Read This Before Starting with Your Cryptocurrency Portfolio
#8 — How to choose the cryptocurrencies to invest on, and how to build a strategy
Do know what cryptocurrencies to buy? I didn’t know either. Actually, I still don’t know what are the cryptocurrencies that will make me a millionaire. What I can tell you is how to build a portfolio, what are the questions to ask yourself, and a few rules that can help you to create a strategy.
This article is part of my Learning challenge where I learn about one topic each month. As you can imagine, this month, I was learning about trading & cryptocurrencies. I based this studies on a book and a few article and ended up investing 1000€ on cryptocurrencies. Click here, if you want to know more about my methodology.
How to build our portfolio
The first rule to build a portfolio is to diversify it and the reason is simple, if you only buy one cryptocurrency and it crashes you lose all your money. By diversifying you reduce this risk. But in cryptocurrencies, at least today there is something you cannot fight against: when the bitcoin crashes, almost everything crashes (at least their price in USD). Because most of the altcoins are mostly traded with BTC. So their price is translated in BTC and then from BTC to USD.
Know what you buy
The second rule is simple
Invest in what you know — Peter Lynch
Actually, I would change it to Invest in what you know, understand and believe in. For example, if you don’t believe in the decentralization of currencies, don’t invest in cryptocurrency 😏.
Invest money you are ready to loose
The third rule is actually the main rule, I already said it and I will say it again, invest money that you don’t need right now, and also money you are ready to loose. Also, and this is specific in cryptocurrency since it’s something relatively new, and quite volatile, always keep in mind that you can lose all the money you invested in it.
Diversify your portfolio. The taxonomy
Before diversifying your portfolio of cryptocurrency you should diversify your investments depending on how much risk you want to take, you can put some money in your bank savings account, then a bit in stocks and finally in cryptocurrencies.
Let’s talk about how to diversify in the cryptocurrencies market. There are different ways to diversify. Try not to buy only the same type of coin. To do this, you need to know what are the type of coins which exist and the different taxonomies to classify coins.
- Type of cryptocurrencies (Currency, Platform — includes smart contracts, Utility, Security, Asset-backed)
- Proof type (Proof of Stake, Proof of Work, …)
- Hashing algorithms (Scrypt, SHA-256, …)
- Mining profitability
- Market capitalization (hight, middle, low)
- Forked from
- Number of transaction per second
- Price correlation to another currency
There are a lot of categories, you don’t need to buy all of them but avoid buying only one type of currency.
You can get some of this information there:
- Coingecko — https://www.coingecko.com
- CryptoCompare — https://www.cryptocompare.com
- On the official website of the coin
- Or just google it
Understand your coins
You can find the questions you can ask yourself before buying a cryptocurrency.
Does this coin/project have a purpose?
If so what?
Can they solve a real problem?
How good is their team?
How long have they been around?
How strong is their code base?
Do they have a roadmap?
Are they transparent?
Questions coming from this article, that I recommend you to read!
Here are a few coins which I tried to group together using some of the previous taxonomy.
- BTC — Bitcoin, the first cryptocurrency, it was supposed to be digital cash, it’s now seen like digital gold since it’s the first, it’s still accepted for payment in some websites, stores or in the dark web by criminals.
- LTC — Litecoin, the second cryptocurrency, now seen as the digital silver.
- DASH — Dash, electronic cash.
Currencies/Anonymous digital cash
- XMR — Monero, the biggest anonymous and privacy-focused cryptocurrency, maybe the future currency of the dark web 😬.
- BCN — Bytecoin, similar to Monero with a price per coin very low, privacy-focused.
- XVG — Verge, privacy-focused, anonymous coin.
- ETH — Ethereum, distributed app platform where you can create smart contracts which are little computer programmes, it has some scalability problems.
- NEO — Neo, the Chinese competitor of Ethereum, this coin also has a Proof of Stake mechanism which means you earn GAS (another coin) by holding Neo in an official wallet.
