Bitcoin’s value in the early days was just pennies. Now, Bitcoin is worth tens of thousands. But many in the industry believe we’re still early and that as new projects launch and crypto continues to gain mainstream adoption, the best is yet to come.
With about 20,000 crypto projects, it can be difficult to know which crypto to buy. The answer depends on your goals and risk tolerance. In this article, we’ll discuss strategies and cryptocurrencies to consider when building your portfolio.
Note: This is not financial or investing advice. Make sure to do your own due diligence before investing in cryptocurrency.
What Type of Crypto Investor Are You?
Every type of investing brings risk, but cryptocurrency investing can be more volatile compared to investing in stocks or mutual funds. That volatility can translate into short-term (or long-term) losses, but can also lead to outsized gains.
Conservative investors might want to start their portfolio with just the leading projects, a strategy that can smooth market ups and downs. If you want a chance at higher returns, a wider diversification strategy might be a better choice. And if you’re an experienced investor – or willing to learn – a more aggressive approach can bring multiple income streams to your portfolio.
- Conservative: Many investors first dip a toe into the crypto asset world by buying into well-established projects like Bitcoin (BTC) and Ethereum (ETH). Both cryptocurrencies are widely traded, making each easy to buy or sell when needed. Returns may be lower than you’ll find with other strategies, but the risk may also be lower compared to newer projects that may or may not succeed.
- Moderate: A moderate approach might expand beyond core Bitcoin and Ethereum holdings to include several top 10 and top 20 cryptocurrencies. This strategy seeks a balance between risk and reward, allowing more opportunities for potential gains but also helping to reduce risk if one or more of your picks don’t work out as hoped. Many top projects also offer staking, a method of securing the network that enables crypto holders to earn a yield.
- Aggressive: A more daring portfolio strategy can include riskier assets, such as small-cap cryptocurrencies that have the potential to become the next big thing. The risk in this approach is that some of your picks might decline dramatically, possibly even going to zero. But you can also experiment with other ways to grow your portfolio, including lending crypto on DeFi protocols or providing liquidity on decentralized liquidity pools, which we’ll discuss in more detail later in the article.
Match Your Risk Tolerance with Your Investment
Similar to stock investing, it’s essential to consider your situation before choosing a crypto investment strategy. For example, both age and income should be considered.
A more aggressive strategy might be best reserved for those with more time to recover from losses. If you’re five years away from your expected retirement date, you may not have time to rebuild if some of your picks don’t pan out.
Similarly, the amount of discretionary funds you have available plays a role in how much you should invest. Someone who has millions of dollars tucked away can afford to take larger stakes and wager on more volatile risks compared to everyday investors who have a limited amount of money to invest.
The age-old investment advice applies to crypto as well: Only invest what you can afford to lose.
Consider your risk tolerance as well. Investors who are well positioned financially may still want to limit risk and choose a more conservative or diversified investment strategy.
Higher risks can lead to outsized returns, but also larger losses. A sizeable loss or a large financial commitment could limit your ability to capitalize on other opportunities.
Build A Conservative Crypto Portfolio
A conservative crypto portfolio might include only one or two well-established crypto assets. Targeting time-tested cryptocurrencies can add a margin of safety to your portfolio while still giving you exposure to crypto and an opportunity to post gains if the value of your investments increases over time.
Bitcoin was first among today’s cryptocurrencies and now commands nearly 40% of the total crypto market capitalization. Bitcoin also makes a logical first investment for new crypto investors or those who want to limit risk.
You can still expect some wild swings in price, however. In 2021, Bitcoin reached an all-time high of nearly $69,000. Today, Bitcoin trades under $17,000. Time in the market plays a role as well. In 2015, Bitcoin was still below $500. In 2010, Bitcoin traded for under $1.
