What is portfolio management? How to Design an Effective Portfolio in Crypto
What is portfolio management? What makes an effective portfolio? How to Design an Effective Portfolio in Crypto?
Capital management and investment planning are very important in any financial market from stocks to Crypto. Designing a scientific portfolio and disbursement plan will help you gain a lot of benefits not only in the market but also in your daily life.
Therefore, the Coin98 Insights team developed a series of articles with the topic “Portfolio Management”, to help you build and optimize your investment strategy and portfolio to suit your needs. myself.
This series of articles will cover the following topics:
- Overview of portfolio management.
- Asset classes in the Crypto market.
- How to determine return and risk in a portfolio.
- Steps to build and evaluate an effective portfolio.
- Some specific investment strategies in the market.
In the first article, let’s find out the most general features in building an effective Portfolio.
Portfolio Management – An important factor in investing
What is an investment portfolio?
Portfolio (or Portfolio) can simply be understood as a “collection” of different types of assets (Stocks, commodities, real estate, crypto, …).
So why multiple asset classes and not “all in” one asset with the highest return?
- It is very simple because the future is very uncertain and every investment has risk, so we cannot “all in” and then when the risk occurs, the assets that we save and save for a period of time. for a long time “flying without wings”.
- Moreover, having a Portfolio will also help you not to miss high profit opportunities when owning many different types of assets.
In fact, when participating in the Crypto market in particular or any financial market in general, we all have our own Portfolio. However, the difference will lie in whether your portfolio is scientifically managed and distributed.
Take a simple example: A portfolio of top AMM tokens from different ecosystems. With this Portfolio, you will have very good profits if Category AMM sucks in cash flow, but also miss opportunities in other Categories. Not to mention the risk of cash flow not going into AMM during that period.
See also: What is AMM?
What is Portfolio Management?
Portfolio management is activities that include:
- Select asset classes to form a portfolio.
- Allocate capital appropriately to optimize the return and risk of the portfolio.
- Monitor portfolio to be able to reallocate capital or replace with new assets as appropriate.
The portfolio management will be based on many factors such as fundamental analysis, collected data and data analysis methods (I will introduce more deeply in the following articles of the series), … to help portfolio owners achieve their financial goals.
Why should we have a specific and scientific investment plan?
So what are the benefits of having a portfolio and scientific portfolio management?
The first two benefits of having an investment plan and scientific Portfolio are optimizing profits & allocating risks to achieve your financial goals as mentioned above.
Besides, there are many other benefits that can be mentioned such as:
- Having a comfortable mind when investing: When you have a plan and scenarios to deal with your assets when there is a risk, you will feel very comfortable and completely invested. unaffected by negative psychological factors – a very dangerous spiral in investment.
- Control greed: Setting a goal and a plan to achieve it right from the beginning, helps you partly control greed and avoid falling into very risky projects such as Ponzi or other companies. multi-level model, scam,…
- Focus on your main work: When you have a comfortable mentality, control greed as well as a scientific investment framework, your investment time will be much more optimized. . From there, you have more time to focus on your main work, improve your income, and use that income to reinvest to increase your Portfolio quickly and effectively.
Thus, in addition to financial goals, having a scientific plan and Portfolio also helps you achieve many other goals, contributing to improving the quality of life both physically and mentally.
Elements of an effective investment portfolio
Asset classes in the catalog
The basic element to form an investment portfolio is the assets in which, the choice of which tokens to invest and hold is based on the following basic factors:
- What category does the project belong to?
- The ecosystem the project is growing on.
- Is this category or ecosystem attracting/willing cash flows?
Currently, on the Crypto market, there are many different types of assets (tokens/coins with the same category), but I can list a few Crypto Assets as follows:
- Blockchain platform.
- The tokens belong to different DeFi puzzle pieces.
- Long/Short positions, derivative contracts.
- Interest bearing token.
- Social Token, Meme Token,…
Regarding each different coin/token, the Coin98 Insights team has also had a lot of articles to provide information and analysis around that category. This will greatly assist you in choosing the types of assets to include in your investment portfolio.
