OK, so if you’ve been following our crypto series from episode 1, you’ll now have a good understanding of how crypto works, the basics and how to trade it. In this article, we’re going to cover 3 things – the basics of building a portfolio, how we pick coins and then the details of our own portfolio!
Now that you know how to make a trade (and if you don’t, visit our previous article in this series HERE to find out how) you’ll want to start buying and filling that wallet with the latest cryptos! But hold up, how do you know which ones to pick? How much are you going to invest in them? With thousands of different currencies at your fingertips, it can be tempting to get stuck in, but if you don’t go in with an investing plan of action, you’re sure to get wrecked. Luckily, were here to provide some info to help you find the gems and avoid the s**tcoins.
“Right now Bitcoin feels like the Internet before the browser”
– Wences Casares
As always, the following is not financial advice, read our disclaimer
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Before we get into how to pick coins, lets cover some of the basics of building a crypto portfolio
Building a crypto portfolio
1.Have a plan
“Failing to prepare is preparing to fail”
– Every teacher and parent, everywhere
If you don’t know exactly what you’re aiming for and generate a plan to get there, you’re far more likely to flounder around in investing purgatory and way more likely to lose money.
Your plan can be anything you want, but it should meet your long term goals, as well as be manageable and easy to stick to (and have a high likelihood of making a good return of course). One of the most popular crypto investing methods is the buy and hold (HODL) method. This really is as simple as it sounds, where you buy into a portfolio of currencies every single month without fail, regardless of price and hold long term until you reach your goals. This is the method we prescribe to (with a few teaks) and it has worked well so far. The reason this works well is because by investing each month regardless of price, you’re guaranteed to get an average price and will therefore get an average return. FYI, the average return on bitcoin over the past 5 years is 230%. Nice.
2.Don’t try and time it.
We’ve covered this topic in a number of stock investing articles, but the same goes for investing in crypto. Studies show time and time again that trying to time the market is a recipe for failure. Like we stated before, missing the best 10 days of investing in the stock market would mean you cut your return by about 50%! The same holds true for crypto, where the best times to invest are confined to a handful of days. Are you sure you have the ability to predict these 10 best days and spot them when they come up? We don’t, so we don’t even try. Stay invested every day and you’re guaranteed to be invested for the best days
I know what you’re thinking, but what about the bad days right? It’s true that you’ll also be invested for the bad days, but on average, bear markets and market dips are shorter and shallower than bull markets and price pumps. It’s essentially a game of probability and your odds get worse the more you try and time it.
Keeping with the theme of investing the same way we do stocks, we like to hold a diverse range of crypto currencies (within reason). The reason for this is that just like in the dot com bubble, it’s unlikely that all of the crypto currencies we see today will last long term. Likewise, although we invest into what we believe to be the best crypto currencies, the tides can turn real quick in this new space.
For this reason, we like to spread our investments between a handful of cryptos that each bring something different to the table. We currently hold 9 different coins in our portfolio, which we feel is enough to dive us some good diversification, but is low enough that we can keep track of each one without missing some important news or feature. This way, we can be sure that if one or two crash to zero, we still have plenty invested to fall back on.
OK, so now you’re learned up on the basics, but what do you fill the portfolio with? Lets get into how we pick the coins for our portfolio.
How to pick coins
Were going to try and keep this part simple because if you’re reading this, then you’re likely a beginner. To ensure you chose right, you’re going to need to do some analysis. There’s two types of analysis – technical and fundamental. Technical analysis centres around what the price of the coin is likely to do in the short term by looking at trends and indicators, where as fundamental analysis focuses on the bigger picture, how strong the coin is overall and it’s potential for the long term. Fundamental is what we’re going to focus on learning here.
Fundamental analysis can be as deep or as shallow as you’d like, but when doing any research, we definitely want to be looking at 5 crucial things:
- Current affairs
- Use case
Basically, the coin needs to have the right technology behind it, people need to be using it and it must have a clear reason for use. Let’s take a look at an example.
Ethereum is one of the biggest cryptos in the world (second largest by market cap just behind bitcoin and the biggest alt-coins). If we were going to do some fundamental analysis on this coin, it would look something like this:
Tokenomics is essentially the overview of the basic numbers and parameters of a cryptocurrency and basically centres around the supply and demand of a crypto. Specifically, we will look at market cap, distribution, supply and inflation. This information can usually be found at reputable market tracking websites. We like to use coinmarketcap.com.
- In terms of market cap, ETH is currently sitting at almost $338 Billion (market cap is coin price x number of coins in circulation, essentially the value of all of the coins out there). This number puts it as the second largest crypto by value in the world.