Unlike many newer crypto projects, Bitcoin came into the world with a simple goal: to provide a better form of money. With a limited supply of 21 million, Bitcoin was designed to preserve value and offer a provable way to send and receive that value. Adoption is still growing, but the future could be bright for Bitcoin holders. In 2021, El Salvador made Bitcoin a legal tender. Bitcoin is money.
Ethereum followed Bitcoin, bringing a new vision of utility to the crypto world. The Ethereum blockchain now acts as an operating system, letting developers build programs called smart contracts that live on-chain. Similar to Bitcoin, Ethereum experienced a meteoric rise in price, and many expect the blockchain’s native token, ether, to continue its growth in value.
As an example, you might want to split your investment between these two assets as a starting point in a conservative portfolio.
- Bitcoin (BTC): 67% allocation
- Ethereum (ETH): 33% allocation
Bitcoin’s market capitalization (total market value) is about twice that of Ethereum. This example takes that weighting into account.
Later in the article, we discuss ways to buy and store your crypto.
Build A Moderate Crypto Portfolio
While a conservative portfolio can limit risks from exposure to unproven projects, a conservative portfolio brings different risks due to its lack of diversification.
- Bitcoin or Ethereum could be displaced by a newer cryptocurrency.
- A less diversified portfolio may see larger fluctuations in total value.
- You might miss opportunities with promising projects outside the top two.
A moderate portfolio can address these risks by expanding your scope to include up-and-coming projects from the top 10 or top 20 cryptocurrencies. A more diversified portfolio also offers some protection against losses if one or more of your picks performs poorly.
To build a sample portfolio, we can look to the leading crypto projects by market cap. This targets projects that already have a community of support and which should be widely available through exchanges.
Several of the leading cryptocurrencies are stablecoins, a crypto asset intended to track a fiat value. As these won’t appreciate in value, we can leave them out of the portfolio. You may also want to bypass projects such as Dogecoin and Shiba Inu, both of which see erratic price fluctuations, as well as cryptos that may be difficult to buy and sell, such as Ripple, Tron, and Monero.
Choose an asset mix that fits your investment goals.
Top-20 Cryptocurrencies To Consider
- Bitcoin (BTC): Bitcoin’s development is glacially slow, with network security as its primary goal. However, Bitcoin also supports sidechains, such as the Lightning Network, a solution that reduces the cost of sending Bitcoin while increasing speed. Learn how to buy BTC.
- Ethereum (ETH): Some refer to Ethereum as a “world computer”, referring to its ability to run programs on the blockchain. Ethereum charges a fee (paid in ETH) to execute these transactions or to move ETH and ETH-based tokens on the network. Learn how to buy ETH.
- Cardano (ADA): A recent upgrade to Cardano brought the ability to run smart contracts to this scalable network. Cardano offers faster speeds and lower fees compared to Ethereum. Development is deliberate, with a focus on stability. Learn how to buy ADA.
- Polygon (MATIC): Network congestion on Ethereum can make transactions slow and expensive. Layer 2 blockchains like Polygon run parallel to Ethereum allowing transactions to flow efficiently, then passing the completed transaction back to the Ethereum blockchain for security. Polygon hosts nearly 40,000 decentralized applications (dApps). Learn how to buy MATIC.
- Polkadot (DOT): Sometimes called a blockchain for blockchains, Polkadot aims to connect diverse chains. For example, Bitcoin and Ethereum don’t talk, but Polkadot enables the transfer of data and value between these chains. Learn how to buy DOT.
- Litecoin: (LTC): Built in the early years after Bitcoin launched, many regard Litecoin as silver to Bitcoin’s gold. The two chains share several similarities, including a limited supply. However, sending and receiving on Litecoin is both cheaper and faster compared to Bitcoin’s main network. Learn how to buy LTC.
- Solana: (SOL): As another Ethereum competitor, Solana puts its focus on speed and affordable transactions. In its short history, Solana has earned a growing percentage of the decentralized finance (DeFi) market and non-fungible token (NFT) market. Learn how to buy SOL.