In addition, we also have a series of articles about Ecosystem Panorama, updating important news of ecosystems during the week, in order to help you know where the cash flow is currently in the market. capital can be allocated accordingly.
Specifically, which token to choose to include in the portfolio is quite complicated, I will analyze it more specifically for you in another article in this Series.
In the framework of this article, I will only take a simple example as follows:
In the current Crypto market context, there are many coins, tokens belonging to different ecosystems and pieces from Blockchain platform, DeFi to Gaming NFT and Metaverse ⇒ The opportunity to have a good entry now is quite rare.
Therefore, as a person with a low risk appetite, my preferred assets include Platform Blockchain, Interest bearing token, Launchpad token, Gaming NFTs and looking for opportunities in the Derivatives segment.
- Platform Blockchain and Interest bearing token: This choice will help me feel more secure because these are relatively low-risk investments in the Crypto market. Moreover, with low price volatility (compared to other coins), the platform Blockchain coins when Farming on AMM will also have a rather pleasant impermanent loss (IL).
- Launchpad token: Due to the current context, it is difficult to have a good entry to invest, so owning Launchpad token to get the advantage of entry will be my next choice.
- Gaming NFTs: Through observation, it can be seen that the Gaming trend is still quite hot and attracts money flow today, so this may also be a category to pay attention to.
- Derivatives: In this segment, I have not seen many outstanding projects on different ecosystems, the market has not shown too much interest in this category, so this will be a category I consider to bring. offers the highest return and also the highest risk in the portfolio.
Above is an example of my portfolio, with the above portfolio there will be a question: Gaming and NFTs are still having strong cash flow, why don’t we bet the whole portfolio on it?
The very simple answer lies in risk diversification. Suppose on a beautiful day, the Gaming category suddenly drops and your Portfolio is only full of Gaming tokens, then it is really a disaster.
⇒ Therefore, the selection of asset classes to invest is a very important factor and the beginning of portfolio management.
Profit and risk
Determining the expected return as well as measuring the risk of the portfolio will help you to allocate capital for each asset class in your portfolio appropriately. Besides, determining expected profit and measuring risk also helps you to take profits or cut losses appropriately.
Regarding how to determine expected and forecast profit in general, you can base it on the following factors:
- Compare Market cap with projects in similar category.
- Evaluate the cash flow on the ecosystem that the project builds.
- Based on the development team, backers.
For some assets with a long history of development and complete price data, it is possible to collect data and forecast based on several methods related to statistical probabilities (this part is quite technical, so I’m not sure if that’s the case). will be mentioned in another article of the Series).
For the same risk measurement, it will take a lot of highly technical methods that I will introduce to you later, in a simple way there will be 2 ways:
- Qualitative: Based on the fundamental analysis and forecast of the Protocol, you can estimate how much the price can drop to the bottom (for example, the market cap of the token will decrease to equal the project’s Treasury in the future). worst case). In addition, there are many other types of risks that can be assessed qualitatively such as Bank run, Rug Pull, Smart contract exploit, etc.
- Quantitative: In traditional finance, this method is very popular because the asset classes have a lot of historical data to do the analysis.
Learn more: Rug-pull & Exploit – The Dark Land of the Crypto World
⇒ In short, determining the expected return and risk will allow us to allocate investment capital in a reasonable and optimal way.
Basically this category will include:
- 60% are houses (invested with a leverage of 4.5 – 5 times), the average profit is 10%/year.
- 30% allocated to a stock fund in the UK with an average return of 8%/year.
- The remaining 10% is BTC (taking the end of 2016 price of $950) with a return of 308%/year.
As such, 90% of the portfolio’s assets will be allocated to fairly solid asset classes with very stable annual growth.
⇒ Profit if losing BTC will be 0.6*10% + 0.3*8% = 8.4%/year.
However thanks to BTC which has a very impressive ROI hence the return of the portfolio is 39.2%/year.
