How to Build a WINNING Crypto Portfolio in 2022
In 2021, Bitcoin set the pace with a 73% YOY gain, consistently outpacing the S&P’s yearly increase of 28%, trailed by gold which posted an overall net negative at -7%.
While the tail end of 2021 was absent of the staggering gains made during the explosive growth highlighted by the extended November rally, the underlying user and network metrics suggest considerable growth upside.
The historic launch of the first BTC Futures ETF marked a landmark moment for the push behind mainstream growth as the debut of the Proshares Bitcoin Futures ETF (BITO) landed at the doorsteps of $1B trading volume on the first day.
According to financial analyst firm PitchBook, the global median valuation for the crypto space ballooned from $12M in 2020 to a near 200% increase at an industry average of $35M.
The entire crypto market currently valued at $2.2T continues to afford lucrative opportunities for traders to accrue significant financial wealth in 2022 across key sectors in NFT, metaverse, L2 scaling solutions, and expanding innovation in the DeFi space through the rise of DeFi 2.0.
Still on the fence regarding crypto? Crypto isn’t just for Cypherpunks.
Before delving into crypto, it is essential to develop a framework to evaluate potential trades and DYOR. Assessing core value propositions, functionality, community size, uniqueness, and market opportunity are a few of the many areas you can explore in great detail.
Due to cryptocurrencies’ volatile nature, profitable market plays surface every day — but not without inherent risk.
Do High-Level Research
Familiarizing yourself with the market and learning about the leading and emerging currencies along with their varying market sectors can help you build a resilient portfolio to weather the inevitable storms ahead.
Once you’ve narrowed down your crypto prospects, start by checking online to see if the project has released a white paper, as typically these provide a roadmap and tokenomics for the cryptocurrency and details regarding the team developing it. They also outline how the cryptocurrency works and unpack the unique value propositions.
The following are some high-level questions you can ask yourself prior to your next crypto purchase to assess its quality early in the research process:
- How deep did you have to dig to discover this currency? Do they have a strong marketing presence?
- Is the token founded on sound models of tokenomics? Do early investors hold a substantial proportion of the total supply and if so, are there strategic vesting periods in place?
- Do the team and advisors excite you? Have they had success before? Are they involved with the community on Twitter or appearing in technical conferences?
- What have you heard on the grapevine? What is the current market sentiment towards your pick and is the news coverage positive or negative?
- Does this cryptocurrency have a strong community that believes in it or is the support base primarily driven through speculation?
- While reading the whitepaper did you get the impression the team has a pipe dream that claims its token will do everything? Coins that promise the moon may not have the underlying capital, may be based on underdeveloped or unreliable technology, and likely do not understand the trade-offs between specific algorithms and protocols.
Given the sensitive, unregulated nature of the crypto space coupled with common, dramatic price fluctuations you should come prepared.
Stay on top of your game with research and analysis to stabilize your entry and hedge exposure in uncharted territory.
Diversify in Market Niches
Your friend who knows a guy found out about this new IEO touted as an upcoming disrupter in the supply chain space. You would hate to incur any FOMO if this were to be the next big thing so best to throw all your funds at it and hope for the best.
Wrong.
Similar to how a stock portfolio should be balanced with blue-chip and non-blue chip shares, your crypto portfolio should have a generous mix of cryptocurrencies in varying market sectors.
In short, diversification manages risk through strategic and calculated exposure to markets with underlying potential.
If your portfolio consisted solely of Bitcoin and Ethereum this would represent a poorly-constructed portfolio due to the considerable correlation between the top 2 assets. If Bitcoin sees a sudden price swing, Ethereum will likely mirror that fluctuation.
Look at the recent rallies by Bitcoin and Ethereum between Dec 2020 and Jan 2021 if you doubt the correlation.
This can lead to your overall portfolio balance experiencing sudden losses which is an unnecessary risk. In all cases, the objective of asset allocation and portfolio diversification is to identify trading opportunities that are uncorrelated.
One of the more full-proof methods of managing risk is through leveraging sector diversification. This disseminates your portfolio across the crypto space, reducing its volatility and managing risk. If one of your tokens were to take a big hit, your portfolio can stomach the blow as you have taken the appropriate precautionary measures.
