A crypto investment can be worth a fortune one moment and become worthless the next; it all depends on how smartly you manage your crypto portfolio.
Cryptocurrencies are far more volatile than traditional assets. While that makes them perfect for making large profits, it also introduces the risk of losing everything if you can’t react fast enough. Volatility introduces uncertainty about an asset’s fair value, and statistically reflects stakeholder confidence (or lack thereof) in the investment.
Implied Volatility can be useful in tracking this sentiment. It is represented as a percentage, indicating whether the market is climbing or falling.
With a well-managed crypto portfolio you won’t only be able to preserve what you have, but will have a chance to make an extra profit.
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Crypto portfolio in a nutshell
In finance, a portfolio is a collection of financial assets such as stocks, bonds, fiat currencies, cash equivalents, and commodities.
Similarly, a crypto portfolio can be defined as a grouping of diverse cryptocurrencies that you hold and trade on your selected trading platforms. Inside it, you can manage your cryptocurrencies at a glance, check your account balance changes in a specific period of time (hourly, daily, weekly, monthly, yearly or all-time) and the digital assets’ allocation in percentage.
In short, crypto portfolios are like inventories of various digital assets that you have.
Importance of crypto portfolio management
Investing is an art. For generations, traders and venture capitalists alike have tried to calculate an all-encompassing formula to make more money. Fortunately, or unfortunately, the crypto market is more complicated than that.
Crypto portfolios can have unprecedented benefits in the long-term. Crypto portfolio tracking habits can have long-lasting effects and help protect the value of your assets against market recessions, economic downturn, and even hyperinflation.
Crypto portfolios introduce some risks, but they also bring some predictability to the growth of your digital assets.
Further, a well-balanced combination of crypto investments will always protect your capital in the long-term and give you more control over your financial future.
Therefore, if investing is an art, then portfolio management is the science behind it. Overseeing a set of crypto investments to ensure they meet long-term financial goals involves keeping track of many things. Between investing within your risk tolerance and predicting the highest growth investments, portfolio management is no walk in the park.
Crypto portfolio management needs a firm hand. It requires you to weigh pros against cons, opportunities against threats, and risks against rewards, all while maximising expected returns within the appropriate risk exposure levels. This is where the necessity of crypto portfolio trackers emerges.
Diversification may not be the sole reason for your crypto portfolio’s success. But manage it correctly, and it will never fail you. Your cryptocurrencies have value, and in order for it to grow they need enough opportunities to develop. The idea is to break your crypto portfolio down by category and risk level and distribute the total value among them based on personal preferences.
Modern portfolio theory states that your average expected gain is the sum of each asset’s expected growth multiplied by its fraction of the portfolio. To minimise risk, a large part of your portfolio should ideally comprise stable, predictable investments and show consistent growth potential for the future.
In the world of cryptocurrencies, this means buying into old-school players that have stood the test of time – like Bitcoin. There are a host of similar blockchains with slight variations in their designs, but none of them is likely to come close to touching Bitcoin’s dominance.
Another category with stiff competition is smart contract platforms. Ethereum is the biggest project in the smart contract game, primarily because the concept of a smart contract didn’t exist before it. Smart contracts elevated blockchain from just decentralised payments to an entire decentralised economy, and enough copycat blockchains are trying to gain favour with the community.
While other smart contract platforms have their merits and certainly warrant consideration on certain levels, it’s Bitcoin and Ethereum that appear to be running the show. Investing in them today is practically a bet on blockchain technology as a whole, and as such, the two networks command around 75% of the space’s market capitalisation.
Risk isn’t necessarily a bad thing; high-risk investments can sometimes yield impressive gains. Allocate a small percentage of your total portfolio to high-risk assets, perhaps even some newer projects being vetted by the community. If it rises, you make a neat profit. If it falls, you haven’t lost much.
Some projects prioritise certain features over others, such as privacy, transaction speeds, storage, or security. It’s crucial to analyse each of these elements and pick the projects that you think bring the most value.
Whether your crypto portfolio is diversified or not, it still runs the risk of losing value due to market conditions. There are a few different kinds of risks, and it pays to be aware of them. Financial risk is determined by the possibility of losing money on an investment, and markets face these risks due to macroeconomic forces like a change in an index like the average interest rate.
The easiest way to become more risk-aware is to learn how different types of risk affect your portfolio. Besides using crypto portfolio trackers, some investors even pay insurance companies to mitigate risk and potentially recover from large losses.
Cryptocurrency projects are the backbone of the blockchain industry, but there’s an inherent risk to betting on the technology. Decentralisation may be the name of the game in crypto, but it’s difficult to determine a project’s worth without looking at its inner workings – usually a centralised team.
