Now that you understand what "risk" is, what the risks in crypto are specifically, and how to go about thinking about it, you are going to need to decide what asset classes you invest in, in what proportion, and for what timeframe. For the overall aspect, we talk about building goal-based strategies & portfolios in more detail here. For building the crypto part of your overall portfolio, here are the steps you can take.
Understand how to Diversify within that Asset Class
You are now ready to build a diversified portfolio of crypto assets, which will fit in your overall investment strategy:
- You have decided how much money to put into that asset class,
- how long it was going to stay there for
- and that you wouldn't touch it in the middle even if it looked like you were going to lose it all at some point.
You need to understand that "crypto" is a vague term. Like "real estate" includes both apartments in New York and Senior Homes in Thailand, there are quite a lot of different things in "Crypto".
Understanding the different types of Crypto assets
There are different types of crypto assets that you can put in your crypto portfolio, just like there are different types of stocks that can go in a stock portfolio. The main categories for crypto are the following:
- Store of value: Those are the coins like Bitcoin, Litecoin, Nano. They have no intrinsic value or utility but people buy them like they buy gold or diamonds, because they want to park money into something in case something happens. Bitcoin and Nano undoubtedly have advantages over gold and diamonds when it comes to logistics, but they intrinsically have about the same useful value.
- Infrastructure: like Ethereum, Luna, Solana. Those have a utility in the sense that you need to spend ETH to use the Ethereum blockchain. And if a lot of people want to use that network, it would make sense for the value of that access token to increase in value. Investing in ETH, SOL, LUNA or BSC means you believe the price will go up because more people want to use that platform and there are only so many that token to go around.
- Centralized or Decentralized Crypto Apps: like PLBT, UNI, COMP, BNT. Those are blockchain "tokens" of companies or Decentralized Autonomous Organisations (DAOs) that are issued on the blockchain. Those companies might or might not do something with the blockchain, but they usually do. Those tokens are usually issued on an "infrastructure" blockchain (ETH, LUNA, BSC,...) because that's what the Crypto App runs on. Sometimes a Crypto App token will also be an "infrastructure" token if an app released its own blockchain with a very narrow use case. The nature of those tokens can vary widely: They can be used for governance, or allow you to receive fees paid by the users of the app to the app, or receive part of future profits,... You have to read the documentation of each app to find out.
And since there are different types, each of those has different risk profiles:
- Bitcoin, like gold, is useless and tied to how we collectively ascribe its value (market risk). It could also be regulated out of existence (regulatory risk), suffer from a 51% attack that would break the reliability (tech risk), your wallet could be hacked (loss risk) or your custodian could get hacked (counterparty risk).
- Ethereum, like a utility company, could find itself useless if something with better utility comes along (market risk). Being a utility, it has less of a regulatory risk than Bitcoin, but it's still a possibility. The tech risk is also present, so are the loss and counterparty risks.
- Centralized or Decentralised apps are like businesses and each token needs to be vetted individually to understand what they offer (strong reputation and barrier to entry, strong tech security, Governance rights or not, fee distribution or not,...). The risks listed for Bitcoin and Ethereum are valid for most crypto apps too. One could even argue that it's more the case since the "base layers" tend to be more vetted and robust than the apps built on top of them.
Picking the assets categories
If you have made it this far you understand the risks you can take, how much money you'll put in the "crypto" asset class, and it is time to pick the asset types you are going to invest in.
Here is one way to think about it:
- 80% in Infrastructure Tokens
- 10% Store of value
- 10% to Apps
This type of portfolio would make sense if you had the following investment thesis:
- You think this new "crypto" infrastructure is going to replace the current internet infrastructure and that it will be just as revolutionary. You want to own as many contenders as possible to be sure you own the TCP/IP protocol of the future.
The good thing is that, whatever the "killer app" ends up being, you won't care because you own the underlying infrastructure anyways.
- Regarding the "store of value", since it's about as (ir)rational as owning gold, and most experts recommend a 5-10% allocation to gold, so that's a rational choice.
- Some of those apps are really cool and doing really well, they might be the next Google or Facebook in their field. It has been historically profitable to own the best performing tech companies, so picking some is smart. However, it's super hard to pick winners, so we can limit the exposure to a small part of the portfolio and, when possible, buy an index of them.
