Even though the cryptocurrency space is still in its infancy, there are already several prominent strategies for developing and managing a portfolio. Many of the same investment strategies used in the stock market are easily applied to cryptocurrencies with a few extra caveats. None of these types of portfolios are mutually exclusive and in all likelihood, you’ll use a combination of these strategies to manage your risk.
And no, you should not be taking your investment advice from people on 4Chan, Telegram, Reddit or even YouTube. Many of these sites are now rife with pump-and-dump schemes as well as get-rich-quick fantasies. By using pre-established strategies to organize your portfolio, you’ll have better control over your risk exposure.
A successful portfolio uses a combination of strategies with different risk levels and by adjusting how much you invest into each strategy, you can manage your risk.
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Well, are you?
The main strategies include:
Low Risk (investing in “blue chip” cryptocurrencies and holding them)
Medium Risk (investing in medium-risk coins and low-to-medium risk staking) and finally swinging for the fences
High-Risk strategies (high-interest staking, liquidity pools, NFTs and meme coins).
Focus on the Blue Chips and HODL
This strategy focuses heavily on Bitcoin and Ethereum investments, which are the two cryptocurrencies that have dominated the space in recent years. Some people may also consider cryptocurrencies like Cardano or Solana as blue chips as well, but they carry more risk than the OGs.
Why are Bitcoin and Ethereum blue chips?
In the general investing world, a blue-chip stock or share refers to a financially stable company with a history of generating profit, even when other companies aren’t doing so hot. Examples of these blue-chip stocks include Apple, Disney and Starbucks. Like these stocks, Bitcoin and Ethereum have been around for a while and have enormous market caps in the hundreds of billions.
Since the space moves fast, many cryptocurrencies have since eclipsed more than a billion dollars in market cap. But that doesn’t necessarily mean that they’ll carry long-term stability. After all, aside from Ethereum and Bitcoin, the top 10 cryptos by market cap have changed year after year. In fact, only Bitcoin, Ethereum, and XRP have remained in the top 10 since 2015 as many older cryptocurrencies have been outcompeted.
Of the three, Bitcoin and Ethereum are considered the true blue chips because they’ve had a lot more adoption – they have the largest market caps by far and many companies (and countries) are considering integrating Bitcoin payments while Ethereum is the reigning king in the DeFi and NFT ecosystems.
Making This Strategy Work
The easiest way to implement this strategy is through dollar-cost averaging your purchases of Bitcoin or Ethereum. Every week or every month, set up a recurring buy for these cryptos rather than waiting for the price to drop. This works as an effective passive strategy that usually performs better than guessing when the price will go down.
Once you’ve bought Bitcoin and Ethereum, you can stake it in a crypto bank like Celsius to earn interest on your investments. While it probably won’t 1000x your investment in a year, it will help your money grow with a higher annual percentage yield than a traditional savings account.
|Works great for setting up passive investments
Lower risk compared to other cryptocurrencies
Price of BTC has increased almost every year of its existence
Price of ETH has increased in 2019, 2020 and 2021
|Gains likely to be more modest when compared to higher risk/higher reward strategies over the same timeframe
If you’re looking for excitement, it might seem a bit boring compared to the fluctuations in other areas of crypto investing
Medium Risk: Altcoin Investing
There are lots of promising projects built around other coins not named Bitcoin or Ethereum. Some of these may one day become the next big thing, while many will not. But choosing up and coming projects can provide much higher yields, with some investments growing by 1000% or more in a year. Do your research and find out what the project is about, what they’ve accomplished, where their roadmap is headed, and also who is behind the project.
Many tend to focus on investing in coins in the top 20 or 50 by market cap thinking that the more established these coins are, the lower the risk. While the market cap can be a pretty good indicator of a coin’s adoption and how its projects are doing, the top coins have changed quite a bit over time, so you shouldn’t rely on the market cap alone.
Another consideration is that a coin with a higher market cap has less room to grow overall, so the potential yield is likely lower as well. Coins further down the list by market cap tend to have more room to grow, so could provide higher yields, but with more potential risk as well. So you have to ask yourself…
Low Risk: Custodial Staking
Similar to earning interest in a bank, there are a number of different ways to earn interest on your crypto.
The first is Staking – the process of committing your crypto to support the operation of the blockchain (as they will be made use of in confirmation of transactions for crypto that runs a proof of stake model). Getting into how it works is complicated and we’ll write another post about that, but basically, you commit your crypto to a staking pool, allowing it to be used to support the operation of the blockchain, and in return, you will receive interest payments. Staking is very popular as the crypto you’re staking remains in your wallet, so it’s really quite low risk. However, most staking pools have lock-in periods (from just a few days right up to months or years, similar to a GIC) so there is risk in that you have your crypto locked up and can’t access it if you need it suddenly or sell it if you see a downturn in the market coming.
|APY of 4 – 14% depending on the cryptocurrency
Relatively safe as you can keep control of your crypto using self custody wallets like Exodus
|Lock in periods means your crypto may be unavailable if you need it or want to sell it quickly|
Medium Risk: CeFi Lending
The next way to earn a yield on your crypto is lending. Much like depositing money in a savings account in a bank and the bank then lending that money out to others, Lending involves depositing your crypto in a platform that then either loans it out to others (who borrow it for margin trading and other uses) or use it to create trading liquidity.
