While cryptocurrencies are a volatile asset class, adopting a balanced approach when investing in them can ensure the right mix that can potentially generate positive long-term returns.

The current bear phase has undoubtedly shaken up even the most optimistic investor and brought to focus the need to maintain a diversified portfolio of cryptocurrencies or crypto coins and tokens. What’s more, irrespective of the asset class one invests in, diversification is one of the fundamental principles of investing that tempers risk and increases the long-term reward potential.

To offer a simple yet effective guiding methodology, let us look at different ways through which crypto investors could select from among the thousands of crypto tokens available today and build a robust portfolio that can stand the test of time.

Invest in crypto coins that are making a difference!

Even though all crypto tokens are based on blockchain technology and cryptography, they can be further classified into payment tokens, utility tokens, security tokens, and stablecoins. Payment tokens such as Bitcoin (BTC) and Ethereum (ETH) are considered to be the gold standard amongst cryptocurrencies and are widely used today as an alternative means of payment for goods and services. Investing in both of them is often the starting point for most crypto investors and most experts believe that their value will keep appreciating with increasing crypto adoption.

Utility tokens on the other hand are usually issued in exchange for payment tokens or stablecoins and essentially grant their owners access to the product or service offered by the underlying blockchain. These tokens depend on the sustained and continued performance of the native blockchain, with a higher risk involved in these tokens in cases where the blockchain undergoes structural changes or the services offered do not gain significant user traction. Security tokens are similar to shares issued by a listed company in the sense that they provide right to ownership of the underlying blockchain.

Both these tokens derive their value from the popularity of their blockchains and offer a higher risk-reward ratio. Investors would do well to allocate a larger proportion of their capital to payment tokens, with investments in other types of tokens done based purely on their promised potential. Stablecoins can be used to park excess or trading funds since their value is pegged to a fiat currency like the US Dollar and display very little volatility as compared to other token classes. That being said, a continuous evaluation of whether the crypto coins in your portfolio are meeting their set objectives is absolutely essential.

Do not put all your eggs in one basket…

After selecting a cryptocurrency to invest in, it is important to not go overboard by pouring huge amounts of capital into it. This helps investors to avoid risking their capital on the success or failure of the selected cryptocurrency, thus limiting the downside risk potential on their overall portfolio. As a thumb rule, it is recommended to not invest more than 10% of one’s total capital in a particular crypto token and even this should be done in stages. By investing in smaller amounts on a regular basis or during bearish market cycles, investors can benefit from cost-averaging and reap decent gains during the subsequent bull run in that token.

It is advisable that investors develop their own capital allocation strategy between different types of crypto tokens that is commensurate with their risk appetite and return expectations. For example, an investor with a high-risk profile could invest higher sums in promising utility or security tokens, as long as this makes up a small portion of the overall capital invested across different asset classes. However, the failure of a crypto project could significantly erode the invested amount, as seen in cases with the Luna token that crashed spectacularly because of botched algorithm used to peg its sister TerraUSD stablecoin.

Spread your bets over tokens from different sunrise sectors

While crypto tokens are usually selected by investors based on price predictions or technical analysis, it is recommended to conduct fundamental research on the sector the token caters to, in order to understand the future potential of the token. Decentralized finance (DeFi) and Web3 infrastructure providers are currently the most promising sectors within the broader cryptocurrency space, with a number of crypto tokens available in each of them to choose from. For examples, tokens like ETH and EOS represent the development the Ethereum and EOS blockchains are bringing about in the smart contract space, with investing in them basically meaning that one is betting on the increasing use of smart contracts for the expansion of Web3 as we know it today.

Other tokens like Cardano (ADA) and Polygon (MATIC) are native tokens of blockchain projects that are helping build secure decentralized apps (DApps) on their networks and improve the scalability of projects that utilize them. It thus makes prudent sense to read more on the actual purpose of the crypto token, understand what does the blockchain do, the services and sectors they cater to as well as how token holders are rewarded, before putting down any capital on it. This is especially important for investors who have a long-term horizon and aren’t just investing to benefit from short-term market volatility.

Taking your first steps with crypto basket investing

Balancing any portfolio requires careful and periodic assessments to be done based on multiple factors and even then, one could end up on the losing side. For example, even though payment tokens like BTC and ETH are considered to be the safest, they have fallen by over 60% since their all-time high level achieved in November 2021. This calls for relying on market and crypto experts to intelligently allocate funds and diversify one’s portfolio in the best possible way.

That being said, adopting a long-term approach is the first pre-requisite for any diversification strategy to work and allowing sufficient time for your cryptocurrency investments is the next important aspect to be considered. Investors would do well to set aside a small percentage of their monthly surplus and use this to buy into tokens that are trading at crucial price supports or average out positions in tokens that they have included in their portfolio. Over a period of time and once the next bull cycle begins, all these aspects should help in generating positive returns through a hardy crypto portfolio that has been well-curated using the above guiding principles.

There are several mobile and web applications available online that allow you to do a couple of things mentioned above like Mudrex and PathCrypto. KoinBasket is one such platform that helps you do all of the above on a single platform.