decentralized nature in cryptocurrencies. As you build your portfolio, you will deal with different exchanges, wallets, and platforms that allow you to take advantage of promotions.
It can be cumbersome to manage your crypto portfolio across such wallets. Crypto portfolio trackers provide an easy solution to this problem. It is software that reads the data of your crypto wallets and displays the proper information on the dashboard.
Portfolio trackers also make it easier to keep up with how much you have invested in each crypto coin. For example, if one crypto coin is outperforming another, you will see it gaining a massive percentage of the entire portfolio.
Also, multiple portfolio trackers allow a person to trade across multiple crypto exchanges from their services. These provide an additional convenience in that you don’t have to log into each exchange account to trade. However, that convenience could have an appropriate fee.
Another essential profit that the crypto portfolio tracker provides is tax planning and preparation. Cryptocurrency holdings are considered property.
Therefore, a taxable event is triggered on the crypto sale, and the cost basis for the crypto holding is required to assess the tax implication accurately.
As a result, an active crypto trade will surely generate multiple transactions that require analysis for tax purposes.
Third, diversification as the key to success
A proper portfolio management strategy includes diversifying your investments. You might have heard that you never place all your eggs in one basket? If the basket were to fall, you need not lose all your eggs.
Multiple hypes surround high-performing and fast-moving cryptocurrencies. Some of the hype is warranted as certain cryptocurrencies do have a promising future as well as solve real-world problems. Of course, other cryptocurrencies also solve real-world problems, but some worlds are dominated by traditional finance and business.
Two uncorrelated and highly volatile crypto assets are smooth to each other, providing outstanding risk-adjusted returns. The bad news is that multiple cryptocurrencies are correlated to each other.
Diversifying the crypto portfolio can be difficult, but it is possible.
Firstly, plan the base for your portfolio and acknowledge which cryptocurrencies have massive market capitalizations, leading to future potential, for example Bitcoin.
Secondly, consider investing the portion of your portfolio into stablecoins that you can lend out for a higher interest rate. Adopting a portion of your portfolio to act as a high yield savings account means that the portion of your portfolio will be gaining in a down market.
Third, you need to consider a small amount invested in small, high-growth projects. These projects will be correlated to the losses and gains of the broader crypto market.
On the fourth position, rebalance your portfolio.
Portfolio rebalancing is to realign the asset weightings within the investment portfolio to rebalance risks.
Rebalancing occurs with time and involves buying or selling cryptocurrencies or other investments held in the portfolio to attain the target level of risk as well as asset allocation.
Traders can implement the portfolio rebalancing alongside existing trading strategies as a risk mitigation technique.
You can use portfolio rebalancing as the stand-alone investment strategy, praised as the promising and prominent alternative to HOLDing.
The primary benefit of rebalancing is to get the return to a strategically determined risk level. However, this is not the only benefit you will get. Rebalancing combats the psychology of wanting to hold on to winners and letting them remain the outsized portion of your portfolio.
You will also get an average to a better price on losing positions. By not letting the psychology of market moves affect the strategy, you can eliminate the emotions from the equations. From the vantage point, it is easier to make a logical as well as rational evaluation of your risk tolerance and to decide the necessary trading strategy for the crypto portfolio.
Traders also use massive market capitalization currencies like Ether and Bitcoin to minimize risk and volatility while investing.
The more you start diversifying towards high volatility crypto assets as well as medium to low market capitalization tokens and coins, the more you will need to rebalance the crypto portfolio. This is because asset values can skyrocket or plummet in minutes, rapidly changing investment sizes.
Finally, you should have an exit strategy.
Every great plan should include an exit strategy, and whenever our trades are winning, dopamine is released from our brain that makes us feel good about our decisions.
Without having an exit plan, the good feeling will cause us to stick with the same position just like a feedback loop kicks off. Higher gains lead to higher dopamine, which causes us to hold on to the trade.
Hence, if the market collapses, we hope it will bounce back. In the best scenario, the cryptocurrency market rallies again, but there is a worst-case scenario in which the correction goes further and further.
Every good trend ends, and strong trends can last longer than people anticipate. But with time, the trend becomes oversaturated, and it ends. A good trader will think about the exit plan before entering a trade. This way, it will be clear at what price they will close the trade for a profit and at what price they will close for a loss.
Crypto Portfolio Management: Conclusion
Keep your emotions in check. Extreme fear and greed among crypto investors can make the market highly vulnerable to ups and downs. As much development is happening, do not let the hype around take control of your emotions. Always try to be realistic about crypto investments and evaluate the projects solving meaningful problems.
Investors ought to remain calm when extreme greed or fear in the crypto market leads to uncertain situations and extreme panic. FOMO is yet another reason investors or traders fail to manage the crypto portfolio triggered by emotional overdrive. Peer pressure is also there.
So, building your crypto portfolio doesn’t need to be complicated, and it does require a plan or some help like a portfolio tracker. Even if you don’t have the excess cash to invest now, you can build a balanced portfolio using the dollar-cost averaging. With multiple investments, you will want to research an asset’s fundamentals before buying.
What do you think of these factors to get a successful strategy? Let us know how you manage your crypto portfolio in the comments below.
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Disclaimer: This article is provided for informational purposes only.
It is not offered or intended to be used as legal, tax, investment, financial, or other advice.