So we’ve got a very secure profitable portfolio. The figure of 8.4% or 39.2% may seem low at first glance, but with a large amount of capital, this profit is quite significant. Not to mention that it doesn’t take long to manage your portfolio and can focus on your own main work.
3 basic steps to setting up an investment portfolio
This process will include 3 steps: Planning, Execution and Feedback.
The first step is Planning, in this step you will need to determine the following factors:
- Portfolio objective: Determining the goal will help you have a clear destination to serve for the following steps such as selecting assets in the portfolio, allocating capital or investment time, etc. must match the ability and knowledge that you have in the market.
- Risk appetite: Determining your risk appetite will make choosing investment assets easier.
- Timing of Investment: Similar to determining risk appetite and portfolio goals, investment time horizons are also essential in financial planning. A long investment period will usually have a lower level of risk than a short investment period with the same goal.
- Necessary liquidity: In a simple way, if you have small capital, participating in retroactive, airdrop or IDO with a moderate amount of allocation will help you increase your portfolio very quickly. But for people with large capital, the profits earned from the above activities are almost insignificant, they will have to have another way of allocating capital to match their account.
The second step in portfolio construction is Execution (or execution). In this step, you will be based on the Planning step with the elements of asset classes in the portfolio, profit and risk as I mentioned above.
The goal of this step will be to help you come up with the most suitable investment portfolio to optimize profit and risk allocation.
The last step is Feedback, because the financial market in general and crypto in particular is always volatile, so regular monitoring, evaluation and reallocation of capital is always necessary.
Some personal experience in portfolio management
How have I allocated my investment assets?
In this section, I will share with you my portfolio in the Crypto market as well as a few personal principles in portfolio management. Hopefully this can be a source for you to refer to in building your own portfolio.
Currently, my list is quite similar to the example I gave in the above part of the article, specifically including:
- Platform Blockchain Coins.
- Launchpad tokens.
- Gaming NFTs.
- Cross-chain Bridge.
- And of course, it is indispensable for Stablecoins
In addition to the reasons that I have given above, my portfolio also has a Cross-chain Bridge because now there are many ecosystems under development, so liquidity bridges between other Blockchains. each other is very important.
In addition, there is another reason why I hold blockchain platforms even though the expected return is not high right now, that is because I receive many incentives from the ecosystem.
- Usually Protocols will have Liquidity Farming programs that pair Farm with the underlying Blockchain coins ⇒ Hold will be able to Add Pair to Farm taking advantage of the very high initial APY.
- Some coins like LUNA when holding and staking will receive a lot of Airdrop, or like Polkadot, DOT can be used to participate in Crowloan.
Regarding the allocation of capital in Crypto, I simply split it evenly because my asset classes in other markets have been calculated for risk allocation.
A few principles that I apply to the Crypto category above:
- Money always has to work, I rarely keep tokens in my wallet, but will always try to find Yield sources to do Farming even with Stablecoins (of course they will calculate costs like IL or Gas Fee) .
- Do not let your entire Fund concentrate on a certain Blockchain or Protocol. Since protocols always have smart contract risks, it is quite dangerous to leave the entire fund in one Protocol.
- Use your own wallet to participate in Retroactive or Airdrop programs.
- Monitor and update market information regularly and continuously to be able to reallocate capital appropriately.
What has scientific portfolio management helped me achieve?
Personally, I have a portfolio that includes quite a few asset classes in different markets. Although I am quite young, I do not allocate most of my assets to the Crypto market like many friends I know.
This may cause my profit to be lower during the Bull run season of the Crypto market, but in return, my investment process is quite comfortable because I do not have to worry too much if the Crypto portfolio fluctuates. strong.
When I have a comfortable mind and an investment process, I will have more time for research as well as learning new skills and knowledge.
The financial market always has a lot of opportunities, so having a scientific investment portfolio, a specific plan, a solid knowledge base, and a comfortable mentality will help you achieve your goals. long-term financial goals.
Thus, through the article, I have introduced you to the most overview on how to build and manage an investment portfolio in a scientific way.