Over the past decade, Bitcoin won the title of the best-performing asset in the world. Bitcoin and the largest cryptocurrencies by market-cap beat the ROI (return on investments) of the vast majority of stocks available on any market, as well as gold and other commodities.
The first Bitcoin exchanges started operating in 2011. However, Bitcoin received its worldwide attention only by the year of 2017. Back then, its price was around $1,000 in January and surged to $20,000 by December – Bitcoin’s current all-time high. That’s 20x in less than a year (!).
While the world was shocked to see people rushing to buy the new digital gold, many Bitcoiners didn’t even sell a single Satoshi of their holding. Why? Because they believe in Bitcoin as a long-term investment, or, as it’s commonly referred to, HODLing.
This guide aims to show you how to implement this investment method – to construct a long-term cryptocurrency portfolio.
Long-term investing is as simple as its name suggests – taking a long-term view of investments. Everyone defines ‘long-term’ differently. In the stock market, ‘long-term’ means typically anything that lasts years.
However, given the fact that the cryptocurrency market moves too quickly due to high volatility, we can scale that number down to a couple of months or one year. If we look at the stock market, the legendary investor, Warren Buffet, is an advocate of long-term investment because of the many advantages it has to offer.
The Advantages of Long-term Crypto Investment
Historical statistical data of a growing economy has proven that it works. Looking at the S&P 500: from 1926 to 2018, the average annual return was 10-11%, according to Investopedia. Because the economy is expanding over time, markets generally tend to trend upwards in the longer terms.
Of course, crypto is a different game. However, HODLing and Dollar Cost Averaging had proved itself to be the best investment strategy even in the decade-young cryptocurrency market.
Keep the trading fees low
if you take an active trading approach to invest, then it is expected that transaction fees will trim your profits, especially when trading on margin with leverage.
With a long-term investment strategy, after allocating the cryptocurrencies, all you have to do is just HODL. Aside from the initial transaction fees, you are not expected to see any more payments down the line.
You Can’t Time The Market
dipping in and out of the market could mean that you miss days in which significant gains are made. Missing the best day for Bitcoin at the year of 2019, which was October 26 – the Chinese Pump means missing a potential ROI of 42%.
You do not have to worry about being inside your position with a long-term investment strategy. Keeping in mind that fact, in order to reduce volatility, we recommend buying your long-term portfolio not at once, but following the DCA method.
Not being an active trader, means that you don’t need to keep your crypto funds on any exchange, but rather keep them safely in your hardware wallet. As we already know, exchanges are valuable targets for hackers, and almost all the leading exchanges had suffered losses due to hackings.
Metrics to evaluate cryptocurrencies for the Long-term
Now that the benefits of a long term-investment strategy have been made clear, it is also essential to consider which cryptocurrencies you want to include in your long-term portfolio, or how to build your portfolio.
Before that, let us identify some indicators that we can use to measure the potential of the cryptocurrency for the long term. These are just a few suggested metrics.
Market capitalization, or market share, can be defined as the proportion of market capitalization that a cryptocurrency has relative to the entire market.
A large market share typically indicates dominance. For example, Bitcoin’s market share is currently at around 67% of the total market capitalization of the cryptocurrency space. We can use this as an indicator to determine the long-term viability of cryptocurrencies, including Bitcoin, in our portfolio. Notice projects that have a market cap higher than one billion USD.
Projects with a tiny market cap, such as a few tens of millions USD, will be easy to manipulate. However, they could also have the potential to grow.
when determining if a cryptocurrency will be here in a few years from now, we need to ask if the cryptocurrency useful, does the project have users?
One example is the second-largest crypto by market cap, Ethereum. ETH’s utility value derives from its function of allowing developers to build Decentralized Applications (dApps) on top of its blockchain.
Another example is Binance Coin (BNB). BNB is used mainly as the utility token of the largest exchange by trading volume, which is Binance. It is used to pay for Binance fees, and also to participate in IEOs – Initial Exchange Offerings by Binance.
