The perfect combination to be exposed to the growth of cryptocurrencies without sacrificing stability


by Santiago Coates *

Building an investment portfolio is no easy task. because there are different financial assets that offer different qualities and returns and are compatible with different types of investors.

Furthermore, The key is to find the balance between risks and benefits so as not to expose yourself to unnecessary risks, often not offset by any profits made.

Exactly the same thing happens with cryptocurrencies. and even more aggressive. Does this mean not adding cryptocurrencies to the investment portfolio in order not to lose money? No, it just means you have to try Learn how to balance it to enjoy growth but without sacrificing stability.

Cryptocurrencies are generally aggressive assets, so you need to learn to balance the wallet that holds them. Source: Pexel.

A market with great potential

The cryptocurrency market has great growth potential. The arrival of these resources and blockchain technology marked a before and after in financial history.

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Just as happened with the Internet a few decades ago, The sector is expected to continue to grow by leaps and bounds and continue until you reach every corner of the city. And the development of cryptocurrencies only reflects this situation.

For example, Bitcoin, the first and largest cryptocurrency, has gained around 29,660,000% from mid-2010 to the present. Yes, read well.

The ether of the Ethereum network has grown by more than 83,600% over the past five years. In this case, the increase in popularity is due to the advantages of the blockchain for the development of smart contracts (smart contracts) and decentralized applications (DApps, from its English acronym).

And just like bitcoin and ether, there are and will be hundreds of interesting projects that are still growing or even developing that could be similarly grouped, the respective cryptocurrencies benefit from this.

Cryptocurrencies have seen incredible growth in recent years and generated huge profits. Source: Pexel.

Volatility risk

As these are relatively new resources that have not been around for a long time (just over a decade is not a significant amount for the financial environment), Cryptocurrencies have high volatility.

This quality, which refers in simple terms to the extent to which the price can fluctuate over a given period of time, is its main advantage but also its main drawback.

The high volatility of cryptocurrencies is good because It is thanks to her that her prices can so dramatically increase in such a short time.. For example, Bitcoin has gained over 700% in the past five years, while the S&P 500 stock index has only risen 58% and the tech-rich Nasdaq 100 has risen 100%.

But precisely because of the high volatility in the midst of these bullish phases there have been significant pullbacks, which in many cases have been devastating.

From December 2013 to January 2015, the price of Bitcoin fell by around 87%. Subsequently, it was practically lateralized until October of the same year. Over the next two years, the popular cryptocurrency gained 8,200% until December 2017, when it entered a correction phase that accumulated an 84% decline in exactly one year.

Most recently, it hit its all-time high of $ 69,000 in November 2021 and started dropping to its current $ 20,000, down 70%.

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Anyone who has gone all-in in the bullish cycles of Bitcoin or other cryptocurrencies, or has invested 100% of their capital, has managed to amass a large fortune. However, If you entered the market at the wrong time or sold early, you may have lost almost everything.

But the solution is not to buy more cryptocurrencies because they currently tend to maintain a high correlation between them (they behave the same way). For example, a wallet with evenly distributed cryptocurrencies Bitcoin, Ether, Binance Coin, XRP and Cardano (20%) would have dropped by about 48% in the past year, even more than Bitcoin (-41%).

Cryptocurrencies tend to be highly correlated with each other, which means they behave in a similar way. Source: Trading view.

Stablecoin, the key to stability

So, How to build a cryptocurrency wallet while maintaining stability? Simple, via stablecoin or Stable cryptocurrencies.

These cryptocurrencies are hedged when they are spent. Just as the dollar was governed by the gold standard many years ago, which meant that all U.S. banknotes were backed by the precious metal, Stablecoins are linked to a specific asset: For each cryptocurrency issued, there is its equivalent in dollars, commodities, etc.

There are currently many stablecoins, but the main ones for maintaining a low volatility cryptocurrency portfolio are those linked to the dollar (Tether, USD-Coin, DAI) and / or gold (PAX-Gold, Tether-Gold, etc.). .) are connected.

