Once you get into cryptocurrencies, you soon realize that it’s not just about Bitcoin (BTC). There are thousands of other coins/tokens as well. The prominent ones being Ether (Ethereum), Cardano, Ripple, Litecoin, etc.
Any exposure to the crypto space initially starts with Bitcoin (BTC) at a minimum. But then comes the question, – what else to put into your portfolio?
Or more specifically,
How to split your cryptocurrency portfolio between Bitcoin, Ethereum and other Altcoins?
There are strong views about this among crypto investors. Some prefer to play it safe (comparatively) by sticking to Bitcoin and few other major names. The rest keep an aggressive stance and invest primarily in the lesser-known smaller crypto tokens.
Here are few possible cryptocurrency portfolio examples:
- 90-100% Bitcoin – Yes. That is a reasonably good portfolio to have even though it might seem like betting on a single horse. Bitcoin is the king of cryptos and is here to stay. It is well established and has the largest network effect. And as of now, has the most institutional investors considering it seriously. So if you are unsure about which cryptos to bet on, then stick to what has worked well in past.
- 50% Bitcoin and 50% Ether – This is also a conservative allocation in the crypto space with almost no investment in smaller altcoins. Bitcoin and Ether are 2 of the most established ones and for a conservative crypto investor, offer a sufficient level of diversification. Do read my detailed article on the 2 major cryptos of today, i.e. Bitcoin Vs Ethereum: Which to choose?
- 60% Bitcoin, 30% Ether, 10% Altcoins
- 40% Bitcoin, 40% Ether, 20% Altcoins
- 33% Bitcoin, 33% Ether, 33% Altcoins
- 30% Bitcoin, 30% Ether, 40% Altcoins
- 25% Bitcoin, 25% Ether, 50% Altcoins
- 20% Bitcoin, 20% Ether, 60% Altcoins
- 15% Bitcoin, 15% Ether, 70% Altcoins
- 10-20% Bitcoin & Ether, 80-90% Altcoins
- One can even look at splitting and allocation portfolios based on market caps. Like 50% in high-market cap coins, 30% in medium-market cap and 20% in low or micro-cap coins
For a portfolio with a major chunk in Bitcoin + Ethereum (like 70-80% or more), the basic idea is to capture consistent and long-term gains via the 2 main bets in Bitcoin and Ethereum. The altcoins on the other hand provide the potential for outsized gains (5x – 100x type returns) in the near-medium term. This is one way to have a sort of Balanced crypto portfolio 2022 to maximize gains but minimize potential losses. Also, do spend some time understanding the difference between Bitcoin and Altcoins.
I am still learning about cryptocurrencies and exploring them out of curiosity. But here are my thoughts and suggestions for how to split your crypto portfolio and do your crypto portfolio allocation:
- Put a large percentage of your portfolio (40-70%) in Bitcoin. Plain and simple. It is the most established crypto out there and compared to the rest of the space, much less risky. It’s also the one that decides which the market is headed given its high dominance.
- The next coin to consider is Ether (Ethereum ETH). You can put it 30-50% in this coin as well.
- In fact, the 50% Bitcoin + 50% Ethereum is the simplest diversified cryptocurrency portfolio that you can build. This is a reasonably good choice given that both are among the two largest digital assets by market capitalization and are also the most liquid ones
- Once these 2-piece of the crypto portfolio jigsaw are set, then you look at Altcoin for 0-30% of your portfolio. The space is not easy to pick from, to be honest, unless you really understand the technical workings of each of the altcoins you plan to pick from 10,000 plus of them. But nevertheless, spreading it across 5-10 (or max 15) crypto altcoins can be considered. Remember, some of these will go bad. Some will do ok. Some might do very well.
So don’t think about putting Rs 1 lakh in 100 cryptos with Rs 1000 each. Instead, put 60-90,000 in Bitcoin + Ethereum and the remaining money in 5-15 other Altcoins. You can even do SIP in Bitcoin if you are uncomfortable investing in one go.
Here we are talking about splitting the crypto allocation. You first need to figure out how much portfolio % to invest in Bitcoin and other cryptos. And that is after you decide whether it makes sense for you to invest in Bitcoin or not.
The idea here is simple.
You can have main positions in Bitcoin (BTC) and Ethereum (ETH), but the strategy can still include a bit of diversification. This can be done by taking smaller positions in a number of alt-coins to spread out the risk and to give a better chance of riding waves of growth when different alt-coins break out. That way, you get the best of both worlds.
Note: These are just sample portfolio suggestions and a cryptocurrency portfolio example. This is neither intended nor should be taken as investment advice.
Now I will address a couple of important points about the Altcoin space. And that will make it clear why I suggested that most of your crypto portfolio should be in Bitcoin and Ethereum. And more importantly, why a very small portion should be in Altcoins.
The first reason.
From what I have learned till now is that most cryptocurrencies have a high correlation and the prices of a majority of them are strongly coupled with the price of Bitcoin. In fact, whenever there is a fall in BTC prices, it is immediately followed by a fall in all other coins (except Stablecoins). And often, then fall in these Alt-coins is much more than the fall in BTC. It is Bitcoin that drives the entire cryptocurrency market for now. If BTC rises, everything rises. If BTC falls, everything falls.
So even though you might have 20 coins in your crypto portfolio, it might still end up being just a coin diversification and not exactly actual diversification in the true sense. Inspite of holding 20 crypto assets, your portfolio will behave more or less like what Bitcoin does. So what is the solution? I think it’s better to diversify coins based on their blockchain use-cases. Here is an interesting take on Why you don’t need a diversified Crypto Portfolio?
