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How to Build a Diversified Cryptocurrency Portfolio that Balances Risk

Build a crypto portfolio with bitcoin, ethereum, litecoin, alt coins, ICOs and other arbitrage opportunities.

There’s a lot more to bitcoin than just buying and holding.
“Bitcoin surged to a new high of $X today, up over Y percent from Z months ago. If you had invested $A just B years ago you would have made $C and you’d be filthy rich.”

Currently, this is the only way most people talk about bitcoin. It’s viewed as a buy and hold vehicle for fast capital appreciation. But the savvy investors and smart money around the world is far more focused on how to actually use bitcoin than just getting their hands on it and holding. While a buy and hold strategy has been quite lucrative over the past few years (and few months especially), buying bitcoin is just the beginning. Just like buying America Online (AOL) back in 1996, what’s really important is what came next.

Talking to passionate bitcoin enthusiasts the past few months I’ve realized that the people making the most money in bitcoin are not only buying bitcoin, but they’re leveraging bitcoin to make even more money. I’ve tried my best to structure my personal portfolio in such a way that it gives me some long-term exposure to a diversified group of coins that I like, while also playing a higher risk/reward game in the medium and short-term. With no further adieu…

My Crypto Portfolio

Here’s what my currently crypto portfolio looks like as of November 2017, broken into a few distinct categories.

Long Term Value (HODL)

Bitcoin Vault: 60%
Ethereum Vault: 10%
Litecoin Vault: 5%

The long-term buy and hold strategy is pretty self explanatory. Recently, Coinbase released a vault feature that requires double authentication for release of funds and a mandatory 48 hour waiting period before money can be moved out of the vault. This is mostly a strategy deployed by Coinbase to reduce leakage and make their assets a little stickier, but I believe it also does make your bitcoins safer because the passwords are stored offline. Further, the system forces you make more strategic decisions with your coins and prevents you from overreacting to short term negative news. I try to keep about 75% of my crypto portfolio in Coinbase’s vault with a 1–2 year investment horizon. I don’t play on withdrawing them anytime soon.

Source: coinbase.com/vault

Medium Term Value (Speculation)

Other Alt Coins: 10%
Hyped ICOs: 5%

Personally, I reserve about 15% of my portfolio for speculative coins with a investment horizon of a few weeks or longer. This could include Bitcoin Cash, Bitcoin Gold, Qtum, Zcash, Zcoin or hundreds of other volatile alt coins. Most of these I purchase on Poloniex.

You could also get in at the early creation of these coins by participating in one of many ICOs. Just remember, most of these companies are crap. Most of these founders are unable to raise money through traditional investors and are trying to dupe the public into thinking their company will be successful. If 90% of funded startups fail, I believe 98% of ICO startups will fail. Just remember that most people don’t actually know what they’re doing. But, if you choose to go down the ICO route, please do your homework first.

  1. Read ICO forums like CryptoCompare or CoinSchedule.
  2. Go to the company website, read their white paper, research the founders, check if they’ve been given an ICO rating, join their Telegram or Slack group (if they don’t have one, beware), and make sure they completed all the necessary legal filings in their country.
  3. Read instructions carefully about how to invest. For some ICOs, you will need to be an accredited investor (or say that you are).
  4. Make sure you clearly understand how you will eventually cash out on the investment (whether through public exchange or dividends), and the projected amount of time that will take.

I don’t recommend putting more than 5% of your portfolio into ICOs. This will be by far the riskiest asset in your portfolio. The game here is buying hyped ICOs and sell them once they “pop” on the public exchanges. You’re basically buying lottery tickets. So far, about 80% of these ICOs have been profitable, but this party is going to end very very soon, so don’t be foolish. Below are some of the best and worst-performing ICOs since last month.

The best and worst-performing ICOs since last month.
The good, bad and ugly!

There’s the good, there’s the bad, then then there’s the Tezos ICO, which raked in a whopping $400 million and has been the subject of a tremendous amount of controversy in recent weeks. Following a highly publicized spat between the individuals at the core of team, Tezos has been hit with three separate class-action lawsuits that seek the return of the ETH and BTC. It was revealed that Tezos may have broken the law by violating US securities (SEC) laws. With the launch of the Tezos network now months overdue, investors are starting to wonder if anything will come of their investment. If the courts decide that Tezos violated securities laws, it could put many other ICOs in legal jeopardy. The SEC hasn’t begun prosecuting companies yet for violating securities laws, but it could start doing so at any time. A negative court ruling against Tezos could put pressure on the SEC to act. So act with caution here.

Short Term Value (Arbitrage)

Arbitrage: 10%

Perhaps the most exciting way to actually use bitcoin is taking advantage of short-term arbitrage opportunities in the market. Over the past few months I’ve spent considerable time exploring all the new financial pathways that have opened up as a result of this new decentralized currency. What’s been most eye-opening to me is how many millions of people bitcoin has invited into the world’s financial economy. Explaining the appeal of bitcoin to people in America is a little challenging because for most of us it’s easy to save money, spend money, and transfer money to friends. But for the 3.2 billion people in the world (39% of the world’s population) who don’t have a bank account, this is nearly impossible.

These 3.2 billion people have been neglected by financial institutions like Chase, VISA and Fidelity — who have no way of currently serving these people. In many countries, they lack a trusted institution to safely store people’s money and facilitate fair transactions. But with bitcoin, the first decentralized digital currency, its system works without a central bank, repository or administrator. So the floodgates have been opened for out-of-network individuals to participate in global e-commerce. What’s I’ve realized is there’s tremendous opportunity in helping bring these people into the market, if you’re willing to part ways with some bitcoin.

The core philosophy here is that these people desperately want to get their hands on bitcoin, but can’t easily create a Coinbase account and wire over the money. Remember, they don’t have bank accounts and they don’t have credit/debit cards. As a result, they will have to pay higher fees to get their hands on bitcoin by some other means. So all you have to do is tell these people what currency you want in exchange for offering some of your bitcoin, and set up a trade and earn a small (or large) margin.

Understand your risks

Exposure to a particular cryptocurrency is primarily dependent on your risk appetite. We can use traditional investment portfolios as a guide of how to structure your crypto portfolio. If your risk tolerance is low, then a typical crypto investment portfolio might be 50% arbitrage/dividend trades (mostly fixed returns), 40% bitcoin, 8% alt-coins and 2% ICOs. If your risk tolerance is high, then perhaps you invest 50% in ICOs, 30% in alt-coins, 18% in bitcoin and 2% in arbitrage plays.

Bitcoin: Large cap stocks (value)
Alt-coins: Small cap stocks (growth)
ICOs: Penny stocks (speculation)
Arbitrage: Bonds/dividend stocks

I’ll be the first to admit that my personal crypto portfolio is far from perfect, and I’m limited in the amount of time I can dedicate to arbitrage plays. But it has still worked well for me and helped me earn some generous returns. Here are the 3-month returns of my portfolio—spanning September 1st, 2017 to November 28th, 2017.

Bitcoin Vault: 60% (+125%)
Ethereum Vault: 10% (
+32%)
Litecoin Vault: 5% (
+22%)
Other Alt Coins: 10% (
+381%*)
Bitcoin Arbitrage: 10% (
+27%**)
Hyped ICOs: 5% (
TBD)

*My only alt-holdings were Bitcoin Cash (BCH) and Ripple (XRP).

Total Return (3M): +120%

Hopefully this article helps you better measure risk in your own portfolio and gives you some tools to go out three and create value in the crypto market.

Don’t own bitcoin yet? Here’s $10 in free BTC. 💰

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