Diversifying your cryptocurrency portfolio is one of the most important aspects of investing and is often the difference between a portfolio that can reasonably maintain its value in a volatile market and one that simply cannot. Let’s dive into what exactly it is and why you should never YOLO your savings into one asset.

What is cryptocurrency portfolio allocation?

Cryptocurrency portfolio allocation, as the name implies, is dividing up your investment capital among various cryptocurrencies, with the similar goal of obtaining a balanced portfolio to diversify your portfolio and manage risk.

There are many different kinds of cryptocurrencies, but they can be broadly divided into two groups. First, there are "coins" that help run blockchains such as ETH, and then there are "tokens" that belong to specific projects or protocols that serve specific purposes within a protocol's ecosystem. And then, we also have the “moonshots” which are driven primarily by hype, but let’s not give it a group just yet.

There are also many different types of coins and tokens, with different characteristics and functions. Stablecoins, for example, have their value pegged to a certain asset (usually fiat currency), allowing you to gain exposure to the underlying asset through them. Non-fungible tokens (NFTs) are a sort of deed of ownership of some digital or real-world asset, while liquidity provider (LP) tokens are used to track contributions to lending, or "liquidity," pools.

While details about the different types of cryptocurrency are beyond the scope of this article, you must note that a well-balanced cryptocurrency portfolio should ideally contain at least a few of them. (yes, maybe some of the moonshots too, depending on how risky you wanna play it)

Cryptocurrency Portfolio Allocations - The Different Types

Now, of course, well-balanced cryptocurrency portfolios mean different things to different people. Maybe you’re someone who likes the degen side of things, in which case, allocating a small percentage of your investment to moonshots would make sense. Or maybe Bitcoin and Ethereum are the only things you’re confident in, which would totally make sense for someone who just wants to test the waters.

So, depending on your risk appetite, you can either choose an aggressive portfolio allocation strategy, medium risk allocation strategy or a super safe portfolio allocation. A typical allocation for a safe portfolio would look something like this:

  1. Bluechips (Bitcoin, ETH, top 10 coins) - 80%
  2. Medium risk (ecosystem coins) - 15
  3. Moonshots (hyped coins, DAOs) - 5%

Play around with the percentages till you find something that you’re comfortable with. The key here is to understand the impact of each type of investment on your portfolio, and how much it can move when you compare it to your entire portfolio.

Benefits of portfolio allocation

Now, let’s talk about why you should even have a plan! Even though it might require some leg work, the idea is to reduce risk and optimize your return no matter where the market moves.  Here is why you should diversify your portfolio:

Risk reduction

This is perhaps the single greatest benefit that portfolio allocation brings to an investment portfolio. By spreading your funds across various cryptocurrency assets with different price behavior, you're able to reduce the risk of a massive decline (aka crash) in the price of one or more assets crushing your entire portfolio.

A crypto portfolio that manages risk well will typically have several cryptocurrencies whose prices aren't highly correlated, that is – they react differently to market developments. Of course, bear markets affect this but you’ll find that some coins are able to hold up more than others.

Return optimization

Another big benefit of portfolio allocation is that it can help you maximize your portfolio returns. Some assets perform better than others at different times and in different market conditions (yeah, especially when Elon Musk comes on SNL). A well-balanced portfolio allows you to benefit from the growth in the value of assets that are performing well at any given time while mitigating the negative effects of the poorly-performing ones.

How Hedgehog can help you allocate your funds

Now, you're probably thinking: "I know I should take the time to allocate my crypto portfolio, but it sounds like so much work! And my crypto is scattered across so many different exchanges and wallets, how can I possibly keep up with them? "

Relax, we were once in your shoes, but thankfully, we have a solution! Welcome to Hedgehog.

Hedgehog is an SEC-certified robo-advisor and portfolio manager that has cool features like portfolio allocation, rebalancing, and management — all made simple and easy for you with just a few clicks. We support thousands of different crypto assets and hundreds of exchanges and crypto wallets — so whether your crypto is on Coinbase or Metamask, we got you covered!

So, how do we help in portfolio allocation and management? Let us walk you through it! We offer:

Support For 100s of assets

Remember we mentioned that Hedgehog supports hundreds of different crypto wallets? Yeah, so we let you track the assets you have in all these different wallets wherever they may be, whether on a centralized or decentralized exchange or in a hardware or paper wallet in your pocket! Hedgehog automatically syncs and updates these wallets' balances, aggregating all your data in one place (works like magic).

Real-life Tracking For All Your Coins

Secondly, And now that all your balances are synced, you can also take advantage of real-time updates! All in one dashboard that’s super easy to read. This makes it a lot easier to build and manage your portfolio than if you had to manually track all your holdings by yourself.

Quick and Easy Management of Your Portfolio

We’re working on a V2 version where Hedgehog can automatically rebalance your portfolio. Rebalancing your portfolio basically means changing the weightings (amount in proportion to the entire portfolio) of assets in your portfolio, thus diversifying your portfolio allocation AND keeping it well-balanced.  Hedgehog supports rebalancing for over 80 (and counting) assets, saving you the stress of having to do it by yourself.

You can even stack assets in your portfolio for easier customization and management with Hedgehog. Create custom stacks or just use one of our own to get going quicker!

Your Personal Crypto Assistant

We saved the best for last! Hedgehog can give you personalized information on how to allocate your funds and manage your portfolio. Hedgehog's smart (and friendly) robo-advisor can make recommendations for you about what assets to buy or sell based on your portfolio settings, identifying opportunities for profits, and hedging (see what we did there?) you from risk. That's not even the best part—these recommendations react to new market data and your portfolio's performance and change accordingly!

And there you have it! We hope you've been able to learn a few things about portfolio allocation and how Hedgehog can help you with it. Sign up with Hedgehog and let’s figure out the best crypto portfolio allocation strategy for you together!