Building a Diversified Crypto Portfolio

We recently hit a high in the bitcoin market and people got excited about it again, exactly at the wrong time (remember, buy low and sell high).  This happens with every boom and bust cycle.  The time to get excited is when the price crashes, but I digress.  Since I've been investing in the crypto market for almost a decade now, all my friends ask me about it from time to time.  Explaining everything I know to every person takes a while, and most don't end up listening or just end up asking me to do it for them.  So I'm writing this so I can just send people here the next time they ask!

First, if you don't know much about crypto and blockchain, start here.  The only thing I'll be discussing in this article is my DeFi (decentralized finance) portfolio strategy, which includes crypto, blockchain, and fintech investments.

I'll start by stating what should be obvious, but sometimes gets lost amidst the hype.  If you're going to try and do this yourself, you need to know how to trade and how to invest (there's a difference).  Trading crypto is like trading any other liquid asset like stocks, forex, commodities, etc.  Technical analysis strategies work the same across all of these assets.  Investing in defi/crypto/blockchain is like investing in any other long term asset.  You look at the overall market and the fundamentals of the specific investment you're evaluating and make a decision.  In short, if you're not a trader or investor now, you should start with the basics.  There are plenty of online courses that can teach you how to trade and/or invest that are a google search away.

One final disclaimer: this is my crypto portfolio strategy that works for me based on my financial goals and my overall investment strategy; crypto is just one part of my overall investment portfolio.  Just because this works for me doesn't mean it will work for you.

Now let's get into it.  The key to my strategy is nothing new or innovative; it's something you've all heard before...diversification.  I'm confident in the long term potential of crypto and defi in general, but I'm not confident in any single coin or company because individual assets can come and go based on things completely outside my control.  So I try to spread my money around as much as possible and try not to get too excited about or invested in any single opportunity unless I have some unique insight into it.

Crypto

Unlike some active traders, I don't have time to sit in front of a computer all day and watch charts.  I don't really even like to try and predict price movements, so I've built my crypto strategy around mostly passive investments, with a little active trading from time to time when markets heat up (i.e. volatility increases).

The foundation of my crypto portfolio is a long position in a basket of the top 20-30 coins/tokens based on market cap according to coinmarketcap.com other than bitcoin (I have a different strategy for bitcoin so I leave it out of this basket).  This makes up about 25% of the portfolio.  I don't actively manage these coins other than checking in once a month or at least once a quarter to make sure no coin makes up more than 10% of the basket.  Every now and then, I'll learn about a coin that I think has promise, but isn't in the top 30, so I reserve a little cash to invest in those, about 5% of the portfolio.  So, in total, these passive, long term holdings make up about 30% of the portfolio.  This is probably the easiest part of the portfolio for people to replicate with very little trading experience.

I reserve another 10% of the portfolio for short term, active trading.  Unlike the passive strategy explained above, I take short and long positions when active trading, so I can make money when the market goes up or down.  This involves following trends and placing short term, directional bets to get small, quick wins (targeting 5-10% profit per trade).  In case I'm wrong in any given trade, I use stop-losses as downside protection.  I also use stop losses to lock in profits, by moving up the trigger as the price moves in the direction I want.  If you don't have at least a basic understanding of technical analysis and trading, I would not suggest you try this on your own just yet.

Finally, I keep about 35% of the portfolio in bitcoin because it is the largest and most liquid market with the most services available to invest and trade.  Most of my bitcoin is held long (I'm waiting for it to hit at least $100K) and used to generate income from active trading, arbitrage, and options trading.  I can consistently generate 3-5% per month with this strategy, so I actually use it as a relatively stable source of income.  

Blockchain & FinTech

My strategy for blockchain and fintech is basically an angel investment strategy, and comprises the remaining 25% of the portfolio.  I look for companies that use blockchain technology in a way that actually enables or improves a process, reduces friction, and/or increases transparency, thus reducing overhead (e.g. you don't need accountants to audit financial statements if all transactions are on a blockchain).  I don't invest in companies that use blockchain just because it's the new hot thing, and they could accomplish what they're trying to do just as easily without it.  

I am open to investments in established exchanges when possible.  My biggest holding in this category is actually an indirect investment in Binance, via their native utility token, BNB.  This token is used to reduce trading fees on the binance exchange, therefore, the more volume increases on the exchange, the more demand for the token increases, thus driving up the price.  I missed the chance to invest in Coinbase, one of the biggest exchanges.

I also look for fintech companies that democratize capital whether they use blockchain or not.  This is about lowering the barriers to entry for alternative investments that are usually reserved for the wealthy.  My biggest investments in this area are Wefunder (equity crowdfunding), Groundfloor (real estate debt crowdfunding), and Tribevest (small group investing).

Summary

Passive crypto (long) 30%
Active crypto (long/short) 10%
Bitcoin (active trading, arbitrage, & options) 35%
Blockchain/Fintech angel investments 25%


Again, this is about spreading money around and limiting losses from any single investment, although, currently I am heavily exposed to swings in the bitcoin price because I hold a good amount of my portfolio in bitcoin.  However, because I started so early, when bitcoin was under $200, my cost basis is lower than what yours would be if you're starting today, so even if the price dropped down to $10K again, I'm still significantly up compared to where I started.  If you're just getting started, I would not put as much into bitcoin.

For the people who don't feel like doing all this themselves, I'm starting an investment club that will replicate this portfolio strategy.  If you're interested, sign up here.