Daily Volume (USD) and Transactions
To determine whether a cryptocurrency is being used, you can look at its daily number of transactions, as well as the volume. Make sure to distinguish between real transactions and zero-value or spam transactions.
In the case of Ethereum, as of writing these lines, the average number of transactions per day is around 800K. Many of those are ERC-20 tokens. However, it proves that the network is being used.
This is a critical aspect of a cryptocurrency. If the technology behind a cryptocurrency is not fit for purpose, then it is likely that in the long-term, the cryptocurrency will fail. Besides numerous hard and soft forks during the year of 2019, Ethereum is working on moving to PoS and implementing Ethereum 2.0.
This positive technological development increases the likelihood of Ethereum being widely adopted, and so, once again, makes it a viable candidate for our portfolio.
Market News and Sentiment
Crypto news reporting on certain projects might influence the price performance of the token, especially the small-cap ones.
There are projects which are liked by the media, following their great marketing habits, while other projects are not the cup of tea of the press. For example, TRON’s marketing budget is probably higher than Monero’s (XMR).
For the above reason, it is important to stay up to date by following the cryptocurrency news related to your projects, and also to track the market sentiment. It’s also advisable to subscribe to updates on the project’s website to receive development updates.
These are just some indicators that you can use to determine the long-term viability of a cryptocurrency. With this in mind, we can now turn to portfolio construction; more specifically, what percentage of each cryptocurrency we should hold in our portfolio.
Portfolio Construction: Risk Allocation
Exposure to a particular cryptocurrency is primarily dependent on your risk appetite. This can be defined simply as your tolerance towards taking risks.
Using global markets as an example, if your tolerance towards risk is neutral, then a typical investment portfolio for a young person would contain 50% equities and 50% bonds.
Equities are known to be riskier than bonds but also offer higher returns – due to the risk-reward tradeoff. Conversely, bonds tend to be a safer asset than stocks, but offer a lower return over time as a result. Both combined create a balanced portfolio for the average Joe.
If we apply these measures to the cryptocurrency world, we can draw some parallels between the traditional markets and the cryptocurrency markets.
One would think that investing in Bitcoin has less risk than investing in mid-cap altcoins. From this, we can then tailor our level of exposure to suit our risk appetite.
For example, a very risky portfolio might be 80% mid or small-cap cryptocurrencies and 20% in Bitcoin. And vice versa – 90% in Bitcoin, and 10% in mid-large cap altcoins would be considered safer portfolio for the long-term.
To conclude this, ask yourself where you are at on the risk-reward scale.
Before we continue, we must add that our base assumption of this article will be that the cryptocurrency market will grow over time. Hence, a cryptocurrency portfolio should be measured by means of Bitcoin and not USD.
Adding to the above, and keeping in mind the market cycles of the crypto markets, it’s always wise to sell Bitcoin and cryptocurrencies in profit when the price is high.
Aside from Bitcoin, the past years had taught us that the majority of the altcoins are far from their all-time high levels. Most of the altcoins lose value against Bitcoin over time. After the 2017 bubble pop, there were only a few altcoins that reached their all-time high. Two of them are included in our sample portfolio.
Lastly, when building the portfolio, we want to diversify. However, we want to be in control of the cryptocurrencies we are holding. It’s advisable not to include many coins and to concentrate only on several ones.
Is this the best long-term crypto portfolio allocation?
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Our portfolio will be different from yours because factors such as our risk appetite will undoubtedly differ. Our portfolio has been closely modeled using the scheme below, by popular trader Crypto Cobain. You can use it too when constructing your long-term cryptocurrency portfolio.
We are suggesting here two portfolio structures, and they constructed of the same cryptocurrencies. What differs is the level of risk.