There’s a risk of volatility, and even security risks from malicious attacks. Investing in promising ventures is key to building new and innovative applications with blockchain, but it’s equally important to make sure you’re betting on the right horse in the long-term.
Not all token crowd sales result in a successful blockchain-based project. For every influential outfit, hundreds of teams have failed before them, paving the road for future attempts to learn from past mistakes. Understanding risk won’t make it go away, but it will soften the blow when things go south.
Ways to mitigate risk
Among the many dull metrics tracked when attempting to grow a crypto portfolio successfully, risk is a concept that is much more fundamental to our understanding of the market. From rebalancing crypto portfolios with the help of trackers to paying for insurance, there are a variety of ways you can minimise your risk exposure, and each caters to a different kind of danger.
With years of hacks, vulnerabilities, and bugs causing billions of dollars in losses, insurance companies have expanded their efforts to cater to more businesses and individuals over the last few years. Insuring unpredictable circumstances costs a pretty penny, and with blockchain presenting some of the most uncertain financial markets the world has ever seen, crypto insurance is far from cheap.
The blockchain is still very much in its early stages compared to the multi-millennia old solution humanity still uses today. With the lack of more long-term historical data, instead of being able to sail through confidently, insurance companies are wading through uncharted waters.
Other situations, like being unable to pay back debt, are consequences of credit risk. In a decentralised, pseudonymous environment, counterparty risk can be relatively high. It’s essential only to use reputed crypto coins and exchanges to trade. This minimises the probability of unnecessary losses, as they usually have penalties in place to mitigate this form of risk.
The value of leverage
In risk vs reward scenarios, it’s nearly impossible to understate the value of leverage. The bigger the risk, the bigger the reward, and with markets as fickle as blockchain, leverage can be a pretty big deal.
Leverage enables traders to operate on a margin, essentially multiplying their buying power to make greater profits from smaller investments. There is obviously high credit risk involved in using leverage – timing the market wrong will have leveraged consequences.
It’s important to highlight that leverage is not inherently risky and is one of the most useful features in the current burgeoning state-independent economy. Leveraged derivatives contracts not only help increase buying/selling power but offer better rewards and lower penalties for the risk while also acting as a hedge against positions on the spot market.
They say you should only invest what you can afford to lose, and in the case of leveraged trades, this can be a tough rule to follow. However, leverage isn’t the only way to command more capital. Flash loans allow strangers to borrow and lend cryptocurrencies instantly with no verification times or background checks –, but there’s a catch. The borrower has to repay the loan in the same transaction that provides it.
Though it doesn’t sound entirely intuitive, investors can divert borrowed funds into smart contracts to flip a profit by leveraging decentralised finance protocols. The original amount is returned with interest, and the remainder is kept as profit. This isn’t an easy task to perform and requires an in-depth look into market conditions, sentiment, and the things that affect them.
With decentralised lending pools, people can now borrow and lend money without involving a trusted third-party. However, this does require loans to be overcollateralised, enabling members to borrow money from a pool of assets on depositing collateral worth more. If the collateral value ever exceeds the value of the loan, the collateral is liquidated to cover the depreciation.
DeFi is a high-risk arena, and it’s crucial to be careful about how much of your portfolio it has an impact on. In 2020 alone, two attacks on flash loan platforms resulted in the siphoning of nearly $1 million worth of cryptocurrencies. Though today most reputed platforms are insured, it’s necessary to seriously consider the potential investment risks involved in DeFi before parting with any money.
Unsolicited advice is all too abundant on Twitter, but remember to keep a calm mind and do your own research. Do not give in to FOMO or succumb to FUD – sticking to a strategy is the difference between risk-minimised investing and gambling with your finances.
Crypto Portfolio FAQ
What is a crypto portfolio tracker?
A crypto portfolio tracker refers to an app, a website or any platform that lets its users manage their investments. Basically, it allows them to keep track of how the crypto coins’ value changes over time.
How does a crypto portfolio tracker work?
Crypto portfolio trackers, especially for large-scale traders, are considered as must-have tools. If you have more than three coins that you are actively trading in a portfolio, you must then link your wallets and exchanges to a tracker. It is a one-stop platform where you can monitor your crypto coins’ changes in value.
Interestingly, some crypto portfolio trackers work just like trading platforms. They offer a wallet key that you can use to buy, hold and sell cryptocurrencies.
What should you look for in a tracker?
- Safety — Many crypto portfolio trackers have the feature to link with users’ exchanges and bank accounts. Choose a tracker that emphasises security, especially looking at the increasing number of hacking incidents.
- Intuitive interface — A good tracker usually shows the total value of your portfolio on its homepage so that you can easily and quickly track the changes.
- Available coins and exchanges — Before signing up, check the connectivity of the tracker with the cryptocurrencies and exchanges you are trading on because the tracker should be your one-stop platform for all of your crypto assets.