Instead of going all in on one asset, a diversified crypto portfolio spreads risk and could promote long-term growth.
Updated Jan 2, 2023
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Diversifying your crypto portfolio to protect it against market volatility is harrowing. We're not talking about going all in on altcoins. But, there can be no harm in taking a page from conventional investing wisdom and trying out the 60-40 strategy.
Cryptocurrencies have become an increasingly popular asset class as more investors look to diversify their crypto portfolios. As a result, a major part of investing in crypto is understanding the different strategies and approaches to building a balanced crypto portfolio.
Crypto portfolio management means deciding the right mix of assets you need to reach short, medium, and long-term investment goals. One of the more conventional strategies is the 60-40 investment strategy, one that simplifies portfolio building and fund management for stock and bond portfolios. But does this translate over to crypto assets?
The 60-40 investment strategy is a retirement portfolio approach that has existed for decades among stock market investors. The idea behind a 60-40 portfolio is to allocate 60% of funds to high-risk assets like stocks and 40% to low-risk and low-yield assets like bonds.
This strategy aims to reduce risk and increase the chance of making significant returns in the long term. A 60-40 asset allocation allows investors to maintain a balanced portfolio during all market cycles. The strategy better ensures consistent returns through diversification, even when markets are volatile.
This is the main idea behind the 60-40, but it has historically only applied to traditional assets. We're about to explore why your crypto portfolio could benefit from this passive investing strategy and how a 60-40 cryptocurrency portfolio allocation could help mitigate risk in the long run.
Even though the 60-40 strategy is a seemingly simple one, there are a few advantages to using it for crypto portfolio management.
The 60-40 asset allocation can be used to create a portfolio that limits some risk while still providing investors exposure to high-growth assets. Though this is not an ideal asset allocation for every investor, the 60-40 portfolio system is an excellent base strategy when navigating the world of crypto investing.
Bitcoin ranks highest among cryptos as it has the most significant market share at a
market capitalization. This is largely because it has the first-mover advantage and a sustainably growing user base of both retail and institutional investors.
On the other hand, ETH is the second-largest crypto asset by market capitalization at
and has positioned itself as the future of finance and decentralized applications. Ethereum houses most decentralized finance (DeFi) platforms, and ETH's price movements are often more dependent on broader crypto market sentiment.
The 60-40 cryptocurrency investment strategy works the same way as traditional portfolio allocation. Since the aim is to protect crypto portfolios from volatility and avoid total capital loss, many investors allocate the largest part of their crypto portfolio to large-cap assets like BTC and ETH and spread out the rest among riskier bets.
Historically, a drop in the price of Bitcoin will lead to a similar plunge in Ethereum and other digital assets. Crypto is a volatile asset class because BTC has a major impact on the value of other crypto assets, such as ETH. That means there's a high correlation between cryptos like BTC and ETH.
Furthermore, other assets use the Bitcoin price as a point of reference for the health of the broader crypto market. When the market experiences high volatility and possible regulatory issues from the SEC or other governing financial bodies, ETH price tends to sway in the same direction as BTC. According to CoinMetrics data, the BTC-ETH price correlation neared an all-time high in December 2022.
While correlation isn't causation, investors ought to be aware of the price movements between the two largest crypto assets. Having a healthy mix of BTC and ETH helps create a balanced crypto portfolio that pays attention to both fundamental and technical analysis. Let’s go further into cryptocurrency portfolio management and explore how a 60-40 asset allocation could work for crypto.
Cryptocurrencies are gaining momentum regarding mass adoption, and projects that prioritize long-term success over short-term hype have made a notable impact. With an ever-growing variety of coins entering the market, Bitcoin's dominance has suffered, yet it still makes up 50% to 60% of most crypto asset allocations since it's the leading cryptocurrency.
But, smart contract platforms like Ethereum have shown great strength over the years, especially considering the growth of DeFi and NFTs. However, due to high fees and slower speeds, Ethereum has lost some market share to competitors like Polygon and Solana. Despite this, ETH remains the second-largest crypto asset and still plays a lead role in any balanced crypto portfolio.
While your 60-40 strategy can comprise only of BTC and ETH, the best crypto portfolio allocation involves adding some altcoins to the mix. The best crypto portfolios are diversified, and some traders have made it big by holding the likes of Dogecoin. Dogecoin has gained attention as a result of its remarkable story, and its market capitalization has surged to
in recent weeks.
Aside from BTC and ETH, other top cryptos you can incorporate into a diversification strategy include Litecoin (LTC), XRP, and Polygon Matic. These assets have gained traction due to their own unique use cases and potential for high returns.
Most traders are unaware of the risks with the 60-40 allocation for crypto, especially if their funds are mostly only BTC and ETH.
