So you’ve formulated your crypto investment thesis and you’re ready to “go all in”. Not so fast! Not every dollar should necessarily go towards your thesis. There are a few factors to consider before deciding what to invest in, and how much.
Wealth Growth vs Wealth Preservation
The traditional financial advice is that younger investors should invest more “aggressively” and take higher risks since they have less to lose and more time to make it back.
Older investors should risk less and focus more on preserving their wealth and using it to generate income as they approach retirement.
The way I see it, the more you have, the more you should focus on not losing it. The less you have, the more you should focus on wealth creation. Regardless, I don’t think you want to go 100% in either direction.
The question is, where are you on your journey to wealth creation? Have you achieved your ultimate goal already? Or are you just getting started?
Growth vs Income
Another thing to consider when building your crypto portfolio is whether you want/need to generate income from your investments. Most younger people earn income from trading their time for money (aka a job) but once you’ve reached a certain net worth, you can consider investing in income generating assets.
For example, if you earn $100k/year in income through your job, you could generate the same level of income by earning 5%/year on $2M.
If you want to quit working entirely, you probably wouldn’t want to invest all your money in income generating assets - otherwise you’d stagnate! So maybe you’d want $4M with half generating income and half invested in growth opportunities.
Or maybe you want to supplement your income and generate some scratch on the side for spending on annual travel and vacations. For example, if you run an Ethereum node, which requires staking 32 ETH ($57,600 @ $1,800/ETH) you could earn 4% or an extra $2,304/year.
Concentration vs Diversification
Diversification is a lever you can pull to raise or lower your risk. The more concentrated your investments the higher the risk and the more diversified the lower your risk.
You think Elon Musk built his wealth through a diversified portfolio of index funds spanning multiple industries and asset classes? No. He went all in on PayPal. All in on Tesla. All in on SpaceX. Over time, these high risk high reward opportunities became a basket of diversified investments.
You can diversify across asset classes (stocks, cryptos, real estate, etc.) and you can diversify across sectors within an asset class (tech stocks, pharma stocks, banking stocks). You can also diversify geographically by investing in international economies.
The goal of diversification is to find investments with low correlation to one another, meaning they historically don’t “move” together as markets fluctuate.
Diversification Within Crypto
So you’ve finally decided how much you want to invest in crypto based on your risk tolerance, income requirements, etc. Now it’s time to decide which cryptos to buy.
To most people, crypto in general is the highest risk investment they can think of. And thats true for most crypto’s, however there are also various levels of risk within the crypto sector itself. For example, a strong argument can be made for Bitcoin being digital gold - a safe haven from volatility and inflation. Something like Ethereum is wildly innovative, has Lindy effect and first mover advantage as the first major decentralized super computing platform.
One way to think of it, is the larger the market cap, the lower the risk. Another way to think about it is the longer it’s stuck around, the more likely it will continue to stick around in the future. This is referred to as the Lindy Effect.
Time Commitment
Are you looking for a more passive investment or do you plan on being hands on? Both options are possible in crypto. For example, for little to no work you can just buy some bitcoin and ETH in your Coinbase account and chill.
If you want to go one small step further, you can go down some rabbit holes and buy some of those coins in your Coinbase account too. If that’s too much, but you still want some exposure to other crypto sectors, there’s even some crypto index funds like Index Coop you can use to get exposure to DeFi (DPI) or even “The Metaverse” (MVI).
The biggest time commitment, but also quite rewarding, would be going full DeFi and becoming an LP or doing some snowball farming.
Questions To Ask Yourself
Here’s a few questions you should ask yourself before constructing your crypto portfolio:
- What is my current net worth?
- Do I have enough to generate income from my assets? If so, how much do I want to make?
- How diversified do I want to be?
- How well do I understand various investment opportunities available to me?
- How much time do I want to spend investing?
Everyone’e portfolio requirements will be different, but let’s break down a few examples based on what I’ve seen work over the years.
Crypto Portfolio Examples
$10k Or Less Crypto Portfolio
- Generating income off $10k isn’t an option, so we’re probably looking to just 10X our investment.
- 20% One full ETH and little more for transaction fees
- 40% Alternative Layer 1’s which survived winter and 10X’d last cycle. Examples:
- ATOM, AVAX, DOT, FTM, SOL, XTZ
- 30% New narratives like Liquid Staking, Real World Assets and Layer 2’s. Examples:
- ARB, LDO, LINK, MATIC, MKR, OP, RPL
- 10% Cash for trading the hot new memecoin that inevitably pumps. Examples:
- SHIB
$100k Or Less Crypto Portfolio
- Still hoping to 10x, but 5x is cool too - and a little income is doable since we’ll have a nice chunk of ETH anyway.
- 30% One full BTC
- 20% ETH, mostly liquid staked to generate some income. Examples:
- frxETH, stETH
- 25% Alternative Layer 1’s which survived winter and 10X’d last cycle. Examples:
- ATOM, AVAX, DOT, FTM, SOL, XTZ
- 25% New narratives like Liquid Staking, Real World Assets and Layer 2’s. Examples:
- ARB, LDO, LINK, MATIC, MKR, OP, RPL
$1M Crypto Portfolio
- Always hoping to 10x, but preservation becomes much more important - and income here can go a long way.
- 30% 10 BTC
- 30% ETH with at least half solo staked and some liquid staked
- frxETH, stETH
- 20% Alternative Layer 1’s which survived winter and 10X’d last cycle. Examples:
- ATOM, AVAX, DOT, FTM, SOL, XTZ
- 20% New narratives like Liquid Staking, Real World Assets and Layer 2’s. Examples:
- ARB, LDO, LINK, MATIC, MKR, OP, RPL
Written by: @gerbz Gerbz is the founder of BitLift and has been journeying down the crypto rabbit hole since 2013.