CeFi (Centralized Finance) refers to depositing your crypto with a central organization that manages the lending process for you – platforms such as Celsius or BlockFi. This is an easy way to earn yield, but there are risks as you no longer control your crypto as you have to transfer it to the CeFi organization. As a result, you have to have trust in that organization as if they act badly or just simply go out of business, you could lose your crypto. You will also need to go through KYC (Know Your Customer) checks in order to open an account with most CeFi organizations, which can sometimes be a bit time-consuming.
|– APY of 2 – 14% depending on the cryptocurrency
– Easy (non-technical)
In BlockFi, some investors have been unable to receive their interest
Reliance on USDT and associated stablecoins for generating investments; since Tether probably doesn’t have enough USD, the stablecoins are not actually pegged to the dollar. This increases the risk that you may lose money if Tether is audited.
– Need to complete KYC checks
– Lock in periods means your crypto may be unavailable if you need it or want to sell it
Medium Risk: DeFi Lending
DeFi Lending has evolved as an alternative to CeFi Lending where your crypto is also leant out but it is managed through decentralized lending pools rather than a centralized organization. Lending pools like Aave or UniSwap will manage the loans using smart contracts which ensure your loaned crypto is fully collateralized so that if the loan is not paid back, you will be paid back with the collateral. Does that mean there’s no risk? No, bad things can still happen. The main risk is that the collateral will be a different coin so if its price falls quickly, that could mean that the collateral is worth less than the loan and you could lose part of your investment.
While smart contracts are trustless, it also does not make them inherently trustworthy. If the code underlying these algorithms is altered to act in an untrustworthy manner, problems can arise. So look for platforms whose code has been audited to ensure backdoors haven’t been added. Due to the lack of regulation, there is always some risk to these investments.
In addition, both CeFi and DeFi Lending tend to have lock-in periods (from just a few days right up to months or years, similar to a GIC) so there are also similar risks to Staking.
Medium to High Risk: Liquidity Pools
Another way to generate a yield is by adding your crypto to a liquidity pool. Liquidity pools lock-in equal amounts of two different cryptos into a pool that facilitates instantaneous trades on a deX (Decentralized Exchange) platform like UniSwap, SushiSwap or PancakeSwap.
Think of it this way, if a person wants to trade ETH for DAI, the exchange needs to wait to match them with someone who wants to trade the same amount of DAI for ETH. But when there is a liquidity pool in place, the pool can accept the trade so that this process can occur almost instantaneously.
The main risk in Liquidity Pools is impermanent loss. Over time, as the price of one coin changes vs the other in the pool, the ratio of coins in the pool will change. When you withdraw your investment, you will then receive a percentage of the pool, which could be in a different ratio than the coins you deposited. This can result in a loss in your assets compared to just holding the coins and not lending them out. However, most times the yield you receive for being in the pool outweigh any impermanent loss.
Another risk is that rug pulls can occur. This exit scam involves creating a new token pair where your new crypto is matched with a stablecoin or low-volatility asset in the liquidity pool. As people are encouraged to add to this trading pair, the developers can use “back door” access to the token’s smart contract to mint millions of coins and sell them for the stable asset to drain this pool. This is very rare, but can happen, so make sure to do your research into both coins in the pool to ensure that they’re both reputable.
High Risk: Early Coins, NFTs & Meme Coins
This is the closest you can get to gambling without explicitly calling it gambling. While some people have made millions off of buying obscure tokens very early, even more people have lost the money they invested in them. The premise is pretty simple: buy a bunch of crypto that is very new and inexpensive, then hope it takes off.
If you’re able to find a coin before it gets pumped up by memes or a community like Dogecoin or Shiba Inu, you can make yields as high as 10,000x. You can also brag about how you saw it all coming from the beginning.
While early coins offer this potential, they are most often too good to be true. The risks of these coins are that the projects don’t go anywhere (which is very common), the coin is beaten out by a similar coin, or the coins are just set up as a scam, to make the coin’s creators money. While it might be worth putting in a little money into some of these tokens on the off chance of picking the next Dogecoin, they are most often too good to be true.
Newer strategies have also begun incorporating machine learning algorithms and automation which dynamically adjust your portfolio for you, based on your desired risk exposure. Many of these products are new in the space so it isn’t exactly clear which ones will prove successful in maximizing your returns and which ones are just capitalizing on buzzwords like crypto, blockchain and AI. Even if portfolio automation nets you a modest yield, there are still fees that need to be paid to whatever you use to automate the portfolio.
Asset Management Based on Risk
By using a combination of these strategies, you can mitigate the overall risk exposure of your portfolio. In a sample low-risk portfolio, it is common to have 75 percent of your assets allocated to blue-chip investments, 20 percent in altcoins and five percent in high-risk moonshots. For medium risk, you may only have 60 percent of your portfolio in blue-chip crypto, 30 percent in altcoins and 10 percent in moon shots. By decreasing your overall reliance on blue-chip cryptos and increasing your investment in altcoins and moon shots, you raise the risk level of your portfolio.
Risk and yield are well-correlated in the world of cryptocurrencies. While there are many different ways to set up your portfolio, the strategies you use will depend on your levels of risk tolerance.
Bitcoin and Ethereum present the lowest risk investments, as they are akin to blue-chip stocks in the corporate world. They’re well-established and adopted by many different parties. These (and other top coins) can also be staked in a crypto bank like Celsius for an annual percentage yield.
If you want to increase your yield, you’ll have to look to invest in cryptocurrencies in the top 100 by market cap. Well-established coins like SOL, ADA and DOT have been around long enough to have proven themselves. The top coins will carry less risk than something that’s only recently cracked the top 200.
Additionally, you can earn even more yield by participating in liquidity pools. However, some liquidity pools are used as exit scams and the smart contracts underlying these pools, while trustless, are not necessarily trustworthy. If there are back doors left in the code, they can be exploited.
Finally, moon shot meme coins promise to make early investors rich but don’t get your hopes up as most never go anywhere.
By mixing and matching different combinations of coins and yield strategies, you can align your desired risk tolerance with the appropriate strategies.