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What Does a Well-Diversified Digital Asset Portfolio Look Like?

In the light of the impressive cryptocurrency rally in the past eleven months, investors that have discovered bitcoin now also want to diversify into other promising digital assets that could potentially experience a similar exuberant price rally as bitcoin has had since its inception in 2009. However, structuring a digital asset portfolio – especially for those who are new to cryptocurrencies – can still be a challenge.

In this article, you will learn how to structure a balanced portfolio of cryptocurrencies that provides diversified exposure to this exciting new digital asset class.

Core Holdings are Bitcoin and Ether

 The two largest cryptocurrencies by market capitalization, bitcoin (BTC) and ether (ETH), should make up the largest proportion of a well-balanced diversified crypto asset portfolio.

Not only are they less volatile and more mature assets than some of their lesser-known counterparts but they have also generated impressive returns since the beginning of the year.

The price of bitcoin rallied from $1,000 to over $16,000 and, thereby, generating a year-to-date return on investment of over 1,500 percent while Ethereum’s ether rallied by over 5000 percent from $8.25 to over $500 and is currently trading in the $450 to $500 range.

Bitcoin and ether should make up around 60 percent of a diversified crypto asset portfolio with a split of 40 percent bitcoin and 20 percent ether as bitcoin is still the market leader and the digital currency that is experiencing the most new inflows as bitcoin is becoming increasingly more mainstream as an investment asset.

 Top 20 Altcoins

For the second basket of cryptocurrencies, investors should be looking the largest and most promising altcoins out of the remaining top 20 largest cryptocurrencies by market capitalization.

Bitcoin Cash (BCH), Litecoin (LTC), Ripple (XRP), Dash (DASH), IOTA (MIOTA), and Monero (XMR) would be top candidates for this part of your portfolio for example.

Bitcoin Cash is a fork of bitcoin that allows for cheaper and faster transactions than its predecessor. Litecoin also provides faster and cheaper transactions than bitcoin and has thus risen in popularity. Ripple is the digital currency used in the RippleNet interbank payments system, which is experiencing increasing adoption from major financial institutions. Dash provides high-speed transactions that can be conducted in privacy. IOTA is an exciting new digital currency that allows for zero-fee payments aimed to become a payments layer for the Internet of Things and Monero is the leading privacy-centric cryptocurrency, which allows for completely anonymous digital payments.

While there are other promising digital currencies in the top 20, the above-mentioned are currently among the best-positioned to outperform their peers and are most likely to see institutional investors inflows as they have some of the largest market capitalizations in the overall crypto market. This, of course, makes it easier for institutional investors to get in and out of positions as liquidity can be a major problem in smaller coins.

This basket of altcoins should make up around 30 percent of a well-balanced crypto asset portfolio.

ICO Tokens and Small-Cap Coins

Finally, for the remaining 10 percent of your portfolio, investors can include high-risk ICO tokens and small-cap cryptocurrencies.

These could include the likes of the anonymity-focused coins PIVX (PIVX) and Komodo (KMD), digital currency debit card provider TenX’s PAY token, decentralized cloud storage provider’s Stroj token, and any other small-cap digital currency or token that investors believe could have the potential to become a winner.

ICO tokens and the majority of smaller coins carry the high risk of becoming near worthless if the project doesn’t succeed. And in most cases, these blockchain projects are run by a small group of developers, which means it can really go either way.

Interestingly, according to a study by Deloitte, Only eight percent of blockchain projects that have been launched are still active. This clearly illustrates the risk of investing in cryptocurrency projects that are only backed by a small community.

Due to the inherent riskiness of small-cap coins, only around 10 percent of one’s overall crypto asset portfolio should be in these type of cryptocurrencies.

The Exact Portfolio Proportion is Depend on the Investor

What percentage mixes you should subscribe too, of course, depends on your personal risk preference. The more risk-averse you are, the higher your proportion of bitcoin and ether should be in relation to other coins. If you are happy to take on substantial risk in an already risky asset class, however, you can allocate a higher percentage to ICO tokens and small-cap cryptocurrencies.

In other words, a conservative investor who still wants digital currency exposure would maybe invest 50 percent in bitcoin, 30 percent in ether and split the remainder between Litecoin, IOTA, and Ripple. A young, risk-taking investors, on the other hand, could only hold 25 percent in bitcoin and ether and the remainder in high-risk small-cap coins that have the potential to increase more than 10-fold or disappear into worthlessness. The choice always depends on the investment goals and the risk preference of the investor.

How Much of Your Net Worth Should Go Into Crypto?

How much of your overall investment portfolio should be in cryptocurrencies is another question altogether. Fred Wilson, CEO of Union Square Ventures, believes that sophisticated investors who want to generate a high returns should allocate five percent of their overall net worth into bitcoin.

Aggressive risk-takers could hold up to ten percent of their net worth in bitcoin but anyone with a more conservative investment approach should not hold more than three percent. Those close to retirement should avoid investing in digital assets altogether, according to Wilson.

Wilson’s view on how much crypto exposure an investor should hold in relations to his or her total net worth is echoed by Mark Painter, a portfolio manager at Everguide Financial Group. Painter considers bitcoin to “about as speculative as you can get with an investment,” and recommends is clients to invest five percent of their total investable capital into the digital currency provided they have understood all the risks involved with investing in digital assets.

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About the author

John DeCleene

Whilst having spent a lot of his life in Asia, John DeCleene has lived and studied all over the world - including spells in Hong Kong, Mexico, The U.S. and China. He graduated with a BA in Political Science from Tulane University in 2016. Fluent in English and proficient in Mandarin and Spanish, he can communicate and connect with most of the world’s population too, and this certainly helped John as he gained work experience interning for the U.S.-Taiwan Business counsel in Washington D.C. as an investment analyst and then working alongside U.S. Senator Robert P. Casey of Pennsylvania as a legislative intern. He subsequently worked as a business analyst for a mutual fund in Singapore, where his passion for travel and aptitude for creating connections between opportunities and ideas was the perfect intersection of natural ability and experience, spending his time travelling between Cambodia, Hong Kong, and China investigating and discovering untapped investment opportunities. John is a fund manager for OCIM’s fintech fund, and currently progressing towards becoming a CFA charter holder. He loves to travel for business and pleasure, having visited 38 countries (including North Korea); he represents the new breed of global citizen for the 21st century.