DOMANI - How to build a Crypto Portfolio
(DOMANI is an oracle-less Digital Asset Management platform that enables users to create, mint and manage ETF-style tokenized funds. The views expressed in the article below should not be taken as investment advice. Always do your own research.)
Building a Crypto Portfolio is an essential part of making it. Unfortunately, essential parts of portfolio management are overlooked by most. Here's how to build a successful Crypto Portfolio using investment management theory.
Before getting into how to build a successful portfolio, we need to set out some goals and take into account some key individual factors. Firstly, the logical goal of any portfolio manager should be to increase returns, whilst decreasing the level of risk. In the real world, creating a risk free portfolio that beats market returns is highly unlikely, so you need to consider some key factors. Namely, you should consider your risk tolerance and take into account your investment timeline before making any investment decision, remembering to always maximize that risk-return tradeoff.
Creating your investment philosophy
It is clear that learning the basics of Investment and Portfolio Management will set you well on your way to building a successful portfolio. But where do you start? The first key step when building any type of financial portfolio is to set out your investment philosophy. Your investment philosophy is a way of thinking about markets and how they work. Your personal beliefs on crypto markets will dictate what you choose to invest in, for example, if you believe in $BTC's capabilities as a store of value, you might choose to go overweight on BTC in your portfolio. If you believe that Ethereum has a scalability problem, you might consider investing in alternative L1s or ETH L2s. Whilst we’ve just given two general examples of how investors might think about crypto markets, you’re also welcome to mix and match beliefs in the markets and create an investment philosophy that matches those beliefs. You don’t have to stick to the pre-set BTC maxi mentality, for example. Ultimately, what’s important is to have an investment philosophy, and stick to it! Not having an investment philosophy could lead you to “flip flopping” between strategies and succumbing to FOMO. Decisions based on FOMO don’t usually turn out well, as they could lead to overtrading, increasing transaction costs and adding tax inefficiencies. FOMO investments can also throw off the risk-return balance of your portfolio.
Diversifying your portfolio
After setting up your investment philosophy, you should consider how you will diversify your portfolio. The goal of diversification is to reduce individual asset risk. Going all-in into a single token will always carry significantly more risk than a well diversified portfolio. However, over-diversification can also dilute profits, a balance might be best. When investing, take into consideration the type of tokens you are investing in, and try not to go too overweight into certain categories of tokens (i.e. DeFi, Metaverse, L1s, L2s, etc.).
Setting your portfolio allocation
When building a portfolio you should ensure you stick to a predetermined allocation per "Crypto Class". Crypto Classes are simply ways of putting crypto assets into groups. Each Crypto Class will have a different role within your portfolio. These are some general examples of Crypto Classes and their role:
High Risk:
Your 10-100x plays. Mkt Cap: < $100m
Medium Risk:
A nice balance. Mkt Cap: $100m - $4bn
Blue chips:
Long-term growth. Mkt Cap: > $5bn
Stablecoins:
Capital preservation & ammo for dips
In terms of investing into stablecoins, you should remember that not all stablecoins are built the same. Before investing into a stablecoin, you should learn how a stablecoin maintains its peg and how it’s collateralized. Proper due diligence is extremely important in this case, as we have recently seen UST, an algorithmic stablecoin, plunge from $1 to less than a cent in a matter of days. Analyzing a stablecoin’s collateralization and centralization methods is essential before choosing to invest. We’ve written a lengthier article on this matter that you might want to check out, simply click here. Diversification is important even with stablecoins.
Using your investment philosophy, taking into account your risk profile and diversifying accordingly you should be able to build an allocation that fits your requirements. The last thing to take into account: rebalancing.
4) Rebalancing
How often should you rebalance? Rebalancing should take place as time goes on to ensure that the portfolio you built is adhering to your Investment Philosophy and Portfolio Allocation. In bull markets, you might want to take profits more often meaning rebalancing is more frequent. In bear markets, your portfolio might not budge too much between weeks. The idea is to make sure that your portfolio’s pre-determined weightings are being maintained as time goes on. If a high risk asset within your portfolio reaches your price target affecting the weighting of the entire portfolio, it might be time to take profits and rebalance the portfolio. If certain assets are not performing as well as expected, it’s also important to reassess your position and potentially sell, even at a loss and use those funds to purchase better performing assets.
About DOMANI Protocol
DOMANI Protocol is an asset management protocol that facilitates portfolio tokenization, rebalancing, and a multiswap DEX to trade a multi-token position in a single transaction.