- Uniswap (UNI): The largest decentralized exchange (Uniswap) offers its own token, UNI, which gives holders a voice in how the exchange runs. Initially released as an airdrop in 2020, UNI tokens have become one of the largest cryptocurrencies by total value.
- Avalanche: (AVAX): The Ethereum-compatible Avalanche network uses three distinct blockchains to deliver better efficiency. The result is lower fees combined with faster speeds compared to Ethereum. Learn how to buy AVAX.
- Chainlink (LINK): Sometimes, smart contracts depend on information from the outside world. That’s where Chainlink comes into the picture. The network acts as an “oracle”, bringing real-world data onto blockchains when called. Learn how to buy Chainlink.
Let’s say you have $10,000 to invest in crypto. In this example, we’ll assign 30% to BTC and Ethereum as core investments. We can then invest the balance, split evenly between the others we identified above. This strategy puts nearly half of your portfolio in market leaders BTC and ETH, while also giving you exposure to other projects that might perform better.
Moderate portfolio example ($10,000 investment):
|Asset||Investment Amount||Percent of Portfolio|
In a moderate portfolio, you might also want to make a small bet on a new project, keeping the initial investment below 5% to 10% of the overall mix. If you think you know what the next big thing might be, this strategy offers a way to gain exposure without betting the farm.
Several of the hypothetical picks above offer staking as a way to help secure the network and earn a yield. For example, you can stake Ethereum, Cardano, Polygon, Polkadot, and Solana. Certain tokens, such as Solana and Polkadot, are inflationary. Staking provides a way to help offset the effects of the expanding supply.
Build An Aggressive Crypto Portfolio
A more daring crypto portfolio assumes more risk but may see higher returns. You might also want to explore additional ways to earn, such as DeFi lending and liquidity pools. There’s a learning curve here; some of the opportunities we’ll discuss require research before you commit capital.
Even in an aggressive portfolio, a core holding of the largest cryptos can make sense.
For example, BTC and ETH have the largest market capitalization, and as established projects tend to have a lower beta compared to fledgling projects. A smaller weighting for BTC and ETH gives you room to experiment with other crypto investments, building around a more stable foundation. For instance, you could start your portfolio with 15% BTC and 7.5% ETH.
With just under 25% invested in the most-established projects, consider some ways to spread your wings.
Research New Projects As Part Of Your Portfolio
To find the next big thing, you may need to reach beyond the top 20 projects. Coinmarketcap provides a Recently Added page where you can explore the newest projects listed on the platform. The trending page could also prove helpful in gauging community interest in the project.
When considering newer projects, information can be scarce. Here are some ideas on where to start digging.
- Whitepapers: Bitcoin started with a nine-page whitepaper, a thesis that explained how the project would work and the problems it attempted to solve. Ethereum had a similar start, although the whitepaper stretched to 201 pages given the more complex goals. As part of your investment research, prepare for some heavy reading before you do any heavy buying.
- Website or GitHub: Look for an official website for the project or the GitHub repository, a commonly used site to host code and information about the project. Also, take note of the activity on GitHub. Low activity could be a sign of trouble, although it’s not uncommon for months to pass with no changes, such as with Dogecoin and Litecoin, which don’t get frequent updates.
- Social media: Look for information about projects you’re considering on sites like Twitter and Reddit, as well as crypto discords. Consider the source, however, and verify any claims independently.
- Exchanges: Scout crypto exchanges for newly listed tokens. Sometimes new tokens can see initial price surges. But be careful, whatever goes up can always go down even faster!
Weigh what you’ve learned against the market prospects for the project.
- Does the project solve a problem or market need?
- What are the catalysts that could lead to adoption or business applications?
- Is there room for growth in the market cap relative to similar projects?
- What are the potential challenges the project might face?
- How is the project funded and do you think the capital will last?
- Is the token available on more than one exchange?
Consider DeFi Lending
Decentralized finance uses smart contracts to let the crypto community borrow or lend. In simple terms, a smart contract is just a set of rules similar to if-then statements in programming. If this happens, then do that.
