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How do I build a good investment portfolio in cryptocurrencies?

November 4, 2020

To tell the truth, building a good investment portfolio is not that easy. And it’s a lot harder to create one that has cryptocurrencies in the foreground. Building a good portfolio is an art normally unknown to the naive investor. However, sooner or later we have to take the first step. If you’ve been in this field for a long time, at some point you will be tempted to become a much more sophisticated investor.

You might think that building an investment portfolio is not necessary. After all, Bitcoin is a “universal solution”. In other words, it’s a panacea. This means that the best strategy is to put all of our assets in Bitcoin as soon as possible. Not to do is “idiotic”. According to many in the field, Bitcoin is a “safe haven”. And buying bitcoin is the best decision.

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How do I build a good investment portfolio in cryptocurrencies?
How do I build a good investment portfolio in cryptocurrencies?

In other words, Bitcoin is not just a good investment. Bitcoin is the only possible investment. We are told that with Bitcoin we have security and profitability at the same time. In the crypto space, fiat money is considered the worst investment ever due to inflation. And for some strange reason, there isn’t much talk of other investments in this area. I mean real estate, stocks, bonds, goods, or businesses. It seems that Bitcoin is the only solution to the inflation problem. Yes, gold is mentioned from time to time, but it is stated that Bitcoin is superior. In short, it’s Bitcoin yes or yes. Otherwise you’re an idiot. It seems we don’t have a lot of options.

Apparently, the most important thing for an asset is its scarcity. Bitcoin is valuable because it is a rare commodity. That gives you security and profitability. So the solution is to collect yourself and go. This strategy does not only benefit the Bitcoin buyer. This will also benefit the whole economy. In this alternate universe, all it takes for an economy to thrive is a hard currency. Hard currency, free markets and a government separate from economic affairs. Easy.

Talking about an investment portfolio is not relevant in this scenario. Diversification and balancing do not make sense in this case. If Bitcoin is suitable for everyone, then it is imperative to buy it. If Bitcoin is a safe asset, there is no need to protect yourself. And when it’s that profitable, you don’t have to look for alternatives. Bitcoin is everything.

Now there are many Bitcoin investors who are not very happy with the official portrayal. Because this narrative seems to be based more on fantasy than reality. I’m afraid the reality is much more complex. And making financial decisions about fantasies can be very costly.

For the purposes of this article, I am not going to treat Bitcoin as a “safe haven” but rather as a high risk asset. That said, we assume from the start that Bitcoin is an extremely volatile asset. I will also distance myself from the official narrative to say that Bitcoin is a very good investment, but it is not perfect and it is not all for the world.

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Bitcoin, for example, is not for the ultra-conservative investor. Not only is this a very volatile asset, it’s a relatively new technology that requires some deployment. That is, it requires an open mind. On the other hand, you have to be familiar with technology. You don’t have to be an expert, of course. However, you should at least have basic computer skills.

I’ll tell you an anecdote. An already retired family friend decided to put almost all of his money into Bitcoin in 2018, mainly due to the increases in 2017. We’re talking about a very old man who doesn’t take risks and is a newcomer to technology. His granddaughter has Whatapp installed on his cell phone and makes bank transfers with great difficulty. His only consolation regarding his investment was to seek “advice” from me. I installed his bitcoin wallet. His calls were practically every day and he kept asking me the same desperate question: “When will the price of bitcoin go up? “

Needless to say, the experience was hell for him and me. I told him from the start that Bitcoin was not for him. In my opinion, the investment should be enjoyed. If you don’t believe in the matter, it’s better to invest in something else. When investing becomes a pain, it is better not to.

Bitcoin is also not for low capital investors. I mean the person who lives from a fortnight to a fortnight. When a person does not have capital to invest and their salary exceeds daily expenses, it is best not to invest in Bitcoin. It is best to save in fiat to have an emergency fund first. And getting into debt to invest in Bitcoin would be insane.

It is very important to have a very good understanding of the concept of capital. “Capital” is money we must invest and is different from the money we have to spend. This means that our capital is not intended for our everyday life as our expenses are already covered. When we have a steady income (which covers our expenses) and an emergency fund, it means that our capital is for investment only. It doesn’t matter if our investment takes 2 or 5 years to mature. Our costs are covered. And there is no rush. If we lose this capital, our life goes on without any problems.

Once we are clear about our capital, the next thing we need to understand is the concept of risk / return. In general, a safe asset offers very little return. And a very profitable asset usually puts us at great risk. Risk in this context means the possibility of losing our money and security in general means stability. The structure of a portfolio depends on our risk tolerance. And this “tolerance” depends on our temperament and our personal situation.

When we have a lot of capital, we can tolerate more risks. When we are young we can tolerate more risks. When we know about investing, we can tolerate more risk. If we can afford to tolerate more risk, we can diversify and offset less.

Default, A conservative portfolio puts 60% of the capital in safe assets (government bonds, triple A bonds, and cash), 30% of the capital in variable income assets (stocks, etc.) and the rest in high risk assets (bitcoin, crypto, Startups, low capital companies).

Of course, it is entirely possible to invest 60% of the capital in Bitcoin and the rest in less risky assets. But we would speak of a very aggressive portfolio. We will have very good results in the bitcoin bull season. But we will suffer more with the bears than with the others.

When it comes to diversification, it is important to understand that bitcoin is not the only valid asset. Investing in stocks, bonds, metals, government bonds, fiat, and real estate is a perfectly valid option. It’s not just about profitability. Stability also has its value. The dollar, for example, is very useful. The -2% lost due to inflation can be covered by income from other investments or by opening an interest account. We must remember that the dollar provides liquidity and stability.

Diversification is of course not everything. It’s not just about having a ton of wealth. It’s also important to consider the risk / reward ratio. It is possible to diversify, but to get it wrong. Because we can focus on assets that are just as risky. In this case, diversification would be useless.

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In the case of Bitcoin, it wouldn’t make sense to diversify by buying altcoins. Because we would add riskier assets to an already risky asset. The logical thing would be to balance bitcoin with fiat and stocks. You could put fiat in an account that offers interest, put some capital in precious metals, and the rest in an SP 500 fund. If we want a more conservative portfolio, we’ll increase the capital in fiat. If we want a more aggressive portfolio, we increase the amount of bitcoin within the portfolio.

Safe assets provide us with stability and fixed income securities. This can be very handy for people who need a monthly income. The most volatile assets do not offer the same level of security, but they do give us the opportunity to grow. These assets are preferred by younger investors who do not need a fixed return on their capital because they have other income (their work). In these cases, the priority is to grow aggressively. At the same time, aggressive growth is not an excuse to do crazy things and lose everything. A certain diversification and balance never hurts. It’s always good to build a good portfolio (crypto) that suits our needs and goals. Think, then invest.