Altcoins & Memecoins – Appropriate Risk Capital Allocation

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13 Jun 2024
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Portfolios Are Designed
Many investors buy coins that catch their attention, or that others are buying, without considering portfolio construction. As a result, most altcoin portfolios are simply the result of buying sprees, with little to no attention given to the design and construction of an actual portfolio. An effective portfolio is a well-thought-out and designed creation, not simply the accumulative result of unbridled purchases.
Portfolio construction is a topic I have touched on a few times in the past. It’s an essential aspect of risk management and should not be taken lightly. For example, a portfolio exposed entirely to memecoins can be destroyed in a serious market correction. Furthermore, many memecoins have a short shelf life. In other words, a few days or weeks of upward motion is eventually met with a complete collapse.
Spend a little time on Dexscreener and see how many rug pulls and failed projects enter the memecoin space daily. It’s the murder capital of the Crypto World. Financial lives are destroyed here at an alarming rate. However, amongst the “violence” reside tremendous opportunities, which attract so many investors, regardless of their experience. However, opportunity must be balanced against risk.
Risk Profile
This is where portfolio construction enters the picture. However, a portfolio cannot be designed without first understanding the risk profile of the individual in question. There is no one-size-fits-all portfolio blueprint. Investors need to ascertain their desired outcome or goal regarding a particular portfolio. Many investors have multiple portfolios with varying risk profiles and capital allocation.
I have a standard portfolio that I usually suggest to newcomers. OGs are well acquainted with the volatility of the Crypto market. However, newcomers are often shocked and gripped with fear by a 20% correction in the Bitcoin price, never mind altcoin corrections. The following is my suggestion for newcomers:

  • Bitcoin/Ethereum – 70%
  • Blue chip altcoins – 15%
  • Top 100 altcoins – 10%
  • Micro-caps & memecoins – 5%

Such a portfolio is a good starting point for newcomers. The percentages can be revised at a later stage. Remember, a 100X return within the micro-cap or memecoin allocation, though it is a small allocation, can easily double or triple your entire portfolio value. A move like this would warrant a modest increase. This is where investors often get carried away and instead of a modest adjustment, enter Degen mode.
In such a scenario, an increase from a 5% allocation to 10%, or even 15% would be an ideal ratio adjustment. However, overconfidence will often deceive an investor to increase their risk allocation to 70% or more after a big win. The average Crypto investor looking to build long-term wealth should remain within 20% regarding micro-caps and memecoins.
Those looking to generate larger and more immediate gains can choose to bump this number up. However, investors in this category should be well acquainted with the risks associated with the micro-cap and memecoin market. Something I have mentioned previously is to generate passive income for risky investments such as micro-caps and memecoins, and in so doing, remove the element of actual loss.

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Final Thoughts
An investor staking Polkadot at approximately 17% APR can skim their staking rewards every month or two. This capital can then be allocated to risky investments without any real risk involved, after all, it’s essentially free money. Creative ideas are another way investors can increase exposure while reducing risks. Ensure you put a decent amount of thought and planning into your portfolio.
Investors who do this effectively will fare much better than the rest of the market. Once again, a disciplined approach is always best. Anyway, that’s it for this one. See you next time!

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Disclaimer
First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.
This article was first published on Sapphire Crypto.



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