How to Build a Good Crypto Portfolio in 2022
It is important to diversify your crypto portfolio. Although cryptocurrencies offer lucrative opportunities, they also carry risks such as volatility.
Allocating your crypto investments to many places that react differently to the same development allows you to maximize returns on investment (ROI) while limiting risks. Diversification does not guarantee protection against losses, but it minimizes the risks associated with the investment in the long run.
Risk Factors to Consider Before Creating a Cryptocurrency Portfolio
Total Market Cap of Cryptocurrency
The total market cap represents the current market share of the cryptocurrency. The common view in the crypto industry is that “the larger the market cap of a cryptocurrency, the less risk it presents to investors”.
Cryptocurrency with a large market capitalization; It can mean that it has a project that has established a good infrastructure and ecosystem, and includes a significant group of active users (people who hold, trade, and use it for various activities). However, cryptocurrencies with high market capitalization have a lower risk of abandoning their project compared to those with limited market share. In this way, you can trade cryptocurrencies with high market value more easily.
On the other hand, high market cap cryptocurrencies (like Bitcoin and Ethereum) dominate the market. The price fluctuations experienced on this side effect the smaller cryptocurrencies connected to them. For example; ETH's price movements may affect the value of some ERC-20 tokens. On the other hand, the higher the market cap a cryptocurrency has, the lower the potential for further growth. An example of this is that in bull markets, altcoins with a small market share outperform Bitcoin.
Conduct in-depth research
Familiarizing yourself with the market and learning about the main and emerging currencies, as well as their various market sectors, will assist you in constructing a resilient portfolio to weather the coming storms.
Once you've narrowed down your crypto options, look to see if the project has issued a white paper, which often includes a roadmap and tokenomics for the coin as well as information on the team behind it. They also explain how cryptocurrency works and break down the various value propositions.
To judge the quality of your next crypto buy early in the research process, ask yourself the following high-level questions:
- How far did you have to search to find this currency? Do they have a well-developed marketing strategy?
- Is the token based on sound tokenomics models? Is there a significant fraction of the total supply held by early investors, and if so, are there any strategic vesting periods in place?
- Do the team and advisors pique your interest? Have they had any previous success? Are they active in the Twitter community or present at technological conferences?
- What do you think you've heard over the grapevine? What is the current market sentiment regarding your option, and how good or negative is the news coverage?
- Is there a solid community behind this coin that believes in it, or is the support mostly based on speculation?
- Did you get the idea from reading the whitepaper that the team is working on a pipe dream in which its token would be able to accomplish everything? Coins that promise the moon may lack the necessary cash, be built on immature or unreliable technology, and be unaware of the trade-offs between specific algorithms and protocols.
Cryptocurrency Transaction Volume
Analyzing the trading volume gives traders an insight into the actual use of cryptocurrencies. This indicator is a reasonable market cap and can be useful for cryptocurrencies with low trading volumes. The low transaction volume of the project; raises questions about its infrastructure, active user, liquidity, and usage status.
The benefit of the Project
While most crypto projects claimed to disrupt the industry with their revolutionary technology, only a few did. Therefore, it is important to analyze the real-world utility of projects from an objective point of view to gain insight into the long-term viability of projects.
Exploring the potential of the project should not be limited to analyzing the whitepaper. You should check third-party websites for relevant reviews and user feedback. Reviewing crypto and mainstream media outlets for news about the project; can help identify past, present, and future events that may have an impact on the valuation of cryptocurrencies.
Before investing, it is also important to know which industry the cryptocurrency belongs to. There are many industries where crypto projects have had a devastating effect on them. In addition, these projects compete with each other. Such a situation may mean that the sector in question has growth potential. On the other hand, determining the sector of the project; will be useful when allocating your fund to different assets to build a diversified portfolio of cryptocurrencies.
In theory, the correlation of asset prices in the same sector is higher, while this correlation is lower between two instruments that represent different industries.
As a result, when you invest in crypto, it is essential to keep your risks to a minimum to limit your losses and maximize your potential gains. To do this, you need to evaluate all the factors listed above at the same time.
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