With over 18,000 cryptocurrencies, managing and tracking investments can definitely become a hurdle. To overcome this challenge, crypto investors utilize portfolio management.
Effective portfolio management allows crypto participants to allocate their assets and protect their investments from potential risks. It will create a significant impact on the long-term success of the crypto market. This article offers you the basic information of portfolio management, including working, steps involved, and more.
What Is Portfolio Management In Crypto?
Portfolio management is the process of managing crypto assets to attain specific financial objectives and thereby improving the potential returns from the investments. The basic steps in portfolio management are asset allocation, investment selection, trade execution, monitoring, and rebalancing.
Asset Allocation
Asset allocation is the process in which an investor determines the amount invested in each asset class. It is also known as portfolio weight. Different crypto categories include meme coins, decentralized finance, and game tokens.
Asset Selection
Asset selection is the process of choosing an individual token. It can happen after the selection of categories, known as ‘top-down’, or before selecting categories, called ‘bottom-up’.
Trade Execution
Trade execution refers to the buying and selling of crypto tokens after they are selected for the portfolio. While trading a crypto token, an investor must consider the transaction cost and slippage (the difference between the actual and targeted prize).
Monitoring
With continuous growth in the crypto industry, the characteristics of crypto tokens may change rapidly; thus, an evaluation of the performance of individual tokens and portfolios becomes mandatory.
Rebalancing
Due to the varying prices of crypto, the target weight changes continuously; thus, a restoration technique is important. Restoring target weights of categories and individual tokens in the portfolio is known as rebalancing.
How Does Crypto Portfolio Management Work?
A crypto portfolio management system optimizes the returns and manages the risks associated. A crypto participant can manage their portfolio based on their investment strategy; it can be either long-term or short-term. An investor should continuously track the investment to manage their potential losses and profits.
Important Concepts Of Portfolio Management
Diversification
Since the crypto platform is highly volatile, the chances of gaining and losing are the same. To increase the winning potential or to reduce the risk, investors are advised to invest the portfolio in different tokens; this strategy is known as diversification. Investing in a portfolio in a specific token can be risky; when a loss occurs, it can be severe. It is always ideal to invest in many random tokens rather than a few unless you are highly convinced about a specific token.
Risk Management
Cryptocurrency stakes are associated with risk; an investor must analyze the risk returns before trading real funds. A risk management system minimizes the effects of risks and controls the volatility. Allocate the stakes after reviewing the risk tolerance. It is always instructed to invest only what you can afford to lose and be prepared for price fluctuations.
Evaluate the market trends and developments in the crypto industry and make informed decisions to create an effective portfolio. Risk management strategies include stop-loss orders and position size techniques.
Exit Strategies
In crypto, an exit strategy refers to the ideal time when an investor should withdraw the investments. An exit strategy can be either taking profits when everything works smoothly or when things go badly. Exit strategies can vary for individual investors since the risk tolerance and investment goals are different for everyone.
Step-by-step and initial investment return are the two popular exit strategies. In a step-by-step strategy, a user has to take a small amount from profits incrementally, while in initial investment returns, one has to take out the initial investment in a profitable trade. By following an initial investment return strategy, an investor ensures more money is not lost than the initial investment.
Final Thoughts
A portfolio management system plays a vital role in crypto investments. It allows an investor to improve the profits of their investment by balancing or eliminating the risk factors. Effective portfolio management helps to select, allocate, trade, monitor, and rebalance investments.
Diversification allows to invest in different tokens and prevents the chances of severe loss. A crypto participant has to analyze the risk management and exit strategies before investing in a crypto space.
