The AVG Blockchain Fund investment team details their 7-step methodology for investing in the cryptocurrency market.
At AVG Blockchain Fund we allocate a portion of our portfolio to cryptocurrencies traded on the exchanges. They are a tricky investment to add to your portfolio. It’s a hot industry, and what comes with that are the dangers of following shiny objects or the newest coin craze. But if you stick to a few simple rules, we hope that you too can start thinking about investing in cryptocurrencies in a strategic way—because your goal over time should be to achieve strong returns while reducing volatility.
Here are 7 steps to help you get there.
1. Balance your market cap exposure. While larger caps provide for better stability and liquidity, medium to small caps cryptocurrencies have higher growth potential.
2. Pick currencies with a higher disruptive potential. Although this is easier said than done, pick currencies with innovative protocols or platforms that are deployable in multiple markets with evidence of traction. With multiple markets and a wider usability, projects will improve their chances for success.
3. Don’t fear the newer projects. It is important to hold more mature currencies that have leveraged first mover advantage to gain scale, but you should balance your portfolio with newer projects. A lot of them are third-generation protocols that are tackling the issues that been surfaced by predecessors like BTC and ETH: scalability, security, privacy, transaction speeds, and more. These projects can potentially see more growth than the majors by displacing them as the protocol of choice or capture a new/different market.
4. Seek geographical diversification. This will limit your exposure to the regulatory risk of a single country or region. We select regions with the most active cryptocurrency markets and position our portfolio to capitalize on the growth of with concentrated exposure to each such region.
5. Minimize portfolio volatility. Our team reduces portfolio volatility by running an optimization model to identify less volatile currencies with higher return potential and group them into clusters at a range of risk/return ratio possibilities — we then proceed to diversify across the clusters.
6. Look for healthy transaction volume and circulating supply. Liquidity was an important consideration when our team selected currencies. Good indicators of that are daily transaction volumes, transaction volume trends, and circulating supplies of coins.
7. Add VC-style due diligence to your vetting process. We sought to pick projects with strong technical teams who are thought leaders in the blockchain community and who were associated with past successful projects. We pick currencies backed by projects that are run by stellar teams and backed by top venture and blockchain investors.
If you still don’t have any idea what cryptocurrencies are all about, perhaps this hilarious but diligent analysis below by comedian John Oliver will help.
The AVG Blockchain Fund is a network of enthusiasts investing in blockchain-connected tech and assets. If you would like to learn more about building a strong portfolio of blockchain investments, click here.