Suggested Crypto Portfolio A: Low-risk tolerance
Bitcoin Cash 3%
Suggested Crypto Portfolio B: High-risk tolerance
Bitcoin Cash 5%
As of writing these lines (May 2020), the numbers above represent the 1-year ROI in Bitcoin and USD of both allocations. As mentioned above and can be reflected, history shows that aside from certain altcoins, Bitcoin’s ROI USD-wise smashes the performance of most altcoins. That’s why we suggested Allocation A, where Bitcoin is an 80% share of the allocation.
We also have to keep in mind that the past 12 months were devastating for altcoins. There was no “Altcoin Season,” and only two major altcoins, named Tezos and Binance Coin, reached their all-time high over the past year.
When speaking about cryptocurrencies, it means talking about Bitcoin. Bitcoin is the base asset for the other alternative coins and the king of the cryptocurrencies.
The first decentralized cryptocurrency, Bitcoin, was invented by Satoshi Nakamoto back in 2008. Bitcoin is designed to function just like physical currency, which transfers value, and as time goes, the adoption and popularity of Bitcoin is growing.
Bitcoin is the gate to the cryptocurrency world. Many new retail investors will buy Bitcoin before buying any other altcoin.
The second-largest cryptocurrency by market cap, Ethereum, is different from Bitcoin in that its sole purpose is not to be used as a medium of value exchange. Instead, Ethereum allows developers to build dApps using smart contracts.
The tradeable currency of the Ethereum project is known as Ether, tokenized by ETH. During the crypto bubble of 2017, Ethereum smart contracts were used for fundraising new projects, a term was known as Initial Coin Offering or ICO.
Tezos is one of the most promising projects that was established in 2017 following a record-breaking initial coin offering (ICO) of $232 million. It’s a proof-of-stake-based blockchain network governed by the so-called Liquid Democracy model.
XTZ is the native cryptocurrency of the project, and it’s currently the tenth largest one in the world. Many exchanges such as Binance and Coinbase offer Tezos staking to its users, enabling them to earn passive income if they put (stake) a certain amount as collateral.
Monero is like Bitcoin in that it allows value exchange. However, Monero differs from Bitcoin in that it is focused on providing enhanced privacy to those that utilize their blockchain, using a stealth address mechanism.
Anonymity is likely to become more and more critical in a world where Bitcoin addresses can be traced. As more regulation starts entering the cryptocurrency space, an increasing number of individuals will gravitate towards privacy coins such as Monero, Zcash, and Dash, which can mask their transaction activities.
Like Monero, Zcash is a privacy coin that is focused on ensuring that user anonymity is well protected when transactions occur on the network.
Zcash does this by leveraging its zero-knowledge proof constructions known as zk-Snarks, which allows users to exchange information without revealing their identities.
Bitcoin Cash was born in August 2017 as a fork of Bitcoin, that has more or less the same characteristics as Bitcoin, where the two cryptocurrencies are means of payments.
Bitcoin Cash and Bitcoin (Core) have been fighting for the title of who is the real Bitcoin. However, Bitcoin Cash is not a real competitor for Bitcoin at all. Besides, the past year carried another fork of Bitcoin Cash – to Bitcoin Cash ABC and Bitcoin Cash SV. This is another proof that the problems in Bitcoin Cash are far from being solved.
Despite the above, we still think any portfolio needs to hold some Bitcoin Cash, just in case. As a reminder, Bitcoin Cash reached an all-time high against Bitcoin at the imaginary price of 0.5 BTC per BCH.
Investing in the cryptocurrency market is exhilarating, but it is also important to make sure your cryptocurrency portfolio is secure. There are too many stories of cryptocurrency funds being stolen because of a lack of security.
It is an exciting time, and not too late, to invest in cryptocurrencies. It is a new asset class that is currently delivering better returns than the traditional markets (as of writing these lines).
However, it is also critical to have a strategy. Not having a ready-made investment plan can result in heavy losses. A long-term investment approach is just one strategy that you can choose to adopt. You can even vary the long-term investment approach to suit your trading style. The most important thing is to have a plan for each scenario that might happen.