Thereby, Investors still have cryptocurrencies, but the portfolio also has two stable assets like the dollar and gold. Excluding inflation and devaluation, one dollar is still one dollar, so such a stablecoin will almost always hold its value. Meanwhile, gold will fluctuate like the precious metal, which has risen 45% over the past five years and has fallen by just 2% from July 2021 to the present.

Since the returns of a portfolio are considered on the grand total, The decline in volatile cryptocurrencies has less impact because they have a share destined for more stable assets such as stablecoins.

There are gold-pegged stablecoins that track the price behavior of the metal, which has low volatility. Source: Pexel.

It all depends on the investor’s profile

Well, the next question you will probably ask yourself is how many stablecoins to include in your wallet. fifty%? 90%? 25%? Only 10%? It all depends on your investor profile.

Basically, the investor profile is built around the analysis of some personal characteristics, such as: B. the total capital to invest, the time horizon, our knowledge and above all our risk aversion, among others.

If we tolerate a lot of risks, we become aggressive investors; if we don’t want to lose anything, we will be conservative; if we are in the middle, then we are moderate investors. like everything in life it is not black and white because there may be some intermediate profiles.

It is important that we decide What percentage of money are we willing to lose? at least temporarily. For example, if a 30% drop keeps us awake at night, then a large part of the wallet must be in stablecoin as, as we saw earlier, the more volatile cryptocurrencies can lose this and more. .

If we have a very long-term investment horizon, an amount of money that we would like to lose and aim for large profits, we need little or no stablecoins.

It is important to know our investor profile in order to build a suitable investment portfolio for it. Source: Pexel.

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Determining our investor profile is generally a complex task, Being very subjective, it can change over time and we only test it when the context justifies it. It is normal to think that we are aggressive and cannot suffer a 15% drop, or vice versa: we think we are conservative and want to make a lot of money regardless of the risk.

The more beginners we are, the more it costs to create an investor profile and a correct distribution of stablecoins. The secret is to gradually test and test our reaction to the vagaries of the market.

Knowing how to diversify between stablecoins is also very important because there are so many different ones. Stable currencies involve risks although they are pegged to the value of the dollar. For example, the stablecoin terraUSD fell to zero after the collapse. Also, there are always concerns about how stablecoins are being supported, here’s why You need to diversify in the same way as other crypto assets.

There are several types of stablecoins, which also require diversification in this sector. Source: Pexel.

Beyond cryptocurrencies

On the other hand, to expose yourself to the growth of cryptocurrencies without sacrificing stability, it is also possible to invest in other types of assets that do not belong to the sector, such as stocks, bonds, commodities or even implement hedging strategies using financial derivatives (if we have the necessary knowledge).

If we want to invest in long-term low volatility cryptocurrencies, we can add a high percentage of stablecoins and also some corporate bonds. These financial instruments represent debt securities that companies issue and investors buy at an interest rate. Their particularity is that they provide us with regular income regardless of what happens at market prices.

The same goes for dividend stocks. In times of crisis, when cryptocurrencies typically come alongside growing stocks, the more stable and established companies in the market continue to generate quarterly revenue that adds value to the portfolio.

The cash flows granted by these assets can also be reinvested, both in the same assets and in other assets, making compound interest more effective over the long term and providing a greater overall benefit.

As can be seen, building an investment portfolio that includes cryptocurrencies to benefit from their growth and high long-term potential, but without sacrificing stability, is not only possible but easy.

The key is to find the balance between the amount of risky assets and the amount of less volatile assets, always with intelligence and in such a way that the final result is compatible with our investor profile.

If you don’t know how to do this, or want advice on other workable strategies, you can turn to industry experts for advice or guidance to get more favorable results.

* Diploma in business administration and communication. Cryptocurrency investment analyst and researcher at Inversor Global.

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