Cryptocurrency industry has gained mainstream traction over the past few years. Following notable gains and the market making many millionaires and billionaires, more individuals are looking for a way to invest their savings in the potential industry. But many newbies in the market are making numerous mistakes while creating an profitable cryptocurrency portfolio.
A crypto portfolio is a collection of digital assets an investor holds over a specific period. Such a period could be anything from a few weeks to several years. The main goal of creating a digital currency portfolio is to gain stability and growth in our investment.
To build a profitable portfolio, there are some tricks and tips that we can follow. Following the below-mentioned tips would help an investor create a stable digital asset’s portfolio that will be stable and provide significant growth with time.
Scrutinize cryptocurrency cash flow
While building a long-term digital currency portfolio, investors should essentially focus on their cash flow. Although the cryptocurrency market has made many millionaires and billionaires, it is most known for the drastic fluctuations in price trends. As the industry is yet in its nascent stage, things are very uncertain in the short timeframe.
Hence, in the short term, it is challenging for any traders in the market to make predictions with accuracy. Thus, veterans believe that in a high-risk market, we should always have a strategy that would help us figure out how to handle digital assets’ cash flow.
So, how would an investor approach their cash flow strategy?
Before investing in the crypto market, every investor should note whether they have enough funds to cover their costs and expenses. Ultimately, we should keep track that we should never pour more than 75% of our total portfolio allocation into the market. Indeed, 25% of the portfolio allocation should be invested in stable areas like stocks, government-issued fiat currencies, and government bonds.
The other way to handle our cash flow is by determining the volatility and using the dollar-cost averaging strategy. This strategy is also used by MicroStrategy, an institution that has invested a significant portion of its balance sheet in Bitcoins. The dollar-Cost Averaging method is used to support the market with a fixed amount at several points of price. This strategy helps reduce the impact of large price swings on our overall portfolio.
On the other hand, it is also essential for investors to have a strategy to manage cash flow fluctuations. By maintaining a budgeted approach and using some suitable techniques, investors should be able to manage their portfolio’s stability.
The digital market fluctuates drastically and can rise or plunge quickly. Hence we should follow some of the things that would minimize the impact of volatility on our holdings. Among the measures, the most important is to calculate our cryptocurrency cash flow through the below-mentioned steps:
Step 1: Estimate monthly expenses (Including all personal expenses)
Step 2: Add the expenses to our net-worth
Step 3: After reducing the expenses, divide the left funds by 12
Step 4: Amid the division would be considered as your estimated monthly cash flow
Step 5: Choose a suitable investment strategy
Step 6: Invest the monthly cash flow in the digital market by applying some strategy
Step 7: Repeat the aforementioned steps until you reach to desired holding size
Diversification is a must for cryptocurrency investors
Bitcoin and altcoins are continuing to grow significantly nowadays. Following the potentiality of the projects, many industries, and businesses are trying to integrate millennial blockchain technology and cryptos to enhance their operations.
Thus, today we have thousands of digital assets available in the ecosystem. Hence, having more than one type of crypto in our portfolio makes more sense. Regarding diversification, freshers in the industry are confused about differentiating projects.
Today we have large-cap assets, like Bitcoin and Ethereum, Some DeFi coins like Uniswap (UNI), PancakeSwap (CAKE), and Aave (AAVE), low-cap assets like Chainlink (LINK) and Cardano (ADA), Metaverse coins like Decentraland (MANA) and The Sandbox (SAND), and meme coins like Dogecoin (DOGE) and Shiba Inu (SHIB).
Simultaneously, we can categorize projects and own some potential projects after scrutinizing them and acquiring them. According to most cryptocurrency market experts, portfolio diversification has several benefits like risk deduction, hedging, and profit potential.
- Risk diminution:
Owning different crypto projects reduces the risk of losing money if a single project’s price crashes. According to experts, digital currency is a new and volatile asset class that can be challenging to forecast. However, diversifying our cryptocurrency portfolio would protect our holdings from potential losses.
