Do you want to create wealth with cryptocurrency and not have to lose sleep at night over market volatility?
The cryptocurrency market can be extremely harsh. Bitcoin might be skyrocketing one day, and then it crashes down 20% on another day. If all your capital is riding on one cryptocurrency, you’re not going to have any peace of mind.
The issue is:
Crypto investors tend to invest everything in one or two tokens and then hope for the best. When the market crashes, they panic and wish to sell. If the market rallies, then they regret not purchasing earlier.
Instead, there’s a far better method:
Diversifying your cryptocurrency portfolio allows you to have exposure to the upside while also safeguarding your gains from the downside. Intelligent crypto trading requires that you spread your risk across multiple assets.
I’ll explain to you precisely how to build a portfolio that can survive the storms and make long-term gains.
Let’s get started!
Your roadmap:
- Why Crypto Diversification Actually Matters
- Figuring out Your Risk Profile
- The Core-Satellite Portfolio Strategy
- Choosing Crypto Assets To Include In Your Portfolio
- Rebalancing Your Portfolio
Why Crypto Diversification Actually Matters
Crypto diversification isn’t just some abstract investment strategy term…
It’s your insurance policy against getting wiped out.
The fact of the matter is that when you’re trading cryptocurrency, you need to be conscious of the fact that different coins can move differently. Bitcoin’s correlation to the S&P 500 is about 0.38 which implies it doesn’t always move with traditional markets.
This is the reason why this is important:
If you’re just holding one token, you’re basically gambling. One poor tweet by Elon Musk, one security breach, one regulatory announcement and your whole portfolio can plummet. This is particularly the case when you are sending or receiving funds to or from different crypto exchanges or with larger trades. That’s why professional traders have used secure escrow services to provide fast, easy and, most importantly, protected trading infrastructure – such as ???? ?????? (Biscro Tether Escrow) which provides traders a safeguarded trading environment for USDT and cryptocurrency exchanges, ensuring secure and reliable transactions.
But when you have your investments spread across multiple assets? Well, it smoothens out the volatility of your portfolio. One coin drops 30% while another one jumps up by 40%. The overall outcome? Your portfolio stays intact, while at the same time capturing some upside.
Not a bad way to do things, right?
The statistics clearly support this. 59% of institutional investors are expected to allocate more than 5% of their asset management towards crypto in 2025 – and you can bet that these pros understand the importance of diversification.
Figuring out Your Risk Profile
Prior to diving in and investing your funds into different cryptocurrencies…
You need to first have a basic understanding of the kind of risk you’re willing to take.
Do you have it in you to stomach your portfolio crashing down by 50%? Would you sell off in a panic at the bottom? Or would you hold and even purchase more of the dip?
Your answers to these questions will determine your cryptocurrency trading strategy. If you are more risk-averse, you are more likely to be leaning towards Bitcoin and Ethereum. If you can handle a little bit more volatility for higher potential returns, then you’re more likely to also consider smaller altcoins.
Here’s a simple framework that you can use:
- Conservative: 70% major coins, 25% mid-caps, 5% small-caps
- Moderate: 50% major coins, 35% mid-caps, 15% small-caps
- Aggressive: 30% major coins, 40% mid-caps, 30% small-caps
The thing is that you need to be honest with yourself about how much risk you’re willing to take.
The Core-Satellite Portfolio Strategy
This is my personal favourite strategy for setting up a crypto portfolio…
This is how it works:
Your “core” holdings are the ones that make up the majority portion of your portfolio – typically 60-70%. These are the blue-chip cryptocurrencies that have historically performed well over multiple market cycles. Bitcoin and Ethereum clearly dominate this segment.
You can think of your core as being the anchor. It offers a sense of stability and gives you a consistent return over a period of time.
You then have your “satellite” holdings, which make up the remaining 30-40%. This is where you can start taking calculated risks. You can experiment with DeFi tokens, Layer 2 tokens, memes and up-and-coming narratives.
The satellite portion of the portfolio does two things:
It allows you to have some exposure to all the potential crazy, exponential growth and at the same time, it keeps your portfolio interesting without putting your entire investment at risk.
Some investors even go to a third bucket known as “speculation” which would typically range between 5-10% of your portfolio where they make high-risk bets. But I wouldn’t bet the farm on these tokens.
Choosing Crypto Assets To Include In Your Portfolio
Okay… so now we get to the interesting part…
Deciding what goes into your portfolio.
First, start with the foundations:
Bitcoin needs to be your largest holding in your portfolio. It is the most liquid, most recognized and most widely accepted cryptocurrency. Ethereum comes a close second as it is the backbone of DeFi and blockchain-based innovation.
These two should make up 50-70% of your portfolio, depending on how much risk you’re willing to take.
You then start adding some variety:
Layer 1 blockchains such as Solana will give you exposure to alternative smart contract platforms. DeFi protocols such as Aave can help you benefit from the decentralized finance boom.
Layer 2 solutions such as Arbitrum can help scale Ethereum and will be adopted in the future.
You also need to account for stablecoins:
Holding 5-10% of your portfolio in stablecoins gives you some dry powder in your pocket. When the market crashes, you will have some capital available to buy the dip.
Exposure to tokenized real-world assets and some infrastructure plays such as Chainlink also provides for some useful diversification.
Rebalancing Your Portfolio
Building your portfolio is only step one…
Maintaining your portfolio is where the real work begins.
Over time, winners become the winners and the losers become losers. All of a sudden, your well-diversified portfolio now has 80% Bitcoin because it rallied while the rest of the market underperformed. Your risk has increased without you even noticing.
This is where rebalancing your portfolio becomes important.
Set a schedule (quarterly or annually should be fine). Go through your holdings and readjust them back to their target allocations. If Bitcoin increased from 40% to 60% of your portfolio, you would sell some and reallocate it to the other holdings.
I know what you are thinking… “Why on earth would I sell my winners?”
You are selling them because you are now locking in your gains while at the same time maintaining your risk profile. You are following a disciplined strategy and it is a strategy that works.
Some people even prefer to rebalance based on thresholds. If any holding in their portfolio increases or decreases by more than 10% from their target, they will rebalance. You just have to pick a method that works for you and stick to it.
Volatility in cryptocurrencies has decreased from an average of 70% during 2020-22 to less than 50% after 2023. But it is still 4x more volatile than the stock market. Regular rebalancing of your portfolio will help you navigate this volatility without you making emotional decisions.
Final Thoughts
Building a well-diversified cryptocurrency portfolio is not difficult…
It just requires some discipline.
Start with a solid foundation with Bitcoin and Ethereum. Add some carefully selected altcoins that solve genuine problems. Hold some stablecoins in your pocket for opportunities. Rebalance regularly to keep your portfolio at your target allocations.
The aim is not to be greedy and pick the next 1000x cryptocurrency. The aim is to steadily grow your wealth over the years while managing your downside risk. A well-diversified portfolio captures the winners while limiting your exposure to the losers.
The cryptocurrency market rewards those who are patient and punishes those who are greedy. Build your portfolio with a lot of thought, follow your strategy and tune out the noise.
Now is the time to take action. Look at your current portfolio. Are you well-diversified or are you overexposed? Make the necessary adjustments to protect your wealth in this cryptocurrency market.