Experienced crypto investors will often look to more than just bitcoin and seek to build a portfolio containing other cryptoassets too.
The most well-known of these alternatives is ethereum, but crypto portfolios will often be far broader than holding just this and bitcoin.
In investing, diversification and spreading your risk is important, and in investment terms that means holding crypto as part of a wider portfolio including other assets too, such as stocks, bonds and cash.
But for those interested in zooming in on the solely crypto element of a wider investment strategy, we speak to eToro crypto analyst Simon Peters to ask how he would go about building a portfolio.
Experienced crypto investors will often look beyond just holding bitcoin
Why look at other cryptoassets beyond bitcoin?
Not all cryptoassets are intended for use as currency, some are designed to be solutions to decentralised projects and services.
Aside from the technical capabilities that differentiate some crypto from bitcoin in their intended utility, many of these cryptos have much smaller market capitalisations (the total number of the assets, multiplied by current market price of a single asset) and as such have the potential to see far higher percentage returns than investing solely in bitcoin due to the lower capital inflows needed to move prices.
However, investing in smaller cap cryptos generally comes with far higher risk as equally with the lower liquidity prices can fall just as quickly, or even quicker than price rises.
What is the thinking when building a crypto portfolio?
Similar to building a stock portfolio, when building a crypto portfolio diversification is important. I personally lean to building a crypto portfolio starting with larger cap cryptos first, such as bitcoin and ethereum as they have been around the longest, and from a security perspective are the more robust blockchains and are actively developing.
I also look at interesting altcoins, those that have unique use cases or are trying to solve a real problem or fulfil a need. But as they tend to be in their infancy, I allocate a smaller percentage of my holdings to these cryptos.
For example, LINK and DOT, the tokens of the respective projects Chainlink and Polkadot. Chainlink is about bringing real-world data onto blockchain using decentralised oracles, which the data can then can be used in smart contracts and other decentralised applications. Polkadot is about blockchain interoperability. Blockchains are separate and can’t communicate with each other.
This is what Polkadot aims to solve. For instance, via Polkadot a smart contract being executed on the Ethereum blockchain could action a transfer on the Bitcoin blockchain from one person’s address to another, based on the conditions of the smart contract.
Going back to the point above, when investing in smaller cap cryptos they have great potential and could see far higher percentage returns, but they come with far higher risk, so having these as a smaller percentage of my portfolio I’m comfortable with.
One way you can diversify within your crypto investments is through eToro’s CryptoPortfolio. Part of the eToro Smart Portfolios, this CryptoPortfolio enables you to diversify among cryptoassets with just a single investment.
What are the main bitcoin alternatives?
If we’re saying bitcoin alternatives (as in cryptos intended to be a currency) such as bitcoin cash, litecoin I personally don’t hold those because I believe bitcoin will ultimately fulfil the global digital currency role.
But if we’re saying alternatives as in different use cases to bitcoin, then we’re talking about the likes of ethereum, polkadot, chainlink, for example. Polkadot is about blockchain interoperability (blockchains communicating with each other), and chainlink is about bringing real world data onto blockchain for use with smart contracts and Dapps.
I try to have exposure to many different types of cryptoassets like these that are aiming to fulfil different needs or solve different problems compared to bitcoin.
What are your three golden rules when assessing a new or up-and-coming crypto?
Firstly, I look at the use case for the crypto and what problem is it trying to solve or what need is it trying to fulfil.
Secondly, I tend to look more towards coins that have their own blockchain, rather than tokens that are built or created on top of an existing blockchain.
As to me, if a crypto has its own blockchain you could argue there are stronger technical capabilities of the personnel behind the crypto project or blockchain, and that if more resources have been invested into it, then this could be an indicator that this crypto/project is being created for the right reasons and less likely to be a scam.
Not to paint all tokens with the same brush, but new tokens created on existing blockchains – because of the ease in how tokens can be created – could be scams cleverly marketed to encourage buying of the token before an eventual rug pull.
Thirdly, and arguably one of the most important things, I would only buy from reputable platforms like eToro, as generally these facilities tend to have their own vetting process before listing a coin or token. So, you could be comfortable knowing that if a coin or token is listed on a reputable platform it’s more likely to be genuine.
Investors should learn what moves crypto prices and be aware that they are volatile
What moves crypto prices?
Ultimately buying and selling. Demand and supply changes – but there are numerous factors which can tilt the scale one way or the other such as regulation, adoption news, technical developments. For example, in October 2021, we saw bitcoin’s price surge after PayPal began accepting bitcoin on the online platform.
As crypto markets become more intertwined with traditional markets, we are starting to see economic data, political news, monetary and fiscal policy changes, or decisions also influencing price changes. A recent example of this was seen in September when bitcoin’s price dropped as China’s central bank announced a ban on crypto.
Are there previously popular cryptos that have fallen behind?
There are a number of cryptos currently that are far lower in the market capitalisation tables than where they were positioned during the previous bull market four years ago. EOS, NEO, IOTA are a few examples.
When would you rebalance a crypto portfolio?
Whilst you can view cryptos against fiat currencies such as the US dollar, you can also view cryptos against each other – crypto crosses.
Looking at the price charts of these crypto crosses you could feel the price of one crypto is very low against the price of another and decide to buy this crypto at a lower price, with the expectation of rotating out to the other at a later date.
However, with rebalancing a portfolio if you are ‘disposing’ of one crypto for another it could constitute a taxable event depending on where you are domiciled.
Of course, I would say to check with a registered professional with regards to tax because circumstances vary by individual, but it is something to be conscious about.
On eToro, I find the benefits of the Crypto Smart Portfolio mean that an investor can get exposure to a large number of cryptoassets while simultaneously removing the guesswork of trying to ‘find’ the cryptos yourself and deciding what weighting of your portfolio to allocate to each crypto as this is already done for you.
It is very much like a thematic investment portfolio, in that if you believe in the direction of the overall market capitalisation of crypto, it is a simple way to gain exposure.
Crypto: know the risks
Crypto is not regulated or protected by the FSCS and platforms solely offering crypto are not regulated by the FCA. This is why it is important to do your research and choose a reputable trustworthy place to invest in crypto. eToro is an example of a multi-asset platform regulated by the FCA that also has cryptoassets. Crypto however is not regulated.
As there can be volatility and risk involved when investing in crypto, it can be considered good practice to diversify one’s investment portfolio to help mitigate the risk of loss.
Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.