- In terms of distribution, we need to understand if the coins are distributed widely among lots of people, or if single people or companies own a large chunk. If we check https://www.oklink.com/eth/rich-list, we can see that only 2 wallets look concerning, owning 6.6% and 6.2% each. HOWEVER, we should also note that these addresses have a small scroll icon next to them, meaning the are smart contract wallets, meaning these are likely owned by and exchange – meaning there’s nothing to worry about.
- In terms of inflation (a high inflation rate is bad because if too many new coins are being created, it can negatively impact it’s price), it is widely accepted that Ethereums inflation rate is around 4%, however we can see that for august it was only 0.5% after it’s recent upgrade. This is low (less than 2% is good) so we’re comfortable with this
It’s important that a crypto currency has good adoption, or at least a strong community with potential for adoption if it’s going to see good growth and profit. Ethereum’s current market dominance (by value) is currently at just over 18%, making it the second largest crypto currency. Not only that, we can see by checking – https://www.statista.com/statistics/647374/worldwide-blockchain-wallet-users/ we can see that there are currently just over 170 million unique wallet addresses for Ethereum. This is amazing, considering bitcoin has just under 80 million addresses, making Ethereum the most adopted currency.
The crypto space as you’ve probably noticed is an ultra competitive space, with over 4000 currencies on the market. For this reason, it’s important that the currency has strong technology backing it up to ensure it solves the problem it’s looking to solve effectively, whilst giving investors confident in buying and using it. Ethereum is the most well known ‘smart contract’ crypto currency, meaning that the technology behind the crypto currency is customisable. This means that instead of just using ETH as a currency, developers around the world can build app’s and platforms that use Ethereum’s blockchain to carry out functions. For instance, Opensea is a popular platform where artists can sell digital art that are created and live on the Ethereum blockchain. Not only that, but Ethereum has more developers working on it than any other blockchain, meaning that the technology is always improving. For this reason, we give it a tick in the box for technology.
Even though some current affairs can be nothing but FUD (fear, uncertainty and doubt), it’s important to understand if there is anything circulating in the news, political sphere, regulatory news or anything else that could have a negative impact on the coins you’re thinking of investing in. In the case of Ethereum, the big news right now is that Ethereum 2 (a new and improved blockchain for Ethereum that utilises proof of stake instead of proof of work, see out article here for more on this) will be launching some time in early 2022. This is good news for the currency. There is plenty of negative news surrounding crypto in general right now too, so it’s important to use your judgement before diving in. for instance, if there’s a regulation worry coming up in the next few weeks, you may hold off until you know the outcome. Is the price high right new because of some great unexpected news? Maybe worth waiting until the price comes back to a reasonable level. The call is ultimately yours, but bear in mind our previous lesson on timing the market. We’re trying to find a currency that looks to have a bright future, there’s no need to worry about short term ups and downs.
When it comes to products, the most successful ones have a clear USP and solve a problem that customers are willing to pay for. Crypto is no different. There are plenty of crypto currencies out there that exist only to make money. Although they may tick a lot of boxes in the short term, we believe that eventually, these currencies will dwindle until only the truly useful Crypto’s will exist. These are the ones we are looking for, so bear this in mind when picking a coin.
In the case of Ethereum, it’s use case is clear and simple – it aims to be the worlds primary platform for all digital functions. Think of Ethereum as ‘internet 2.0’. The current internet relies on trust – trusting people and companies to carry out functions to keep it going. With Ethereum, these functions can be run without trust, using algorithms to ensure the function is carried out. This could be making a payment, watching the correct movie or sending a message. The native coin of the platform, ‘ETH’, is what is used to pay for these functions to be carried out. When someone wants to carry out a function on the Ethereum network, the transaction needs to be validated. This validation process is carried out by an array of validators (computers with the Ethereum software running on them) from across the globe. These Validators are paid a ‘reward’ for contributing to the validation in the form of ETH. Meaning that as the network grows, the more ETH will be needed to pay for things. For us, this use case is clear so we’re happy to invest.
The coins we invest in
So now onto the part you have all been waiting for. Before we dive in, once again we need to stress, that the following isn’t an endorsement of any of the coins listed and you should do your own research and chose the investments that suit your goals and risks accordingly. Also, this is our holdings at time of writing. We continually monitor our crypto portfolio, so changes frequently. This means that depending on when you are reading this, we may no longer be invested ion the below.