In traditional finance, the lender earns interest from the borrower. But to become a traditional lender, you have to jump through regulatory hoops. DeFi uses rules instead of regulations, allowing anyone to become a lender. For example, a smart contract might require a certain amount of collateral and define which conditions trigger the liquidation of the collateral to pay the loan.
A growing number of DeFi platforms give you plenty of options.
Yields vary based on the platform and the type of assets used in the loan, but you can earn between 1% and 20% by lending your crypto.
DeFi lending isn’t without risk, however. Some platforms, such as Maple Finance, offer undercollateralized loans, meaning the collateral is initially worth less than the loan balance. A default could result in a loss for the people who provided the loan funding. Other platforms, like Aave and Compound, overcollateralize loans, which reduces the risk for aspiring lenders.
But there may still be risks because your assets are committed to the DeFi loan contract. With an asset class as volatile as crypto, the market risk of locked funds should be considered.
Explore Liquidity Pools
Decentralized exchanges use liquidity pools to facilitate trades. Liquidity pools work similarly to trading pairs on exchanges wherein you can trade one asset for another.
Exchange trading pairs work well for popular pairs, like ETH-USDT. However, liquidity pools excel at providing ways to enter or exit positions for both popular and more obscure assets.
For example, a liquidity pool might hold Ethereum (ETH) and Basic Attention Tokens (BAT). Someone who wants to buy BAT would exchange ETH with the pool to buy BAT, paying a small commission for doing so.
These pools are funded by investors who deposit both tokens into the pool to provide liquidity. The liquidity providers who funded the pool split the commission earnings from the pool, which can be substantial in some cases.
Liquidity pools also offer arbitrage opportunities due to the mechanism used to balance the value of the pool. As one asset in a pool is purchased, the price of that asset goes up to maintain the pool’s total value. The other asset also becomes cheaper.
These price differences relative to the outside market can create opportunities for traders to buy pool tokens and trade them elsewhere. Arbitrage traders help keep liquidity pools in balance, and can profit from the service.
Some of the top decentralized exchanges where you can provide liquidity include:
But there are risks to using liquidity pools as well, so do your research before you dive in.
- Impermanent loss: If the token value in a liquidity pool falls below the outside market value of your deposit to the pool, this is called impermanent loss. The value may return in time as the value of tokens rebalances.
- Locked assets: Pools with a time lock are generally considered to be safer for traders, but if you’re a provider, know that your tokens will be unavailable for withdrawal or trading until the set date for the contract.
- Liquidity rug pulls: One concern with pools that don’t use time locks is that the assets in the pool can be pulled at any time. For example, a liquidity provider that pairs a new token with an in-demand token like ETH could pull the ETH from the pool after selling the new (possibly worthless) token.
- Hacks: In December 2022, one or more industrious hackers finessed an exploit in the Ankr DeFi protocol, minting 6 quadrillion aBNBc tokens. These tokens then made their way onto PancakeSwap and ApeSwap, draining liquidity pools and decimating the price of aBNBc. Ankr has detailed a plan to help those affected.
Where To Buy Crypto
Most people start their crypto journey on a centralized exchange like Binance or Coinbase, which are similar to stock brokers in many ways. It’s also possible to purchase crypto using an ATM. You also have the option to trade on decentralized exchanges, which don’t have a traditional management structure.
Most centralized exchanges are designed to be user-friendly on-ramps for purchases made with fiat. Typically, they’re subject to local regulatory requirements such as know-your-customer (KYC) and anti-money-laundering (AML) measures. Expect to provide proof of identity before you can start trading.
|Exchange||Number Of Cryptocurrencies||Fees||Best For|
|Binance||350+||Debit 3.75%, credit 3.5%, 0.009% up to 0.075% trading fees based on amount of BNB held||wide selection of tokens; worldwide presence|
|Coinbase||240+||Debit 2.49%, 0.5% spread, 0% up to 0.60% trading fee (advanced trading)||Ease of use and wide selection|
A decentralized exchange or DEX is an online blockchain application that lets you swap currencies with other crypto traders. Maybe you have some USDC but want ETH instead. A decentralized exchange can make it happen, sometimes at a lower cost compared to traditional exchanges.
