Tue Sep 12 2023
Knowing how to efficiently manage your cryptocurrency portfolio can make all the difference. Here is a set of tips and best practices to consider whether you're trading manually or using an algorithmic crypto trading platform.
A solid strategy, plenty of research, and a good risk management practice is the backbone of every strong portfolio. In this article, we will cover the top portfolio management best practices, whether you are planing to manage your portfolio manually or via an algorithmic cryptocurrency trading platform.
Portfolio management involves the selection and oversight of a basket of different investments to achieve long-term financial goals while considering your own risk profile. There are two types of portfolio management ideologies: active and passive. Active portfolio managers attempt to “beat the market,” while passive ones invest alongside the market to “match” it.
The current understanding of Portfolio management is based on the Modern Portfolio Theory (MPT), developed by Harry Markowitz in the 1950s. MPT gives mathematical form to the basic intuition behind diversification, emphasizing that it’s safer to invest in a range of different assets or asset classes than just one. In cryptocurrency and beyond, investors need to compose a portfolio of different assets such that their returns will be maximized without increasing their level of risk.
Building a cryptocurrency investment portfolio involves determining which assets to compose a portfolio from, spreading the asset-specific risks by investing in a variety of well researched and well chosen assets. While there’s no consensus on the exact number of cryptocurrencies one should hold, a diversified portfolio should strike a balance between the risk-reward ratio, availability of funds, and time availability to actually manage the portfolio when considering which assets to include as part of it.
Whether you’re managing your portfolio manually, or using an algorithmic cryptocurrency trading platform such as Aesir, the assets chosen to invest in are usually more important than the number of assets to invest in. For instance, you could spread your risk over 20 different assets, but they’re all memecoins low in the Marketcap rankings. It’s possible that approach might not yield the best long term results.
Investors need to consider several factors when selecting cryptocurrencies for their portfolio. These include the market capitalization, trading volume, market trends, and volatility. It’s equally crucial to evaluate the project’s whitepaper, the team behind it, and any strategic partnerships they’ve formed. In order words - do your own research.
To monitor a range of cryptocurrencies, investors can use specialized software called portfolio trackers. These applications simplify the concepts of portfolio management (asset allocation, diversification, rebalancing) within a user-friendly interface, either on desktop or mobile platforms. Such trackers allow for seamless trading without deep diving into the software intricacies.
But beyond just tracking, algorithmic cryptocurrency trading platforms can play a pivotal role in managing crypto portfolios. These platforms use advanced algorithms to determine the best times to buy or sell assets based on predefined conditions, helping maintain desired portfolio balances. Furthermore, they can assist in diversifying portfolios by analyzing market data and suggesting when it might be beneficial to trade one asset for another. For passive investors, these platforms can be set to automatically rebalance portfolios at specific intervals, ensuring that the desired asset allocation is maintained without manual intervention.
Portfolio management is more than just selecting a mix of assets; it’s about continuously aligning that mix with one’s financial goals and risk tolerance. In the dynamic world of cryptocurrency, leveraging tools like portfolio trackers and algorithmic trading platforms can offer a strategic advantage. By integrating algorithmic trading into their strategies, crypto investors can make more informed decisions, streamline their trading processes, and potentially achieve better returns, all while managing risk.
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