How to structure the satellite holdings and rebalance a crypto portfolio
Amateur investors often allocate too much funds into altcoins and don’t rebalance a crypto portfolio during price swings, which leads to unnecessary risks
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
- Satellite holdings and rebalancing of a crypto portfolio (current)
Disclosure: some links in this article are referral links. I also own BTC, ETH, BCH, XMR, 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, talked about the most common mistakes that amateur investors make when entering a crypto market, and explained how to properly choose the core holdings of a crypto portfolio in order to reduce risks.
For most people buying and holding a few major cryptos is more than enough to diversify their investment portfolio. However, many amateur crypto investors are hungry for high gains in a short period of time, so they make all sorts of mistakes like allocating too much funds into new altcoins, or day trading with margin. Those mistakes often lead to huge losses, so it’s important to remind that the aggressive satellite holdings are by far the riskiest part of a crypto portfolio, and should not represent more than 10–20% of all crypto holdings.
In this article we will analyze different aggressive investment strategies and discuss how to properly structure the satellite holdings of a crypto portfolio that will give a long-term exposure to a diversified group of coins. We will also emphasize the importance of portfolio rebalancing.
A basket of altcoins (crypto index fund)
After structuring the core holdings of a portfolio with a few major coins, advanced users can add more diversification and increase profits by using more aggressive strategies like buying many altcoins on exchanges or getting tokens during ICO sales.
The best way to minimize risks is to follow experienced crypto market analysts, and do your own research for every project that you’re planning to invest in. However, there are so many new projects in the crypto space that ordinary people often don’t have enough time for a research, so they simply buy everything in equal portions. That way they invest not in a particular project, but rather in a whole altcoin market.
A relatively conservative approach to structuring satellite holdings is to buy and hold 10 largest cryptos by market cap. Such “top 10 crypto index fund” was profitable during the bull market of 2017, devastating during the bear market of 2018, and flat in 2019.
However, some investors want to get exposure to more projects so they use more aggressive strategies like buying and holding 100 top cryptos. This strategy is very risky, so let’s analyze whether it can be profitable.
Past performance is not an indicator for future performance.
For example, this investor bought 100 top coins for $10 each on January 1, 2017 without any research.
One year later, on January 1, 2018 his initial investment of $1,000 turned into $71,000 which was a 7,000% growth, while Bitcoin (BTC) had just a 1,300% growth in the same period of time. As we can see, investing in 100 different coins was extremely lucrative during a previous crypto bull run.
It’s important to understand though that due to low liquidity altcoins crash hard during bear markets, so the same portfolio fell down from $71K in 2018 to $5K in 2020, which was a 93% decline.
However, $5,000 was still 5 times higher than the initial investment of $1,000 in January 2017, which was a good result for just 3 years of holding, even though Bitcoin (BTC) outperformed that result with +680% gains for the same period of time.
If you’ve decided to get lots of altcoins for the satellite holdings, then make sure that the altcoin market has entered a bull cycle, otherwise your portfolio will shrink very fast. The easiest way to get so many coins is to register on a centralized exchange with many altcoins. This way you trust an exchange to do a research for you and add only coins that have some community support and a growing demand. Keep in mind though that some exchanges might add altcoins simply if developers will pay enough fees for the listing, which doesn’t mean that a project is worth investing in.
ICOs and IEOs
Another aggressive strategy is buying tokens during ICO or IEO sales. Here is an example of investing 1 BTC in 14 popular ICOs each. As we can see, those ICO tokens performed 20 times better than Bitcoin (BTC) during a bull run of 2017.
However, the same as 100 altcoins from the example above, those 14 ICO tokens crashed hard during the bear market of 2018–2019.
One can argue that holding those 14 ICO tokens was still 3 times more profitable than holding Bitcoin (BTC). That’s right, but if we examine those tokens closer, we will see that the half of the projects has totally failed and Ethereum (ETH) makes 85% of that ICO portfolio. In other words, most of ICO tokens will go to zero during a long bear market, so it’s extremely risky to allocate more than 10–20% of crypto investments in new projects.
Thus I wouldn’t recommend anybody to invest any significant amount of money into ICOs or IEOs, but buying a few tokens can be an interesting experience that will give you a better understanding of how ICOs work, and how some successful projects eventually migrate to their own blockchain (main network or mainnet).
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Leverage investing vs. margin trading
When a crypto portfolio is fully built, some users might want to get additional adrenaline with aggressive leverage investing using margin trading on centralized exchanges during a bull market. I urge you that this strategy can lead to significant losses, especially in case of flash crashes, so please do not allocate there more than 5–10% of a crypto portfolio and be ready to have a less quality sleep.
Here is what you need to understand about losses:
- If you lose 10%, you will need to gain 11% to return to the same value.
- If you lose 50%, you will need to gain 100% to return to the same value.
- If you lose 75%, you will need to gain 300% to return to the same value.
That means that losing a big chunk of your portfolio has a much more devastating effect than you probably thought, so try to diversify your portfolio, reduce the risks, and avoid a single point of failure.
If you still want to try margin, then I’d emphasize that day trading is a zero-sum game, where beginners constantly lose their money to more experienced traders. Instead of day trading with margin, one can try leverage investing, which is a bit safer approach if executed properly. The idea is to simply buy a well-established high-liquidity crypto asset during a bull market using 2x leverage and hold this position for a long time.
