By Ben Marks, CEO and Founder of Blocktrade Capital
Due to the dynamic nature of the market and landscape, structuring a digital asset portfolio can be a formidable task. As CEO and Founder of a weighted index fund for crypto assets, I spend countless hours debating and researching which tokens will bring my clients the highest returns. I’m frequently asked what kind of assets to include when building a portfolio and I always walk through the same three questions to achieve the best balance and diversified exposure for each individual’s situation.
1) Liquid or Illiquid Assets?
The key question is: how liquid do you want your portfolio to be? If you’re an active trader who checks the markets regularly, you probably want to stay away from ICO’s, as they can tie up your capital for long periods of time. If you’re a passive investor who wants to be in crypto but doesn’t have time to keep up with the markets regularly, ICO’s might be a good option for you. A recent study conducted by Boston College found that the average ICO returns 82% for investors. The same study also found that only 44% of ICO’s survive in the long run, and that generally ICO returns have been decreasing over time. So, while ICO’s can provide handsome returns to those who are patient, there’s also the realistic possibility an ICO will fold completely before being listed on exchanges. During this time the market could increase significantly, but you’d miss out on those gains being locked into an ICO. For these reasons I prefer to hold liquid assets in my portfolio, and that’s why I’m almost entirely invested in tokens that are already trading on exchanges.
2) More Established Coins or Newer, Riskier Coins?
Now that you’ve decided how liquid you want your portfolio to be, it’s time to decide the risk-level you’re comfortable with. Do you want to hold a basket of some of the top coins by market capitalization? Or do you want to focus on newer, potentially riskier coins that have just been listed on exchanges? The first option offers returns that will be in line with the market, while the latter option offers higher returns with greater risk. I personally opt for 2/3 of my portfolio to be in the safer, more established coins, with the remaining 1/3 to be in newer, riskier coins. This strategy ensures that I don’t miss out on market-wide gains brought on by a bull run, but enough risk is incurred to be able to beat the market if I pick the right coins. After all, my goal as a crypto fund manager is to beat bitcoin on a consistent basis. If I invest in only the top coins and achieve returns on par with the market, why would investors want to give me their money if they can easily buy into an index fund and achieve those same returns without paying a 20% fee? Making risky investments is a must if you want to achieve outsized returns.
3) From Which Region of the World do you Want to Focus your Investments? And from Which Crypto Sector?
At this point you’ve decided you want a liquid portfolio with a 50/50 split between more established coins and newer coins. That narrows it down to two dozen of the safer coins to choose from, and over 1500 of the riskier coins. How do you even know where to begin to focus your research?
One strategy is to narrow it down to the coins that are in your region of the world. For example, focus on all the coins in California, or all the projects in Korea. The reasoning here is that coins located close to you geographically are easier to keep up with since individuals closely associated with the organization are likely to appear at conferences and events in your area. Another reason is that investor bases in various regions of the world are culturally different from one another. Asian investors, for example, are typically short-term speculators who focus mostly on price, while western investors are usually long-term traders who focus more on the technology. By zeroing in on the coins in your region, you’ll have a better grasp of the motivations and psyche of the investors driving the prices of those projects.
Another strategy is to choose a few token sectors that interest you, and research those coins exclusively. Some examples of token sectors include decentralized and centralized exchanges, developer platforms, privacy coins, payment coins, gaming tokens, and esports tokens. The two sectors that I’m currently the most bullish on are exchanges – both decentralized and centralized – and tokenized funds. Each of these sectors has about a half dozen projects with trade-able coins, and so those 10 or 12 coins are where I’m devoting a significant amount of my research these days. The sectors that you choose to study might be different, but the key is to find sectors with projects that interest you.
Hopefully this article helps guide you to better measure risk and determine the optimal combination of digital assets for your portfolio. As you know, crypto markets are highly volatile; do not invest any money you can’t afford to lose. Please make sure you research all investments you make and fully understand the market you are entering.