Picking the assets
You know your risks, you know your categories. Now you need to research each asset to decide what to invest in. There are two ways of going about it: popularity or research.
Not a very smart play, but you could take the most popular coins in each category. A bit like in "index" investing, you take the top 2, 3 or 10 most popular coins.
Today, with the top 2, it would look like this:
- Store of Value: BTC and XRP
- Infrastructure : ETH and BNB
- Crypto Apps: UNI and THETA
But you could easily build the top 10 because cryptos are fractionnable so you can buy 1/200th of a Bitcoin and 1/40th of an ETH. So even with small amounts, it's possible to diversify broadly.
That's how most people start.
It's not always the popular kids who end up winning (ask Bill Gates), and you might be able to find little gems further down the list.
One way to do your research could be using an insights platform such as Messari.io where you can easily screen for "infrastructure", "store of value" and "apps". You can then research each project to see if you think they are going somewhere.
Some things to look for when doing your research is:
- Project Objective: if you don't understand the point, it's probably not worth it.
- Developer activity: if no one's working on it, it's not going anywhere
- On-chain activity: how many people are _actually _using it? Ethereum has 100 million active wallets. Some successful projects have 100.000. Projects with 200 are probably just starting or struggling.
- Technology: has it been hacked? Has it been audited?
- Market capitalization: it will give you an idea of how popular it is because even when going with research, you don't want to invest in something that absolutely no one is looking at
- Liquidity: this tells you nothing about the project but gives you an idea of whether you will be able to sell your position if you need to.
- Volatility: price goes up, price goes down. By how much? Has it recovered from a historical all-time high and all-time low? Can you support the volatility?
Mixing, and cheating a bit
You might not have a ton of time for research, so you could also employ a mixed strategy.
- Take the top 2 coins for "store of value", as one could argue that it's unlikely that more than a handful will be widely adopted as stores of value.
- Take the top 3 coins in "infrastructure", and do some research for another 7 in the top 200 coins. Today, past #200 by market capitalization it's rare to find very liquid tokens.
- For the Apps, buy a DeFi Index (Decentralized Finance) and do some research to find 3 to 5 others, which are not DeFi, in the top 200.
- Because DeFi is currently the most adopted use case for Crypto Apps on the blockchain
- And because taking an index will save you some research and ensure you're diversified. At OSOM we don't think investing like an index is the best idea (read why here), but if you want to go it alone and don't have time for research, it's always an option. DeFi Pulse Index is a well know one
Or, if you used Messari, you can also look at their Venture Capitalist screeners and, for example, reproduce Pantera Capital's portfolio.
How often will you pick?
Congrats. You've now spent hours doing your own research and you know more about crypto than you ever did before.
Also, you have chosen what to invest in today, so next on your "to-do" list is: when do you do it again?
Indeed, whether you have chosen to go by popularity, research or a mix, you have made picks that are valid now. But things move fast and you are going to need to revisit those picks. What's popular today might not be tomorrow, and what's working today might not tomorrow.
You have entered into the world investing into high-growth software companies, and you need to manage your portfolio like a VC.
Once a week might be a bit much but twice a year might be a little too slow for such a fast-moving world.
Tracking your Crypto portfolio
You now have bought the assets you wanted and which fit your investment thesis. You also have an idea when to sell. And you are planning on reevaluating your portfolio periodically.
It's doubtful you have it all in the same place (hint: you shouldn't). You'll have some on ETH wallets, some on a BTC wallet, maybe some other crypto in a couple of reputable exchanges.
The next question is naturally: "How do you track your Cryptocurrency Portfolio?"
You can do so in a crypto portfolio tracker, or crypto coin tracker app. These allow you to track the balances of your wallets and exchanges all in one central place. We have one for free in OSOM where you can track the balances of your ETH wallets, BTC wallets and all the reputable exchanges.
There are also some paid options out there which you will easily find with a quick duckduckgo search. Popular options include Blockfolio and delta.app. Or Zerion.io, which is a crypto wallet tracker useful if you are just buying assets on the Ethereum Network.
And you're all set! You're now the proud owner of a diversified crypto portfolio based on your investment thesis and risk appetite, and maybe more importantly you have a plan for going forward. Best of luck out there!