Are you struggling to build a CRYPTO portfolio on your own?
Creating a CRYPTO portfolio requires specific knowledge.
A portfolio is a collection of financial assets
1. Number of assets
2. Asset percentage
3. Stables percentage
4. Portfolio formulas
5. Asset intentions
Number of assets:
Under-diversification means that you are most likely a cult follower.
You 'only' bet on your favorite project & you become vulnerable to a black swan event.
The world is too complicated to predict every bad scenario so never put all your eggs in one basket.
Over-diversification means that you do not have enough in-depth knowledge about each project.
You just skimp off multiple projects and diversify your holdings among 20 projects, only to see everything fail.
You only need to focus your attention on 'some' solid projects.
Number of assets ∝ Amount of time and effort put into researching the project
If you don't have the time to research a project, then don't even think about investing in it
It is almost impossible to keep track of 20 projects every day
Don't diversify just b/c you have to!
Hold 5-6 assets and monitor their progress rigorously
Look at the data & analyze whether the project is heading in a 'sustainable' trend with respect to growth:
• No. of Defi apps built (is it growing?)
• Total Value Locked
• Yield reserves
• User growth
Types of Assets ranked from low-high risk:
- Blue chips - $BTC , $ETH
- Growth chips - L0s, Alt L1s, L2s
- Risky chips - Meme coins, High APR coins
Betting 'only' on blue chips makes you miss out on exponential returns
Betting 'only' on growth chips will test your risk tolerance when your portfolio is down 85%
Betting 'only' on risky chips can wipe you out of the game
Implementing a set of rules is essential to maintain a balance among the chips such as:
- Blue chips are capped at 40% of the portfolio
- Growth chips are capped at 30% of the portfolio
- Risky chips are capped at 20% of the portfolio
- Any single chip is capped at 20%
In a bull market
- Take profit from Risky & Growth chips and move them into Blue chips & Stables
- Take minimal if not zero risk in the former ones
- STABLES:CHIPS ratio should be high in a bull market to minimize risk and have enough dry powder to invest in a bear market
In a bear market
- Invest the Stables into Blue, Growth & Risky chips
- Take risk in 'solid' Growth chips to see exponential returns(kinda like investing in $ETH when it was at 100$ in 2018)
- STABLES:CHIPS ratio should be low in a bear market b/c R:R is really high
If the project's growth is stagnant / there is a logical FUD / there are no new DeFi apps being built then the risk of failure is significantly high
POSITION SIZE ∝ 1/RISK
- When risk goes up, your position size must go down
- When risk goes down, your position size goes up
Have a dynamic position sized portfolio at all times, Your bets should simultaneously vary with the risk of failure, It is okay to have more stables & lose out on some gains instead of losing it ALL b/c of the project's failure and always remember that you need to survive!
This is a crypto-specific factor that is essential to a crypto portfolio. The crypto markets are still inefficient & illiquid, so simply holding 'stable' money has proven to be risky in recent times, Diversifying stables is the new meta
IMHO earning APY on stables is not a good R:R play
But, you might say 'I want to earn interest on my stables b/c my green $ bills are losing out to inflation'
Why I disagree?
- Lockup periods make it difficult to deploy capital immediately when the market is drippin out there
- There is already a depeg risk in holding stables, taking on more leverage is not a good way to 'safely' store one's money
- The pools pay you 20% APY which might be delicious, but what if there is a smart contract hack and 100% of your funds are gone?
- R:R is really bad
- A good Risk : Reward play is when you get more gains for less losses not when you get less gains for more losses:
- 20% loss(inflation) for a 100%(investment) gain is good
- 100% loss(Hack, depeg) for a 20% gain(APY) is bad
These are essential 'formulas' for one's portfolio without a pre-defined system, we tend to make impulsive decisions, acting with a system without any emotions is an effective way to make decisions
Formulas >>> emotions
Limit buy orders
- Limit buy orders are buy orders which are set in advance to avoid FOMO & catching the bottom
- FOMO arises when we anticipate buying an asset but we don't, it immediately pumps hard & we FOMO hard
- When you set pre-determined buy orders it becomes easy to not make emotional decisions at the time of buying the asset
- You have already done the research & you are interested in buying the asset at -X% no matter what
- Also spread your total position size equally
- Stop loss is used to prevent oneself from sunk-cost fallacy• Sunk cost fallacy is a phenomenon where we tend to 'HOLD ON' to something when we have invested a lot of time, money, or effort into it
- Regardless of the time, money & effort one must get out of his position if the conditions to sell the asset are met (discussed later)Not having an SL makes investors 'HOPE' that somehow their asset will appreciate in price
- But how to use a Stop Loss?
- Pre-determine the 'maximum loss' you are willing to take from the investment and set an SL at that level
- Learn basic Technical Analysis to identify Support/ Resistance levels and set an SL below the S/R level
Limit sell orders
- Limit sell orders are sell orders which are set in advance to avoid panic selling & to have some dry powder to reinvest
- It is so easy to get fooled by the narratives that go around Twitter
- So you wait 'patiently' to sell the absolute top
- Always remember that there will be money left on the table, Your goal should not be to squeeze as much $ as possible from the market instead you must learn how to have enough dry powder at all times to re-invest in the downturns
- The goal of an investor must be to take profits when the asset is exceeding its market value not when it is drippin hard, Since we don't want to time the top, we set limit sell orders when the asset appreciates +X% from our entry and spread your total position size equally
This is a personal strategy of mine that I think is crucial to every portfolio. Intentions are nothing but answers to certain questions and If the intentions are matched with the market data, you make the decision to buy/sell the asset
Having intentions help us to have a clear mind to make our 'OWN' decisions despite the noise around us:
- Why am I buying the asset?
- At what conditions will I sell the asset?
- How long am I holding the asset?
If you want to have a strong conviction you must have your intentions written down & rigorously stick to it. WRITING the intentions is the best way to check if the conditions are met. Without answering any such intentions we tend to make unconscious decisions with no logic in it
Example: Let us assume we want to create a crypto portfolio for a 23 y/o She's only looked at five projects thus far She is willing to take risks in growth chips to see exponential returns At the time of investment, crypto is in a bear market The portfolio will looks like this:
Thank you for spending your valuable time here. At the end of the day you know yourself better than I do, so use the above information to make changes to your portfolio or use it as a stepping stone to understand how to create a portfolio. Happy Investing!