How (and Why) To Build a Strong Crypto Portfolio Allocation


Jacob Sansbury

Jacob Sansbury

Tue Jan 10 2023

7 min

How (and Why) To Build a Strong Crypto Portfolio Allocation

Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.

What Is Crypto Portfolio Allocation?

Allocation refers to how you deploy your investment capital across crypto assets. Depending on the investing strategy, different crypto assets are assigned percentages to make up 100% of your portfolio.

For example, if you have $1,000 to invest in cryptocurrency, you might choose an allocation of 50% Bitcoin and 50% Ethereum. You would then allocate $500 to both tokens.

If one token outperforms the other, you would have to exchange one for the other to rebalance your allocations back to 50/50.

Of course, intelligent crypto investors don’t just pick two assets, dump all their capital, and forget about it. Successful crypto portfolios use a combination of asset allocation strategies that change based on market data and events.

Why Are Diversified Portfolios Important?

A diversified investment portfolio can mitigate the risk of underperforming assets. It reduces your points of failure. This is important to consider because crypto markets have high volatility. Assets can sharply decrease in price overnight.

Say your entire portfolio is composed of two assets. If one asset drops 50%, your whole portfolio will decrease by 25%. That’s not a well-balanced crypto portfolio.

Another way to diversify is by allocating capital to different asset classes. Asset classes include payment tokens, utility tokens, mid-caps, and stablecoins.

A well-balanced crypto portfolio takes your risk tolerance into account by not over-allocating into one asset. Portfolio management requires rebalancing your portfolio, so you only have up to 10% of your portfolio in a single asset. It could also mean keeping a % in stablecoins.

Another reason diversification is essential is it gives you exposure to the upside of cryptocurrencies. You may miss out on investment opportunities elsewhere if you have all of your cryptos in stablecoins or just Bitcoin.

Beginners should understand different cryptocurrency portfolio allocation strategies to diversify and protect their capital.

How Can You Diversify Your Crypto Portfolio?


What Are Stablecoins?

Stablecoins like Tether (USDT), USD Coin (USDC), and DAI are cryptocurrencies pegged to the US dollar. Stablecoins are a vital tool to hedge portfolio risk during volatile market conditions.

However, just because stablecoins are pegged to the dollar does not mean they are risk-free. To understand the risk, you need to know the underlying fundamentals that keep the token’s value at one dollar.

Crypto assets, cash, and bonds back USDT and USDC. You could go to the issuer, the Tether Foundation, for USDT Circle for USDC and redeem your tokens for real dollars.

Even though Tether is the third highest-valued cryptocurrency by market cap, there is speculation that they don’t have enough cash to redeem every token in the case of a bank run. They have been subject to many US Government investigations.

Tokens back the stablecoin DAI in vaults on the Ethereum blockchain. This means you can check the reserves all on-chain.

Issuers like Circle have products for stablecoins pegged to other fiat currencies like the Euro (EUROC). But most of the time, when you hear stablecoin, people refer to tokens pegged to the US dollar.

How To Invest in Stablecoins?

Stablecoins can be purchased on a centralized exchange (CEX) like Coinbase or Binance. Stablecoins like USDC, USDT, and DAI can also be exchanged on Decentralized Exchanges (DEX) like Uniswap or Sushiswap.

Stablecoins can even earn yield like bonds. Yield amounts vary by platform so check your crypto exchange to see what stablecoin yield products are available.

If you want to earn a yield on stablecoins, it’s essential to make the platform you’re using is federally insured in case the stablecoin collapses due to an exploit, regulation, or technical failure.

Payment Crypto

What Are Payment Crypto?

Payment tokens use smart contracts to transmit value across blockchains. Bitcoin, Ethereum, Litecoin, and Monero are examples of payment tokens.

Ethereum is a public blockchain meaning anyone can query your transactions, while Bitcoin and Monero are private blockchains. This means the users’ transaction amounts are confidential.

Payment tokens can be used to pay for goods and services. Many people even are paid their salaries in payment tokens.

How To Invest in Payment Crypto?

Using a crypto wallet, you can exchange dollars for payment tokens on cryptocurrency exchanges like Coinbase or Binance or buy them on decentralized exchanges like Uniswap.

You can even earn payment tokens in exchange for securing the network by setting up your own Bitcoin, Eth, or Monero node. This is called mining.

Mining can be technically intensive, and the required hardware can be expensive. You can go through a third-party mining company like River financial or Rocket Pool, where you give them your capital, and they use it to mine on your behalf for a small fee.

Central Bank Digital Currencies (CBDC)

What Are Central Bank Digital Currencies?

Central Bank Digital Currencies, or CBDCs, are digital assets issued by a central bank backed by a specific country’s fiat currency.

Because CBDCs are issued and backed by central banks, they might not even need a blockchain to be issued. Countries could use a traditional database to track accounts. It’s essential to remember CBDCs may not necessarily take the form of cryptocurrencies but are still digital assets.