- IOTA — Payment for the IoT devices, this coin doesn’t work like a standard blockchain, it’s a tangle and it’s very fast and scalable.
- MAID — MaidSafe, distributed internet to host websites on their network.
- STEEM — Steem, a mix of Reddit and Medium where you earn money when you get upvotes.
- XRP — Ripple, one of the most famous B2B solutions, for settlement between banks, it’s not open source but very fast, 500x faster than BTC.
- XLM — Stellar Lumens, backed by IBM and advised by some members of Stripe, it’s for payment between different currencies.
- BCH — Bitcoin cash, be careful this is not Bitcoin, it’s a nonofficial fork to make bitcoin more scalable, some people think it’s a scam, and some are supporting it, I personally don’t recommend it, but it can grow well. If you want to know more about forks read this.
I invite you to check out this list containing the top 100 coin market capitalization explained in one sentence of 4 words.
This list describes cryptocurrencies. Each gets four words. There are many. Some are landmarks. Some are scams…techcrunch.com
Example of portfolio
I will show my portfolio at the end of the article. In the meanwhile, I will show you a portfolio coming from the author of https://btctrading.wordpress.com/
He recommends to hold 10 different coins with more or less an equal investment in each.
I invite you to read his articles to understand how he defined them, at least this one.
In part I and II I did a quantitative analysis on altcoins and possible strategies on how to capitalize on their…btctrading.wordpress.com
Defining a strategy
Once you defined your portfolio it’s time to define a strategy.
There are two main strategies: the short-term and long-term.
This consist of buying at a local low and selling at a local high (find out how in my other article about Technical and chart analysis). By doing so, even if the trend is going up or down you can always make a profit. But this is very hard for a beginner and requires to be very active. So, if you are full time investor it’s very good at least you can train and practice the use of the different indicators and take your decisions. If you don’t have too much time this can be very stressful and in the beginning you will not make a lot of profits.
For short-term trading, the strategy is to buy when it reaches the support and sell when it reaches the resistance.
Once your portfolio is defined, buy and hold. They also call it HODL on the internet. This is not stressful at all if you accept the fact that you will make profits in the long-term so in 1, 2, 3 or more years 🙂.
You can always do both, for example, 80% of your investment in long-term and 20% in short-term. Also, what I can recommend is to do long-term and put some Stop Loss order, who will sell if the price goes below the threshold you define.
Here are some tips coming from the book I read and from the web that you should try to follow as much as possible:
- Follow your strategy not your emotions 😎.
- Be careful with the price of altcoins as you buy in BTC, check their price in BTC, not in EUR/USD.
- Don’t buy at all-time high (ATH).
- Don’t sell at loss.
- Don’t buy because of FOMO (Fear of Missing Out 🙄).
- Don’t panic sell because of FUD (Fear, Uncertainty, and Doubt)
- If you miss a trade, stay the hell out of the market. Get ’em next time.
- Curves never keep going up forever (I don’t like this one but it’s what the book says 😭).
- Buy on rumor sell on news, but be careful there are a lot of fake-rumors all over the web!
- Never buy during a crash, wait until it ends.
- Always check twice or three times, before passing an order, that you are doing what you want to do (sometimes a typo can change the full order!).
- Don’t think you can buy when it’s lowest and sell when it’s highest, it’s the ideal but very hard to do.
If you think it’s too late to invest in bitcoin check this very cool article.
As I write this, Bitcoin has just made a new all time high. I think we may see $25,000 per Bitcoin in the next 2 years.medium.com
Also, read this very cool article, I took some of the advice from it.
- Should You Invest in Cryptocurrencies?
- Become a Better Crypto Trader with Technical and Chart Analysis
- Manage Your Cryptocurrency Portfolio and Track Your Profits
- A Step by Step Guide on Investing in Your First Cryptocurrency