How to choose the core holdings of a crypto portfolio
The most common mistakes investors make when building core holdings of a crypto portfolio is buying too many cryptocurrencies or investing only in one crypto project.
This article is a part of “How to onboard your folks to crypto” series:
- The modern financial system from gold to petroyuan & de-dollarization
- Debunking misconceptions about crypto deflation
- How not to lose your money when entering a crypto market
- How to choose the core holdings of a crypto portfolio (current)
- Satellite holdings and rebalancing of a crypto portfolio
Disclosure: some links in this article are referral links. I also own BTC, ETH, BCH, XMR, XRP, TRX, and all other coins mentioned in the article, but my portfolio is heavily diversified, so I don’t have financial incentives to shill for any particular coin. This article is brought to you by a privacy-oriented peer-to-peer marketplace LocalCryptos.
Intro
In the previous articles we’ve discussed how the modern financial system evolved from commodity money to unbacked fiat money that constantly loses its value, we’ve debunked misconceptions about deflation, and talked about the most common mistakes that amateur investors make when entering a crypto market.
The purpose of this article is to teach amateur investors how to reduce their risks by picking the right cryptocurrencies for the diversification of the core holdings of a long-term crypto portfolio. In the next article we will focus on satellite holdings, aggressive investments, portfolio rebalancing, and effective ways to follow the crypto news.
What crypto assets to buy?
Here are the most common mistakes amateur investors make when building a crypto portfolio:
- Invest most money into some new trendy project
- Invest too much into non-major cryptos
- Hold only bitcoin (BTC)
Buying lots of new tokens during an ICO or after a first listing on an exchange can be very lucrative, but it’s also extremely risky and doesn’t suit amateur investors. We can definitely allocate a small portion of our crypto portfolio for aggressive investments, especially during a bull market, but core holdings should consist of less risky cryptos like bitcoin (BTC), ethereum (ETH), etc.
Bitcoin’s dominance refers to the percentage bitcoin has of the market capitalization of all other cryptocurrencies. Bitcoin is the most liquid crypto, so its price is more stable comparative to other tokens. As a result, altcoins outperform bitcoin during a bull market, but they also crash harder during a bear market, because they cannot handle a selling pressure as good as BTC.
Bitcoin maximalists often suggest people to invest only in BTC, so let’s make it clear that bitcoin is indeed the safest crypto, and it’s a good suggestion to hold some BTC. However, investing only in BTC posses certain risks, because the project heavily relies on one scaling solution. There is nothing wrong in holding only BTC if you’re a tech-savvy bitcoin maximalist, but amateur investors don’t have enough knowledge to evaluate all the risks and make informed decisions. Full diversification and dollar-cost averaging is the only way for amateur investors to minimize risks.
So what cryptos amateur investors should hold?
Core holdings
Past performance is not an indicator for future performance.
The core holdings of a crypto portfolio should consist of well-established coins with strong fundamentals and proven industry support. This will be the most stable part that can survive even a long bear market. For example, the strongest IT companies (eBay, Amazon) survived the dot-com bubble and later surpassed their stock price peaks during the bubble.
The exact coins can vary depending on political views and risk preferences of an investor, but the most common examples are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Bitcoin Cash (BCH)
- XRP (XRP)
- Monero (XMR)
Just to make it clear, I don’t encourage you to buy any of these cryptos, but I do encourage you to research these projects. Some of these cryptos are a part of my core holdings as well (but not all of them).
If you didn’t follow cryptocurrencies before, then you will quickly find out that none of the cryptos above has any future, because according to critics:
- “Bitcoin is controlled by bankers”
- “Ether won’t have any value even if Ethereum Network will be widely used”
- “Bitcoin Cash is a centralized coin”
- “XRP is not a cryptocurrency”
- “Monero cannot scale”
Yes, this is the beauty of a crypto space. It’s a full democracy in the action. Everybody who disagrees with the established narrative can fork off and create a new coin with blackjack and hookers, which sometimes leads to lots of drama. The diversity of different approaches to solve common problems and high decentralization is the key to cryptocurrencies’ resilience.
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Basic research
OK, but how can an amateur investor navigate in all this drama and find solid projects without spending hundreds of hours on the research? Since core holdings consist of well-established projects, you can find them by looking at the top cryptos by the market cap.
Let’s look at the 5 years time period and compare prices snapshots from January 2015 to December 2019.
As we can see, most of the top cryptos by the market cap from 2015 were still in the top after 5 years, so we can assume that they are relatively stable crypto assets, despite a daily volatility.