The second reason.
In the Altcoin space, there is a disconnect between the story and reality. Most altcoins start with a promise to disrupt some industry or the other. Some even commit to change the world. And that may be true for some of them eventually but it cannot be true for all 10,000+ coins. In initial periods, it’s just about who markets their coins better and gets the word out. And when that happens, the prices rise and so does people’s interest in it. This becomes a self-fulfilling prophecy and things keep rolling. Just like the Dogecoin saga.
In the altcoin space, there are huge incentives to over-promise on the story and under-deliver on the reality. This may sound like a fraud in making but that is how it seems to be going on.
As this article (link) details quite well – Embellishing the marketing story will result in higher price as most people will use this shortcut for their evaluation. What’s more, the reality doesn’t need to be delivered immediately and that gives the coin’s developers plenty of excuses to delay. Given that it’s an order of magnitude harder to disprove a story than to tell it, the over-promising has a good chance of not needing much defending beyond “we’ll get to it later”. In other words, exaggeration in marketing doesn’t cost much but adds a lot of demand….Under-delivering the reality is another clear win for the coin’s development team. Promises that cost too much to deliver don’t have to be delivered at all. After all, they often already have the money. What they do deliver has no need to meet any sort of technical standards, either. Since it’s costly to evaluate the code that they do deliver, most people just stick with the marketing story and don’t bother much with the technical reality….As a result, the risk/reward ratio gets very high as permanent loss of capital becomes more and more likely….Most [Alt]coins are not vetted beyond the marketing story making sense (and sometimes, not even that!), and result in a giant inverted trust pyramid with the founder at the bottom….The technical reality is usually only understood by a few and everyone else trusts that what the creators put into the whitepaper reflects reality. There is nothing to really enforce that the story and reality conform, and instead the information about the coin comes from a small number of people that created the coin….This means that most coins in the industry have very high risk profiles. Most of them have no hope of achieving what they purport in their marketing story.
I think there is another angle to this. And that comes from my experience of stock markets. No doubt some altcoins will do well. And deliver on what they promise. But that doesn’t guarantee anything. As Benjamin Graham rightly said – “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” This I think is true for the cryptocurrency space as well. So even though Bitcoin has been called New Gold and Gold 2.0 at times, we still need to be careful about other smaller altcoins all the time.
Another article (link) says – Talk to any altcoin holder and they will inevitably argue that their coin is the one with the most interesting features. They argue that their coin will revolutionize some industry by doing something that will make the tokens worth more, usually through some convoluted set of hand-wavy incentives. The hope, of course, is that their coin will be “the next Bitcoin”…This is little more than wishful thinking as any holder of previous pretenders to the throne can tell you.
And that is the truth. There are a lot of dead cryptocurrencies, altcoins, and tokens. And that is the hard reality you need to accept. The mortality rate of coins is pretty high. If not complete extinction, then not being traded much and value falling more than 99.9% is another factor.
A majority of Altcoin space is about marketing it well.
The article (link) explains it – Marketing in crypto has a virtuous feedback cycle as anyone that buys a token tends to market the token to other people via word-of-mouth much more than any other product. The incentives are such that holders of a particular token do a lot of additional marketing for the coin, essentially for free. Altcoin creators euphemistically call such people their “community” which help promote the coin without any cost to the altcoin marketers. As such, the marketing money spent on altcoins has had out-sized returns.…Altcoins that aren’t good at marketing tend to do worse over time, even if they have strong technical teams.
I know I have ranted a lot about altcoins negatively. But that is the truth.
Do you want to know What Will Be the Next Bitcoin? And you want to invest in it. You are looking for the Best Cryptocurrencies to Invest in 2022 other than Bitcoin and Ethereum. But you need to face the facts.
I don’t want to be foolish to say that none of the altcoins will amount to anything. Some will do well. Some might even do push Bitcoin to the second spot in years to come. But the problem is that it’s very difficult for layperson like us to learn a lot about several of them (due to lack of time and skill) and then predict how successful these might be.
I read an interesting article on Fool titled The Only Reason I Own Bitcoin. It says that Bitcoin…is an insurance policy. Treating it like an investment now would make it impossible to continue treating it like an insurance policy in the future. My solution: I no longer even mentally count the investment as part of my retirement portfolio (even though that’s where it is). Because of that, I don’t have cortisol running through my veins when the price of Bitcoin drops. In the end, that makes Bitcoin much more like a set-it-and-forget-it investment in a small, highly speculative growth company. If it fails, a little is all I want. If it succeeds, a little is all I need. Anything more than that is unnecessary.
Further Reading – Should you Buy & Hold Bitcoin for 10 Years?
So that’s it.
If you were looking for How to Build Your Cryptocurrency Portfolio in 2022, then I hope you got some thoughts from this article. As explained in detail here, going for BTC+ETH and few Altcoins is How to Diversify your Crypto Portfolio by Balancing between Bitcoin, Ethereum and other Altcoins. This may or may not be the Ideal crypto portfolio 2022. But it is still something to begin your thinking from and then go on to build the best-diversified crypto portfolio 2022.
Disclaimer – I have invested a small amount in Cryptocurrencies. But my daily life is largely unaffected by the swings of cryptocurrencies. It’s not a significant part of my overall portfolio as of now.