But a decentralized exchange may offer additional features as well. For instance, Uniswap and PancakeSwap offer perpetual futures, a way to bet on the future price of cryptocurrencies without buying the actual asset. PancakeSwap also offers margin trading, a way to multiply your gains (or losses) by making leveraged trades.
Where decentralized exchanges can fall short is their funding methods. Trades are predicated on owning some crypto to trade. To buy with fiat, you’ll have to use a third-party provider, which can add to trading costs and often brings KYC or AML back into the picture.
|Exchange||Number Of Cryptocurrencies||Fees||Best For|
|1inch (Aggregator)||400+||No 1inch fees but other exchange fees may apply||Finding the best swap price|
|Uniswap (Exchange)||800+||0.3%||Token selection|
|PancakeSwap (Exchange)||3,000+ pairs||0.25%||Staking and yield farming|
Where To Store Your Crypto
Whether you choose a conservative, moderate, or aggressive portfolio, storage for your crypto becomes a prime consideration. Centralized exchanges can come and go, and you don’t want your crypto on an exchange if the exchange reaches the “go” part.
- Hot wallets: A hot wallet is a software crypto wallet that’s connected to the internet, possibly creating a security risk because it’s online. Some hot wallets let you use a hardware wallet to secure your funds.
- Hardware wallets: A hardware wallet is a device that stores your private keys offline. Ledger and Trezor lead the market, and both brands support multiple types of cryptocurrencies.
Depending on which assets you choose for your portfolio, you may need to use both hot wallets and hardware wallets.
Dollar-Cost Averaging Your Buys
When you’re building your portfolio, the price at which you buy matters. A 10% or 20% mistake in timing can take months to recover. But timing the market isn’t as easy as it sounds on TV. Dollar-cost averaging removes all the guesswork by building a position over time.
While dollar-cost averaging doesn’t guarantee the lowest buying cost, this strategy can help reduce your downside risk because you’re buying more when prices are lower and less when prices move higher.
Wrapping It Up
Awareness of cryptocurrencies continues to grow and each month brings new projects or improvements to existing projects that just might change the world one day. To get involved, consider what type of investment portfolio suits you best, but also match that to the funds you have available to invest.
Crypto is volatile and not every project is going to the moon, but some will. On the other hand, some projects will go to zero. Knowing the risks (and ways to mitigate those risks) before you start is essential to good decision-making.
Frequently Asked Questions
Starting investors often begin their crypto portfolio with just Bitcoin and Ethereum. You can also consider additional cryptocurrencies in the top 20 projects by market capitalization (total market value).
One strategy to build a diversified portfolio is to focus on top-20 projects by market capitalization but to weight your purchases based on market dominance, which refers to the percentage of the market a given crypto asset represents.
For example, if Bitcoin is 30% of the total crypto market capitalization, you might make Bitcoin 30% of your holdings rather than 100%. You can use the same approach for other picks, weighting each according to its market dominance.
Many beginner investors in the crypto market start with Bitcoin or a mix of Bitcoin and Ethereum. As you gain experience, you can expand to other holdings, if desired.
But even as a beginner, it’s helpful to read the whitepaper for the cryptocurrencies you’re considering and understand what each crypto blockchain offers rather than investing in something because it’s popular.
Crypto exchanges are helpful for exchanging fiat for crypto or exchanging one crypto asset for another. However, recent exchange failures like FTX highlight the importance of moving your crypto off exchanges into self-custody wallets. If an exchange fails or pauses withdrawals while you have assets on the exchange, recovering your funds could take months or even years, if ever.