The first risk is that BTC and ETH constitute a high percentage of portfolio value, meaning their performance will heavily influence the value of the entire portfolio. Secondly, a high correlation between BTC and ETH means that a trader's total portfolio value could take a beating if the price of either asset dips. Some traders opt out of the 60-40 allocation and diversify their portfolio further with lower correlation altcoins.
You still need to conduct adequate research and make informed decisions to find the best crypto portfolio allocation for you. With the correlation of BTC, ETH, and other crypto assets in mind, a 60-40 strategy may not be as appropriate for a well-balanced crypto portfolio as it is for stocks and bonds. Perhaps a cryptocurrency portfolio allocation of 45-45-10 between BTC, ETH, and top altcoins may provide better exposure while limiting asset correlation.
The best crypto portfolio allocation for you ultimately depends on your investment goals and risk tolerance. There's no one size fits all crypto asset allocation, but the 60-40 portfolio is a good starting point for understanding what a well-balanced portfolio looks like.
the 60-40 allocation is a simple and beneficial strategy for traditional asset portfolio management. However, the same approach may be less effective when applied to the crypto market. You must understand the quirks of the crypto market, who drives price, and what their influence is. Taking all these factors into account will help you dial in on the asset mix that's right for you.
Diversification is an essential investment principle that helps you reduce overall risk. You can use this by investing in uncorrelated assets, meaning the price movement of one asset doesn't affect the price of another within your portfolio.
Nonetheless, cryptocurrencies are still high-risk assets with high correlation, meaning their prices change concurrently. An investor with a 60-40 portfolio of only ETH and BTC would have a 'safer' ride during various market cycles, but won't see as much growth. A more diverse portfolio with DeFi tokens and other altcoins, in addition to bitcoin and Ethereum, could result in higher returns with a similar risk threshold.
Whatever your crypto investment strategy, an excellent way to track your investment portfolio is by splitting them across multiple cryptocurrency exchanges. Exchanges like Coinbase and Kraken are great options that make it easy to explore the 60-40 rule and conduct periodic rebalancing. Spreading out your assets also reduces the risk of compromising your funds, as you never have all of your assets in a single place.
Like any speculative asset, Bitcoin has both risks and potential rewards. Despite BTC's volatility, institutional investors have reluctantly accepted Bitcoin's potential to change the face of finance. But, this volatility is a major factor when considering what's appropriate for a diverse portfolio.
An investor's decision to allocate a percentage of their portfolio to BTC or other digital assets comes down to their risk appetite and perspective on the future of finance. Bitcoin could disrupt the U.S. dollar and other fiat currencies. That may result in investors holding BTC as a way to protect against runaway inflation and shrinking economies.
While Bitcoin's volatility is still a valid concern for investors, instability decreases as the long-term interests of institutions and governments are further tied to the crypto market and the longevity of the asset class. The 60-40 portfolio approach helps manage the risks of crypto while still allowing investors exposure to high-growth assets.
Spreading out the holdings between Bitcoin and Ethereum is an excellent way to reduce correlation and risk. While the two assets are usually seen as direct competitors, they have different use cases that make pairing them an attractive way to drive returns.
Bitcoin boasts the first-mover advantage and is known as a reliable store of value, but Ethereum is a platform that's expanded significantly over the years. It has emerged as the primary blockchain for most decentralized applications and digitized assets.
Ethereum has consistently performed well since its launch in 2014. Based on ETH's history, it's provided high returns to early investors and provides an extremely compelling use case of decentralized ownership using blockchain technology.
As an investor, you might opt to include Ethereum in a 60-40 asset allocation if you want to maintain exposure to the booming DeFi space and other related digital assets. This will allow you to benefit from the exposure to ETH as well as its low correlation and strong performance.
The 60-40 portfolio is one of the oldest and most tested investment strategies. It helps keep a consistent ratio of investments and takes away some danger of human error when allocating funds.
Investors could use variations of the 60-40 strategy depending on personal preference, but since crypto assets are still strongly correlated, diversification isn't as crucial as gaining exposure to the top two assets: BTC and ETH. Some investors may opt for a 60-40 ratio of bitcoin and ethereum while others may flip it to 40-60 or further split their portfolio into 45/45/10 or 40/40/20 ratios.
Whichever way you prefer, conduct adequate research before deciding on the best crypto portfolio allocation for you.
The 60-40 investment strategy is a tried and true approach to traditional portfolio management. It's a simple and effective way to reduce risk and gain exposure to high-growth assets. This strategy can also be applied to a crypto portfolio, though diversification is slightly less important when it comes to crypto assets.
Investors looking to try the 60-40 crypto portfolio strategy should consider their risk tolerance and long-term goals. Bitcoin and Ethereum are the two leading assets for a crypto portfolio, but investors should also consider adding some of the top altcoins to their portfolios for more diversification.
Once your 60-40 crypto portfolio is set up, rebalance it every few months to ensure it stays on track. With the right crypto portfolio management and asset allocation, you'll be prepared for any market.
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