A growing number of investors are exploring ways to expand their investment portfolios by blending traditional assets like stocks and bonds with digital assets like Bitcoin (BTC) and Ether (ETH). While the traditional market is well-established in many jurisdictions, the crypto sector is relatively new and more volatile. This is why investors looking to create portfolios with assets from both sides must carefully consider a few factors before making the move.
Assessing Risk Tolerance
Investors must evaluate their risk tolerance before blending cryptocurrency and traditional assets into their portfolios. This is mainly because of the infamous instability in the crypto sector, where BTC and several altcoins are known for wild price swings that can significantly erase all profits and even flatten the initial investment capital.
Nonetheless, the blend is possible through risk tolerance assessment, which should dictate how much of an individual’s portfolio they should allocate to cryptocurrency. A high-risk investor may consider allocating up to 30% of their portfolio in cryptocurrency, while low-risk investors may put less than 5% in crypto. Investors with a moderate risk profile can set their maximum at 20%.
In addition to crypto’s inherent volatility, investors must consider the state of security in the crypto sector. Although blockchain records are immutable, hackers have successfully breached wallet security a few times and made away with hefty sums. To ensure proper security, investors may consider using one of the top decentralized wallets that allow holders complete control of their private keys. This means that access to funds is decided by the owner of the wallet and not a crypto exchange, broker, or other centralized platform.
Define Investment Goals
The next step is to define investment goals that fit the determined risk tolerance. The investor must decide whether they want to generate long-term growth or simply preserve their capital while generating passive income.
The specific goals offer the investor some direction. For instance, traditional assets like bonds and stocks are mostly predictable and can provide a portfolio with much-needed stability. On the other hand, cryptocurrencies would appeal to investors looking for the largest possible spikes, despite the investment risks.
Defining investment goals may also help to decide what specific cryptocurrencies to add. While most decentralized digital assets are extremely unstable, some are still more volatile than others. For instance, cryptocurrencies like BTC offer more stability than others like meme coins. Although these meme coins are more likely to bring in heavy returns, they are just as likely to dissolve investment deposits completely.
Diversifying In Each Industry
Diversification is essential for all kinds of investments, as it helps investors balance risk and reward in their portfolios. This strategy is much more critical when dealing with cryptocurrencies because of their volatility. Diversification in the traditional sector involves spreading funds across multiple assets, including equities, bonds, real estate, and commodities. In the crypto sector, investors may consider using established assets like BTC in addition to altcoins like Solana (SOL) or Cardano’s ADA. Meme coins like Dogecoin (DOGE) or Shiba Inu (SHIB) may also be carefully selected and added to a portfolio for broader diversification.
Creating a Balance
The best way to create a balance is to consider leaving a larger percentage of the portfolio in stable assets and try active trading with more volatile options. Stable assets may not require a lot of work and may correct losses over time, ensuring that investors preserve the value of their portfolios. For unstable assets like cryptocurrencies, making regular changes is important because it may be advisable to continuously enter and exit positions depending on specific market conditions. However, active trading requires some research and is a strategy reserved for more experienced investors.
Investment Duration
Deciding duration is crucial as it helps to make careful decisions for the portfolio’s overall health. For instance, relying on traditional assets for an outlook spanning only a few years might be advisable because they are more predictable and not very volatile. On the other hand, long-term players may allocate a large portion to established cryptocurrencies because there is more time to recover from any violent price swings.
Liquidity
Traditional assets like stocks and exchange-traded funds (ETFs) offer investors high liquidity as they can be sold for cash very quickly. Interestingly, many cryptocurrencies, especially large-cap options, also provide high liquidity. However, because of their extreme volatility, the value of the portfolio may crash significantly, such that selling off the assets might be detrimental to the health of the overall portfolio.
Either way, balancing a portfolio requires ensuring that a portion of the holdings is in highly liquid assets. This way, investors do not run into problems if they need to liquidate on short notice.
Conclusion: Portfolio Rebalancing
Investors must be willing to rebalance their portfolios as market conditions change. Over time, some assets are likely to outperform others, requiring a shift in allocation calculations. For instance, a crypto bull market may drive the value of crypto holdings much higher, providing good returns for an investor, but making the portfolio riskier.
Generally, investors should avoid sticking to one method and consider flexibility to maximize the potential of their portfolios. By diversifying within each category and regularly rebalancing, investors can enjoy impressive returns on investment in both worlds without undue exposure to the risks of either.