Bitcoin (BTC) safeguarded the largest market cap, but ETH and XRP showed higher gains even after a long bear market of 2018–2019:
- Ethereum (ETH) +15,867%
- XRP (XRP) +3,806%
- Bitcoin (BTC) +1,753%
- Dash (DASH) +1,606%
- Litecoin (LTC) +1,316%
However, some newer cryptos can occasionally jump into the top due to hype and FOMO, so here is a short-list of other metrics that everybody can easily check apart from the market cap:
- Reddit (an amount of subscribers, a date of creation, a daily activity)
- GitHub (stars, forks, contributors, issues, pull requests)
- Daily transactions and active addresses
Here is an example. At the time of writing, TRON (TRX) and Monero (XMR) had a similar market cap with TRON being a bit higher in the rating.
An amateur investor can assume that both projects carry the same degree of investment risk. However, once we compare some basic stats, we see another picture.
First of all, Monero subreddit has been created 3 years earlier and it has twice more subscribers. Keep in mind though that the number of members can be manipulated with bots, so let’s look at the actual activity on the subreddit. At r/Monero we can see meaningful posts with many comments and upvotes like a call to use smaller mining pools for higher decentralization.
While TRON’s subreddit doesn’t have much activity and the front page is full of short educational videos with low engagement. These videos are posted by a moderator, so it looks more like an attempt to artificially create an illusion of some activity.
Next we can look at GitHub repositories of each project and see that Monero has more stars, forks, contributors, open issues and pull requests.
Of course, stars and forks can be manipulated with bots, while a high number of open issues/pull requests might mean that Monero devs are very slow at resolving them. However, when we take a closer look, we see that Monero project has much more submitted pull requests and opened issues in general.
There is an interesting tool coincodecap that tracks GitHub activity of different crypto projects, and it also rates Monero higher than TRON, even though some metrics of TRON project are actually higher.
Ask we can see, either Monero has a bigger and more active community, or TRON community uses other platforms for the communication, e.g. Chinese social media apps like Weibo, WeChat, QQ. Keep in mind though that Chinese apps can ban crypto projects at any time and that’s exactly what happened with a Weibo account of TRON’s founder.
Another important and easily accessible data is daily transactions and daily active addresses. BitInfoCharts is a great tool to compare different cryptos.
Unfortunately, TRON is not among 40+ cryptos listed on the website, but we can find TRON’s network data at tronscan. Surprisingly, the number of daily transactions is very high comparative to other major cryptos, which is usually a good sign.
However, this data can be manipulated with SPAM-transactions, especially when transaction fees are very low, so be cautious.
Obviously, this was a very simple quantitative analysis without looking into the details, but this kind of research doesn’t require any technical knowledge and can be performed by any amateur investor. Within just 15 minutes we’ve found out that TRON project is too new and risky for the core holdings of our portfolio.
Can we still hold TRON tokens?
Well, after having a quick look at wikipedia pages or coin tracking websites like coinlib or coinlore, we can discover that Monero and TRON projects have very different goals. While Monero is highly focused on privacy, TRON is a developer platform, which should be compared with projects like Ethereum and EOS, but that requires more skills and knowledge than ordinary people have, so we can make decision based only on the metrics that we have.
Of course, we still can hold some TRON tokens, but we should allocate them to a more risky portion of crypto holdings, which implies a much higher level of diversification with other cryptocurrencies like EOS, NEO, ADA, IOTA, BNB, XLM, etc.
You won’t buy stocks without any research, right? The same logic applies to cryptocurrencies. If your goal is to invest some money into cryptos for the diversification purpose, then I’d encourage you to do at least a quick research about each crypto asset that you’re planning to hold.
Conclusion
Now you have a better understanding of how to build core holdings of a crypto portfolio, and how to do a basic research that doesn’t require any high-tech knowledge.
If you’re new to a crypto market, then make sure to read the previous article where we’ve discussed in details how to buy cryptos using privacy-oriented platforms, when exactly to buy, and how to store cryptos.
In the next article of this series we will talk about further diversification with satellite holdings, which are the more risky part of a crypto portfolio.
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Disclaimer: I am not a licensed financial advisor, and this article is not a financial advice. The information presented here is for educational purpose only, it represents my personal opinion, and is not purported to be fact. Cryptocurrencies are very volatile and can move quickly in any direction. I’m not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, services or companies mentioned in this article. Seek a duly licensed professional for an investment advice.
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