How To Balance Different Market Capitalization Cryptocurrencies For Portfolio Diversification
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By PAGE Editor
Cryptocurrency volatility is nothing new to investors ―although Bitcoin’s seems to have declined in the past ten years. This is because asset adoption has expanded across the world, with more and more companies using it or accepting it as a payment method from customers, including PayPal, Microsoft, and Balenciaga. Trust has also strengthened around the cryptocurrency, as increased efforts to familiarize people with its benefits and use cases have paid off.
However, a person’s portfolio is more substantial and profitable when it has diversified assets spread across different industries and features. Hence, investors and traders must learn to balance safer options, such as Bitcoin or Ethereum, with emerging projects, like Pepe, a popular meme coin. While its use case is limited, investors can still exchange Pepe to USD, so it’s a lucrative investment for the long term.
Therefore, users must even out their portfolios by investing with asset allocation in mind based on market capitalization. Here’s what it’s about.
What is market capitalization in crypto?
Market capitalization, or market cap, is the total value of the coins mined within a crypto project. It is calculated by multiplying the number of mined coins by the coin’s price at the given time. The index offers insight into how stable an asset can be, so the bigger the cap, the safer the coin.
Investors leverage market cap as a tool to identify valuable assets and compare cryptocurrencies. At the same time, market cap is more important than price, so even if one cryptocurrency has a much higher price than another, the market capitalization counts as more critical.
How are market capitalization assets classified?
There are three different types of market capitalization in crypto, and they’re great guidelines for investors to understand the value of an asset:
Large-cap cryptocurrencies have a value between $1300 billion and $390 billion, and they include Bitcoin, Ethereum, Tether USDT, and XRP. These coins have lower investment risks due to their track record of growth for longer periods and higher liquidity.
Mid-cap cryptocurrencies are situated between $1 billion and $10 billion and include coins like BNB, Solana, and Dogecoin. While they are less safe, investors see them with huge potential for growth and innovation;
Small-cap cryptocurrencies have less than $1 billion in value and are prone to a sudden price swing, making them unreliable. Considering they’re mostly emerging projects, they are focused on social media, gaming and memes;
How do we balance these categories into our portfolios?
Portfolio diversification must be designed in accordance with the investors’ risk tolerance, including the following factors:
Short- or long-term investment timeframe;
Financial situation and FOMO;
Experience and skills in navigating challenges;
Liquidity needs;
These elements lead to a general of four types of investors:
The conservative investor has a low-risk tolerance due to consistent portfolio composition and return expectations;
The moderate investors are more balanced as they don’t take excessive risks and are looking for a medium-term investment horizon;
The aggressive investor relies on volatility for high-reward assets, which is why they invest in the short-term;
The highly aggressive investor is interested in speculative assets but has a long-term investment horizon;
Considering that one’s portfolio also consists of stocks, bonds, and cash, crypto allocation depends on the risk level. That’s why conservative and moderate investors should allocate the least to crypto, while highly aggressive ones should seek to have almost half of the portfolio’s assets be crypto.
What kinds of tokens are best for portfolio allocation?
Luckily for investors, there are plenty of crypto projects with different use cases and features, so they don’t lack growth opportunities with:
Payment cryptocurrencies that facilitate transactions through peer-to-peer operations;
Utility tokens that serve special purposes on their designated blockchains;
Stablecoins are pegged to currencies, commodities, or financial instruments for stability;
Central Bank Digital Currencies are issued by official banks;
Meme coins are based on actual memes, such as Pepe coin from Pepe the Frog;
Usually, it’s best to allocate more to large-cap cryptocurrencies that act as payment or have utility, but stablecoins and altcoins (any other cryptocurrency than Bitcoin) offer opportunity growth. On the other hand, Meme coins are mostly passing projects whose investment must be carefully navigated.
What are some essential portfolio diversification tips?
While portfolio diversification seems easy, it involves many hours of research and learning to truly understand a project's implications and impact on assets. All investors must continuously review and rebalance their portfolios, especially during challenging market times, such as bear trends or high FOMO risks.
Using metrics and analytics is necessary to keep an eye on your assets and check out newer and stronger cryptocurrencies if you’re an aggressive investor. Many crypto projects exploded in the past years and brought significant returns to fast and prepared investors, such as Dogecoin, following Elon Musk’s tweets, and Fartcoin, the asset with a market capitalization of more than $800 million that boomed following Trump’s election.
Another important tip is to avoid over-diversification, which happens more often than you’d believe. This occurs when investors have their value correctly allocated in the portfolio but add more due to fear of losing the investments or the need for personal financial gain. However, this practice leads to more confusion and weak risk-adjusted returns, so it’s always best to perform due diligence when diversifying your portfolio.
Finally, be wary of crypto projects that inflate and crash, which usually happens during challenging financial and global moments. For example, during the COVID-10 pandemic, many coins crashed due to a previous long rally, which triggered an all-time high, followed by a drop-down phase.
Are you ready to better diversify your crypto portfolio?
Being a crypto investor comes with many ups and downs, but it’s all about hard work and continuous learning about the market and its projects. That’s why investors must diversify their portfolios based on their risk level and correctly allocate assets with large, mid, and small market capitalization. This index offers insight into safe and risky cryptocurrencies that provide long-term returns or rapid growth opportunities.
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