- Hedging:
Amid the global COVID-19 pandemic, cryptocurrencies acted as a hedge against inflation when governments were printing money to use them as economic stimulus.
Besides, many investors also use crypto as a hedge against their stock portfolio. For instance, if an investor owns some equity in any company, they also acquire some Bitcoins or Ethereum, as this could help to protect against a potential loss on our stock portfolio.
Diversification will help if the price of the asset we are using as hedge drops after we acquire that.
- Passive Gains:
Like what happened at the time of the dot-com boom, only the potential technology firms were able to survive. Simultaneously, not all digital assets would succeed, as most of the projects are yet under development. However, diversifying our portfolio would help increase the chances of generating gains rather than depending on one single project.
Cryptocurrency high trading volumes
When it comes to investment, it is sometimes difficult to choose among the potential projects to invest in. However, investors should look for crypto assets with a high trading volume to generate a consistent cash flow. Such cryptocurrency projects assure that numerous individuals are buying and selling the coins or tokens, which means the coins’ value will be stable.
Since the establishment of the cryptocurrency industry, it is always noted that as a coin gains mainstream traction, its value gets more table compared to coins that are not popular.
High potential cryptocurrency projects
Before investing in any kind of digital asset, the first thing is to do our own research. We need to see what real-world utility does a project bring, how is bigger the community is, and how bullish the community is. And also, we should give a glimpse of the development team working in the back-end.
Notably, it is deemed that a project with robust fundamentals helps generate a consistent cash flow. Things that we should consider are:
- Having any real utility
- Good technology
- Robust community backing
- Good governance
- Good team working behind the scene
The best example of a coin with the most strong fundamentals is Bitcoin, the flagship cryptocurrency. Since its establishment, the coin has proved that it is a reliable cryptocurrency.
Common mistakes to avoid
It is said that we humans always learn from our mistakes. Simultaneously, every newbie in the industry makes some mistakes and learns from them. Hence, I have noted three mistakes that everyone makes in the industry, and we believe that such mistakes should, must be avoided.
- Investing the majority of total cryptocurrency portfolio allocation in one coin:
Instead of investing in one particular coin, we can choose some from a wide range of assets. Primarily, people invest their majority of funds in one project as they believe that the specific coin or token is going to be the next big thing. Moreover, such investors want to get in on the action early. But need to comprehend that there are a lot of different cryptocurrencies available, and we can spread our funds among as many as possible for a stable portfolio.
- Focusing on the short-term:
Investing in the volatile asset class like crypto, and expecting gains in the short-term, is similar to gambling on our hard-earned funds. Although the market tracted mainstream growth over the past few years, the majority of the projects are under development. Hence, until the project’s stable version is launched, we cannot expect their prices to be less volatile.
Experts believe that digital assets are not a short-term investment, at least for now, and it is significant to think about how we will be able to generate a consistent cash flow from our portfolio.
- Lack of research before investing:
Many investors are attracted to the market following the price boom. But not every time the significant surge is because of potentiality, but hype.
Some early groups of inventors sometimes create advertising, and many begin to follow them, and as the price goes upwards, the early investors start selling off their holdings, and the late comers will then have to sell the coins for a loss. Hence, we should always ignore the hype, fear of missing out (FOMO), or fear, uncertainty, and doubt (FUD).
Always do your own research. If you believe the coin has true potential, then opt for a strategy and invest likewise in the project. And always stick to your strategy.
Conclusion
Besides the aforementioned tips or factors, creating a long-term cryptocurrency portfolio also depends on the investor’s risk appetite, goals, and financial situation. Before stepping into the market, investors should know that the industry is yet volatile and is consists of a new asset class.
Always carefully consider your portfolio, and do diversify it to stabilize the entire holding while also providing the opportunity for more significant upside potential.
Finally, it is significant to quantify the risks and rewards before taking any further steps in the industry. Always try not to invest more than what we can afford. And most essential part is our emotion, which should never flow towards greed and stick to our goal.
These tips can help investors mitigate risks during any given market mood. Moreover, it will provide more opportunities for more significant long-term gains.