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What Is Crypto Portfolio Management?
Crypto portfolio management is the process of selecting and overseeing a mix of crypto asset investments with the goal of achieving your financial objective. The goal of crypto portfolio management is to achieve this objective while considering factors like risk tolerance and time horizon.
The goal of every crypto investor is to get the best reward with the least possible risk. However, with many crypto investment classes providing varying risk-to-reward ratios, the responsibility becomes a bit more demanding.
There are a million ways to allocate funds in crypto assets and manage your crypto, and differences in risk tolerance and investment personality will ensure that no two people get the same reward. Understanding Crypto Asset Classes
Cryptocurrencies come in many different shapes and sizes, meaning that they can also be categorized in many different ways. However, for the purposes of crypto portfolio management, we will be categorizing cryptocurrencies into the following asset classes:
- Coins
- Tokens
- Non-fungible tokens (NFTs)
- Stablecoins
Coins
Coins are cryptocurrencies that use their own blockchain to operate. While they may have numerous use cases, one of the most common ones is that they are used to pay for gas fees whenever a transaction occurs on their blockchain.
The most famous examples of coins are the two largest cryptocurrencies by market cap, namely Bitcoin (BTC) and Ethereum (ETH).
Tokens
Crypto tokens are digital assets that are built on top of existing blockchain platforms, such as Ethereum. Tokens usually serve a specific purpose within a particular ecosystem. Some could be used to access certain features or services on a platform, while others may represent an ownership stake in a company or project.
There are several types of crypto tokens, including utility tokens, security tokens, and asset-backed tokens. Utility tokens provide users with access to a platform’s services, while security tokens represent an investment in a company or project and are subject to regulatory oversight. Asset-backed tokens are tokens that are backed by a physical asset, such as gold or real estate.
| Coins are digital currencies akin to traditional currencies | Tokens are digital assets that offer some sort of utility |
| Coins have their own blockchain | Tokens are created on an existing blockchain |
| Coins are used to pay for transaction fees within their blockchain | Tokens offer different sorts of utility, but cannot be used to pay transaction fees |
Coins vs. Tokens
Non-Fungible Tokens (NFTs)
Non-fungible tokens (NFTs) are unique digital assets that are stored on a blockchain. Unlike coins and tokens, which are interchangeable with others of the same type, NFTs are one-of-a-kind and cannot be replicated. NFTs are typically used to represent digital art, music, and other types of creative work.
One of the most significant advantages of NFTs is that they allow creators to monetize their work in a more direct and transparent manner. NFTs can be sold on blockchain-based marketplaces, and the ownership and transfer of the token can be easily tracked on the blockchain.
Stablecoins
Stablecoins are digital assets designed to maintain a stable value relative to a particular asset, such as the US dollar. They are typically used as a medium of exchange or store of value, providing users with the benefits of cryptocurrencies without price volatility.
Several types of stablecoins include:
- Fiat-backed stablecoins, backed by a reserve of fiat currency or cash equivalents
- Crypto-backed stablecoins, backed by other cryptocurrencies
- Commodity-collateralized stablecoins, backed by commodities such as gold or silver
We also distinguish between fully collateralized, overcollateralized, undercollateralized, or algorithmic stablecoins, based on the amount of collateral they hold.
In the case of fully collateralized stablecoins, the token supply is backed by an equivalent amount of reserves. Overcollateralized stablecoin reserves exceed the total token supply, on the other hand, the equation is reversed for undercollateralized stablecoins, which hold less reserves than the total token supply. Last but not least, algorithmic stablecoins use an algorithm to maintain their peg by adjusting the token supply based on demand.
Active Crypto Portfolio Management
Active crypto portfolio management is a hands-on approach to managing your crypto investments. To actively manage your crypto portfolio, you must keep up with everything crypto, including news and narratives, market conditions, and fundamental metrics.
Active portfolio managers make frequent adjustments to their portfolios, trying to capitalize on short-term trends. By actively managing their portfolios, they can respond quickly to changing market conditions and take advantage of price movements.
It’s important to note that active portfolio management and trading aren’t exactly the same thing. Trading involves buying and selling assets sometimes within minutes or hours to profit from short-term price movements.
If you’re relatively tolerant to risk and want to get involved in crypto investing without trading cryptocurrencies full-time, then active crypto portfolio management may be the right thing for you.
Passive Crypto Portfolio Management
On the other hand, passive crypto portfolio management involves taking a more hands-off approach to investments.
Passive portfolio managers often dedicate less time to investing. They utilize the buy-and-hold strategy, limit their trading activity, and rarely rebalance their portfolios.
Instead of actively researching and analyzing specific market conditions, these investors may simply buy a basket of cryptocurrency assets, or invest only in Bitcoin as the main driving force of crypto movements.
Passive crypto portfolio management can be a good option for you if you believe in the potential of the cryptocurrency sector but don’t have the time or expertise to actively research and trade cryptocurrencies.
Crypto Portfolio Management: Where to Start?
If you are still unsure about how and where to start your crypto portfolio management journey, these are the starting steps you need to take:
- Define your investment goal
- Define your risk tolerance
- Develop an investment strategy