How Can You Invest in Central Bank Digital Currencies?

Right now, there aren’t any CBDCs launched by central governments yet. But countries like China, Canada, and South Korea are in the process of designing their own. Once issued, the assets should behave like traditional currency markets.

Utility Tokens

What Are Utility Tokens?

Utility tokens are cryptocurrencies that enable the holder to perform an action. You can redeem utility tokens for physical or digital goods. The utility of the token could also be a discount. For example, reduced trading fees on a crypto exchange if the user holds 100 exchange tokens. An example of a utility token is BNB.

You might invest in utility tokens if you believe in the technical use cases of crypto besides currency. The utility is what gives the token value, not price speculation.

How To Invest in Utility Tokens?

You can purchase utility tokens on centralized or decentralized exchanges. They can also be automatically invested in using Pluto trading strategies.

The best way to research utility tokens is by reading their whitepaper. A whitepaper is an in-depth report of how a token is created, distributed, and used.

What Are Some Types of Portfolio Allocation?

1. Conservative

A conservative portfolio allocation would be heavy on stablecoins and major cryptocurrencies like Bitcoin and Ethereum. Depending on risk tolerance, the split between assets could be 70% stablecoins and 30% majors or higher. During a bear market, that percentage of stablecoins would be much higher.

If you are very bullish on crypto, your risk appetite is probably higher than most. If you believe crypto isn’t going away, you will want exposure to majors like Bitcoin and Ethereum. In this case, a conservative portfolio might be 20% stablecoins, 60% BTC + Eth, and 20% mid-caps and altcoins.

In this type of portfolio allocation strategy, you are exposed to the crypto space in general while also placing some bets on tokens with high upside.

2. Aggressive

An aggressive portfolio allocation would have very little allocated to stablecoins. In trading, this is called being “risk-on” and is typical during bull markets.

An aggressive portfolio could also mean investing in tokens with a high upside. The power law is an investing theory standard in Venture Capital.

The strategy is to make many small bets on crypto investments with a chance to earn multiple high returns. In theory, because of the numerous high returns, you only need a few winners to profit.

Because cryptocurrencies can be invested in at shallow values, there is a high upside opportunity. The downside of this opportunity is that many crypto projects that appear to have high upside are also high-risk.

Even in an aggressive crypto portfolio, it’s essential to keep a targeted % in stablecoins. If your investments perform well, you must profit from stablecoins to maintain that ratio. This also allows you to buy oversold assets after sharp price declines.

3. 80/20

A standard 80/20 portfolio is allocated 80% to equities and 20% to bonds. In a crypto 80/20, this could be 80% allocated to majors, utility tokens, and governance tokens and 20% to stablecoins.

The 80/20 portfolio is a good starting place. Depending on your outlook and market conditions, you may slide the allocations to 70/30 or even 90/10.

4. Mid-Caps

Mid-caps have more short-term upside than significant cryptocurrencies. If you look at the top tokens by market capitalization on a website like CoinMarketaCap, you’ll notice that the top 50 coins all have market caps of a billion dollars or higher.

Under a mid-cap investment strategy, you are betting that a crypto token with a market cap of a few million dollars could someday reach the top 100 or even the top 50.

To make it simple, the gains of a token going just from $50 million to $500 million market cap are higher than Bitcoin, adding on another $100 billion of market cap.

While this type of rise is not common, it’s not unheard of in cryptocurrency markets. The risk of investing in smaller mid-caps is also higher as, over time, they have a higher risk of going to zero.

5. Long-Term

A popular long-term strategy is called dollar-cost averaging or DCA. Dollar-cost averaging is when you buy a set amount of crypto at regular intervals regardless of price. For example, you could purchase $100 of Bitcoin monthly to gain long-term exposure to that asset.

The point of DCA’ing is to build a prominent position over time without the emotional ups and downs of checking the price before buying. You can automate these buys to remove the emotional component using a service like Pluto or Robinhood.

You may even have different allocation strategies that work together in the long term. For example, you could use an aggressive portfolio to take profits in stablecoins and then slowly accumulate or DCA Bitcoin.

The Bottom Line

When crafting your crypto portfolio allocation strategy, reacting to market changes is essential. Depending on market conditions, you may want to switch from a conservative approach to an aggressive one or vice versa.

Instead of manually changing your portfolio allocations, Pluto allows you to create automated investment strategies that take the emotion out of trading. You can even set price and indicator thresholds in Pluto that trigger a portfolio rebalance.

Ready to up your crypto game? Check out some free data-driven investment strategies on Pluto today. And if you just want some practice try your hand paper trading with our strategies.


What is a Central Bank Digital Currency (CBDC)? | Investopedia

Which Countries Have CBDCs? | Gemini

Governance Token Vs Utility Token – Key Differences | 101 Blockchains

What AngelList Data Says About Power-Law Returns In Venture Capital | AngelList