Planning the structure of your portfolio before you actually enter the market can save you a lot of time, money and frustration further down the track. As in all things financial, planning is a critical component of probable success. It’s no guarantee but it certainly helps!
To be absolutely clear – cryptocurrencies and blockchains are all high risk investments.
The vast majority are slowly on their way to zero – this includes many of the current top twenty cryptos by market capitalization. If in doubt – check out this chart of the top 20 cryptos from Jan 2016:
And May 2019:
Only 6 of the original 20 have kept their position with most of the other coins long gone or entirely irrelevant.
So, no crypto investment can be considered ‘safe’ with perhaps the debatable exception of Bitcoin.
When constructing your crypto portfolio this is the capital allocation model I recommend:
These ratios are a direct reflection of general comparative risk. All risky – some just less so. This is not a trading portfolio – so all positions are taken with a multi-year hold in mind.
Of course, these ratios reflect my investment bias but they also reflect an undeniable recognition of risk. What’s debatable are the ratios, not the concept. If however, you have only a small amount of capital in crypto, by all means, trawl the dark corners of the crypto market and good luck with your punt!
If any crypto can be deemed ‘safe’ it’s Bitcoin. With a 10 year history, demonstrated resilience, tested security, a growing network, true decentralization, and above all brand -BTC is far and away the most likely crypto to survive 5-10 years or more.
Many challenges face it, some of which may even led to it’s demise – tech limitations, a fatal bug, a 51% attack, a global crackdown by regulatory authorities and so on…
Nonetheless, Bitcoin has been and, in all likelihood, will continue to be, the best performer over a multi-year horizon.
BTC is the ultimate -set and forget crypto and doesn’t require frequent repositioning. Of course, it’s a good idea to take profits after parabolic moves but there’s no necessity to do so as BTC continues to set higher highs and higher lows after each and every bull-bear cycle.
Large Cap 20-30%
Anything in the 10 top excluding Tether.
Of course, you’ll need to do your research. It would be an optimistic man indeed who invested heavily in Tron over the long-term but nonetheless, there’s likely a good reason or number of reasons why these projects are sitting at the top of the pile. They may indeed fail but your investment in something like EOS or Binance is ‘likely’ to maintain some value through a bear cycle and emerge out the other side as a going venture.
Institutional money will flow in an orderly fashion into crypto – BTC – then large caps- then (maybe) the lesser lights.
Anything in the top 100.
You are now entering very high risk territory.
True daily volumes for such projects are very light indeed. HXRO…hmm..maybe not?
Of course, there’s plenty of upside to some of these projects earning the best of them a place in your portfolio.
Extensive research should underpin any decision to invest in a mid-cap. A video on Youtube and a random article do not constitute ‘research‘.
Small Cap 0-10%
Anything 101-to infinity.
These are long long long shots. Innovation, hope, revolution! Nah, mostly junk on the way to zero. Research, research and a dash of research is the only way to go about investing in small cap projects. Even with due diligence, the odds are stacked against you in the long run. However, if you get it right the rewards can be great so, it’s worth allocating a small portion of your portfolio to such ‘punt’s’. (That’s what they really are at the end of the day.)
Of course, once live in the wild these portfolio proportions will shift around. What was once a large-cap becomes a mid or vice versa. How you manage that fluidity is up to you but occasionally checking the risk ratio of your portfolio is simply good practice.
One other area to highlight is sector diversity. It’s important to be aware of the sector or sectors each crypto falls into so you don’t unwittingly end up over-invested in supply chain projects/ remittance cryptos and so on.