Cryptoasset networks can be easily compartmentalized into several key categories dictated by the type of users they address. There are numerous more underlying sectors but the main categories below allow for an ample amount of asset diversification.
- Market movers
2. Ethereum killers
3. DeFi
4. NFTs and the Metaverse
If you want to analyze your targets even further, you can ask yourself the following questions:
- Are these tokens well established or in their infancy?
- Are these projects disruptive or an alternative to an existing project?
- Do they have similar levels of risk? If so, am I comfortable with that?
It’s up to you to determine your values, risk appetite, and chosen level of diversification — strive to find your happy medium.
Assessing Risk Factors
Familiarity with the market and diversifying over myriad industries is a great start, but assessing the outlook of a potential purchase can go far beyond qualitative analysis. What are some other ways you can evaluate a cryptocurrency?
Market Cap
One of the first technical indicators you should review when assessing a cryptocurrency is market capitalization, which reflects the current market share.
The consensus among the crypto community is that the bigger the market cap of a coin, the fewer risks it may pose.
On the flip side, those with smaller market caps can represent significant opportunities but may be associated with a higher range of volatility.
Market cap can be calculated by multiplying the current market price of a coin or token by the total circulating supply.
Market cap = Current Price x Circulating Supply
You can use the market cap of a token or coin as a tool in your crypto toolbox to roughly forecast what the market cap will be a year or two from now. This is done by comparing your chosen token to other leaders in the space with a similar market cap, and assessing whether it is at a reasonable total for the sector it aims to disrupt.
However, it is vital to keep in mind the protocols surrounding token production and circulation.
This can be significant as if you expect a 20% growth in market cap over the next two years but the circulation of coins is growing faster than 20%, the value of the coin and its long-term potential will inevitably decrease.
Transactional Volume
You’ve found a solid cryptocurrency and it has a healthy market cap but its transaction volume is at ATLs. Analyzing the transactional volume of a cryptocurrency can illuminate how holders use a cryptocurrency.
Tread carefully with cryptocurrencies exhibiting low, infrequent trading activity and volume as this could indicate a lack of legitimate use-cases, insufficient community support, low liquidity, or possibly a dead project.
Total Development Activity
One of the more advanced tactics when analyzing a cryptocurrency’s growth potential resides within public code repositories.
Conducting an evaluation of how organized the repository is, the total number of contributors, and how frequently serious problems have been reported offers invaluable developer competency insight. The total number of active contributors is also a significant metric to measure progress as a lone developer resolving issues or bugs is not sustainable and could lead to an abandoned cryptocurrency.
For those with an in-depth understanding of well-written, future-minded code, exploring the code and reviewing how well it’s documented, checking if there is a robust test environment, and observing if the code is designed in a logical and precise manner is a sure-fire way to get into the creator’s head.
You can determine the developers’ competency and commitment based on the quality of the code and conclude whether this is a viable project.
Do Your Due Diligence
Portfolio diversification can be a headache as it can demand substantial time for research and analysis, something many traders simply don’t have or aren’t willing to commit. In the financial world, brokers and institutional investors understand this and develop products like mutual funds and ETFs to give retail traders diversity without the legwork.
It’s essential to reiterate the importance of “risk appetite” when designing your crypto portfolio; you don’t want to lose sleep because your tokens are always top of mind.
Also, community analysis and interaction may often go overlooked, but these are crucial variables to a token’s success. It’s easy to forget that Bitcoin’s early growth was a series of technological innovations, not initiated by corporations or governments, but through a grass-roots movement driven by early crypto enthusiasts.
With Bitcoin now completing its 13th year of network growth since the creation of genesis block 0 back on January 3, 2019, ProBit Global is providing a 1-week subscription offer to accumulate BTC at half off the market price, a potential entry point to start building a new portfolio with the industry’s cornerstone.
ProBit Global helps reduce asset risk through an in-depth vetting process to feature a wide array of global projects and early-stage retail opportunities with over 700 currently trading tokens.
Due to the transient nature of the cryptocurrency niche, best practices in cryptocurrency analysis are sure to evolve. Still, if you stick to the fundamentals discussed in this article and commit to intensive, self-directed research, you will limit your risk and increase your potential ROI.