Our allocation – Ok, let’s jump straight in. The chart below shows our current allocation at 01/10/21:
ADA (CARDANO) – Let’s start with our largest holding ADA. If you know anything about the crypto space, you’ve likely heard of Cardano and it’s native coin ADA. Cardano is the 4 largest coin by market cap (3rd largest crypto coin if we discount Tether and second largest Alt-coin, behind ETH). The reason we hold such a large portion of our portfolio in ADA is that Cardano has some serious tech behind it and seems to be ahead of many of the biggest Alt-coins in terms of technology. Founded by Charles Hoskinson, who was a co-founder of Ethereum, Cardano is a smart contract Crypto, much like Ethereum (which we covered above). However, unlike Ethereum, Cardano is already ‘proof of stake’ (see our article HERE on what that means) meaning it’s cheaper and faster than Ethereum and to top it off, it aims to be a true method of payment, aiming to bring banking and money to the un-banked in the world. It’s smart contract ability is in it’s infancy right now, but we feel that gives it a lot of upward potential.
BTC (BITCOIN) – This one needs no introduction. The grandfather of crytpo currency, Bitcoin is the most well known currency on the planet, representing about half of the entire market. The simple reason we hold BTC is that the market considers BTC to be a fantastic store of value, much like Gold. This is because of it’s rarity (there will only ever be 21 Million Bitcoin). Couple this with it’s adoption (Bitcoin is by far and away the most adopted and likely to be adopted currency) and you’ve got a real solid investment long term.
BNB (BINANCE COIN) – Not strictly a coin, but a token. BNB is the native currency of the Binance smart chain and the Binance eco-system. Regular readers of our know that we are big fans of Binance, which is the largest crypto currency exchange in the world. Although running into some regulatory issues recently, biannce continues to be a power house in the crypto world, being a major innovator and bringing many crypto coins to the masses with it’s own block chain – the Binance smart chain. Like ETH, BNB is used to pay for transaction on the Binance smart chain, so if Binance grows (and we think it will), we expect BNB to grow.
ETH (ETHEREUM) – We covered this coin pretty heavily in this article, so all that’s left to say is – the only reason we dont hold more is that it has been slow to bring proof of stake onboard. However, this is looking increadingly likely in early 2022, so we’re closely watching for buy opportunities coming up.
DOT (POLKADOT) – Polkadot is much like Cardano – a smart contract coin that aims to be an Ethereum killer. Like Cardano, Polkadot has some serious technology behind it – being founded by Gavin Wood who is yet another Ethereum co-founder. Polkadot at the present moment is poised to be the defactor Ethereum replacement if anything were to happen to it, so we hold DOT more as a hedge.
ALGO (ALGORAND) – Moving into the more exotic coins, we have ALGO. Algorand is a proof of stake currency much like Cardano, developed by Silvio Micali, an Italian computer scientist. The reason we hold Algorand is because Algorand uses a unique proof of stake technology called ‘pure’ proof of stake, which it says solves the ‘block chain trilemma’ of being, decentralised, scalable and secure. We wont get too much into it now, but ALGO has some awesome technology driving it – so much so that it has signed a number of contracts with world governments and institutions to develop CBDCs and technologies around the world. The only reason it hasn’t seen as much price increase as the rest is because of it’s relatively poor tokenomics, though we expect this to change in the long run
BAKE (BAKERY TOKEN) – Going real exotic, next up we have BAKE. You may not have heard of Bake, but it is essentially the Binance smart chain’s answer to uniswap, a decentralised exchange that leverages smart contract tech to function. We’re not going to get technical here, so to sum it up, we hold Bake as its the token used on bakery swap. We like Binance, we like Uniswap, put them together, and we hold bake. Simples.
SOL (SOLANA) + AR (ARWEAVE) – recent additions to the portfolio are Solana and Arweave. You’ll notice that we’ve grouped these two together, but there’s a good reason for that. Allow us to explain, starting with SOL. SOL is the native coin of the Solana block chain. Much like Polkadot and Cardano, it is a smart contract crypto currency. However, the main USP of Solana is its scalability. Currently, Solana is able to process far more transactions per second than almost any other crypto currency at 65,000 tps, with plans to scale to over 700,000 tps! (FYI Ethereum tops out at around 45 tps). Solana also uses a novel validation method called ‘proof of time’. Again, we’re not going to get too technical here, all we can say is that there’s some real interesting tech behind Solana and we’re onboard.
OK so what does that have to do with Arweave? Arweave, and it’s native coin AR is basically a tech developed for storing data, forever, on the block chain. It essentially offers storage solutions to companies and other interested parties at a low price that would otherwise cost a fortune to store digitally. The AR coin is what is used on the network to pay for this storage and the transactions. The big thing to remember here is that Solana have signed a deal Arweave to store all of it’s transanction data on the Arweave block chain. This means that as demand for Solana increases and more transactions are processed, so does the demand for AR, making the price of these two coins inexplicably linked.
That’s it folks! you should now be well on your way to building out that crypto portfolio. Remember, investing isn’t trading and it’s important to have patience when investing for the long term. If you want to know exactly what we’re investing in every month, sign up to our newsletter below or head on over to our crypto section HERE for more articles like this one!
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