Side note: you still can lose everything in just a few seconds even with 2x leverage in case of flash crashes, because the only way to protect yourself from flash crashes is to use no margin trade, and no stop loss orders (use stop limit orders instead).
TradingView can help you learn basics of technical analysis and get some free ideas about a good buy-in zone and where the market is heading to.
The difference between leverage investing and leverage trading is that you don’t take a profit immediately when an asset goes up, but instead you keep on holding for a long period of time. You can even increase your position on the next correction while keeping the leverage ratio at the same level (e.g. not more than 2x leverage). Eventually, you’ll have to cash out though, otherwise you’ll be liquidated during a next bear market cycle, so be cautious.
For most people leverage investing during a bull market is more profitable than day trading because it’s much easier to spot a “support” level and buy more coins, rather than spot an ATH (all-time-high) and sell at the best price. Quite often during a bull run people will sell when the market is overbought and yet they will miss the greatest rally to the moon.
Portfolio rebalancing
The idea of rebalancing is to keep your portfolio aligned with your initial risk-management plan and help boost returns.
Coins rebalancing
For example, you decided to allocate 80% of your crypto portfolio to 4 major coins and 20% to a basket of 100 other coins and tokens:
- 20% BTC
- 20% ETH
- 20% BCH
- 20% XMR
- 20% a basket of altcoins
Suppose that after a few months XMR skyrocketed comparative to other cryptos, so your portfolio became:
- 15% BTC
- 15% ETH
- 15% BCH
- 40% XMR
- 15% a basket of altcoins
Now 40% of your crypto portfolio consists of only one coin, which is a poor risk-management plan, so you have to rebalance it and exchange some XMR for other coins, trying to get closer to initial target allocations.
Rebalancing funds that are held on a centralized custodial exchange is very cheap and can be done often. On the other hand, rebalancing coins stored on a hardware wallet via services like Changelly, SimpleSwap, ChangeNow, or other non-custodial exchanges, will cost you much money on fees and so decrease your potential gains. Thus it’s much easier to hold satellite holdings on a few reputable custodial exchanges, while keeping the core holdings of your crypto portfolio on hardware and software wallets.
Wallets rebalancing
For example, you decided to hold 70% of your crypto portfolio on hardware wallets, 20% on custodial exchanges and 10% on a few software wallets that you use for payments:
- 70% hardware wallets
- 20% custodial exchanges
- 10% software wallets
Suppose that during a bull run your altcoins held on custodial exchanges skyrocketed, so your portfolio allocation naturally changed to:
- 45% hardware wallets
- 50% custodial exchanges
- 5% software wallets
Now the half of your crypto portfolio is stored on centralized exchanges, which is very risky, so you have to rebalance it and move some funds from exchanges to other wallets, trying to get closer to initial target allocations.
The example above might sound unrealistic, but that’s exactly what happened in 2017, when small altcoins greatly outperformed major cryptos, and many investors held those smaller tokens on custodial exchanges due to higher liquidity and better UX.
The investors that rebalanced their portfolios at least once a month have either pocketed the profit by converting funds to stablecoins, or moved funds from speculative projects to well-established cryptos that were better at holding value during the bear market that started after the massive bull run.
The investors that didn’t spend time rebalancing their portfolios have seen crazy gains and crazy losses.
Keep some fiat
More and more crypto enthusiasts abandon fiat money and go full crypto, which is good from ideological perspective, but it’s a very risky strategy. For example, they can lose their crypto income during a bear market, because there will be less money in the space, and so they’ll have to sell their crypto savings for a very low price in order to pay the bills, since they don’t have enough fiat.
Thus it’s important to always hold some fiat that can be used as a safety net or to buy more cryptos during a market crash. If your income is full in crypto, then you can use dollar-cost averaging to convert some cryptos into fiat to make sure that you can pay for living during crypto bear markets.
Follow the news
Once you’ve invested in crypto assets, you have to follow at least major news, especially if you store some funds on custodial exchanges, because they can shut down with all your money.
Following one big news publisher is not safe, because there might be a conflict of interest with certain exchanges or advertisers, so a publisher can potentially ignore negative news. For example, CoinDesk was not covering serious Bitfinex’s issues in the end of 2017. Side note: CoinDesk improved the coverage since then.
However, there are so many things happening in the crypto space every day that following all the news will take too much time. The solution is to use news aggregators such as Reddit or CryptoPanic with different filters including keywords.
You can type in names of your exchanges and tickers of your core holdings with filters like “Important” or “Rising” in order to get most important news.
Big exchanges are often under an attack from hackers, competitors, and regulators, so one bad article is not a reason to panic. However, when an exchange gets lots of bad press from different sources for months, then it’s the time to do your own investigation and may be move some funds to other wallets until the storm ends.
Conclusion
Now you have more ideas how to structure the aggressive satellite holdings of a crypto portfolio without exposing yourself to unnecessary risks.
If you’re new to a crypto market, then make sure to read the previous articles where we’ve discussed in details how to buy cryptos using privacy-oriented platforms, when exactly to buy, and how to store cryptos to minimize risks.
In the next articles of this series we will continue our discussion on why cryptocurrencies are a better form of money than state-imposed fiat money.
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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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