Crypto Portfolio Construction: Build a Diversified Portfolio That Performs
Picking good coins is only half the battle. How you combine them matters just as much. Portfolio construction is the art and science of allocating capital across assets to optimize return for your risk tolerance. This comprehensive guide covers every major approach: market cap weighting, equal weight, risk parity, momentum, and core-satellite. Build portfolios that match your goals.
- Portfolio construction = how you allocate capital. Weights matter as much as picks.
- Market cap weighting tracks the market passively. Simple, low maintenance.
- Equal weight provides more diversification but requires more rebalancing.
- Risk parity allocates by risk contribution, reducing overall portfolio volatility.
- Core-satellite combines stability (BTC/ETH) with alpha-seeking satellites.
Portfolio Approaches
Click through different portfolio construction approaches to understand their characteristics:
Weight holdings by market capitalization. Larger coins get larger allocations. Simple, tracks the market, minimal decisions. The "index fund" approach to crypto.
Allocation
BTC 60%, ETH 20%, Others 20% (proportional to market cap)
Rebalancing
Quarterly or when drift exceeds 5%
Pros
- ✓Simple to implement
- ✓Low maintenance
- ✓Captures market beta
- ✓Low turnover
Cons
- ✗Concentration in few assets
- ✗No alpha generation
- ✗Overweight overvalued assets
- ✗Limited downside protection
Why Portfolio Construction Matters
Two investors pick the same coins but allocate differently:
- Investor A: 90% in one altcoin, 10% in BTC.
- Investor B: 60% BTC, 25% ETH, 15% alts.
Same picks, wildly different outcomes. Investor A might 10x or lose 90%. Investor B has more stable returns with less extreme scenarios. Construction determines risk profile.
Allocation Approaches
Market Cap Weighted
Weight holdings proportionally to market cap. BTC is ~50% of crypto market, so it gets ~50% allocation. Simple, tracks the overall market, minimal decisions.
Best for: Passive investors who want market exposure without active decisions.
Equal Weighted
Same allocation to each asset regardless of size. If you hold 10 coins, each gets 10%. Provides more diversification and small cap exposure.
Best for: Investors who want true diversification and believe smaller coins will outperform.
Risk Parity
Weight by inverse volatility so each asset contributes equal risk. Low volatility assets (BTC, stables) get higher weights. Results in lower portfolio volatility.
Best for: Risk-conscious investors seeking better risk-adjusted returns.
Momentum
Overweight recent winners. Rank assets by 3-6 month returns, allocate more to top performers. Captures trending assets.
Best for: Active investors comfortable with higher turnover seeking alpha.
| Approach | Complexity | Rebalancing | Best For |
|---|---|---|---|
| Market Cap | Low | Quarterly | Passive investors |
| Equal Weight | Low | Monthly | Diversification seekers |
| Risk Parity | Medium | Monthly | Risk-conscious |
| Momentum | Medium | Monthly | Alpha seekers |
| Core-Satellite | Medium | Variable | Balanced approach |
Rebalancing Strategy
As prices change, allocations drift. Rebalancing brings them back to targets.
Calendar Rebalancing
Rebalance on fixed schedule: monthly, quarterly, annually. Simple to implement. May miss significant drift between dates.
Threshold Rebalancing
Rebalance when any position drifts beyond threshold (e.g., 5% from target). Responds to market moves but requires monitoring.
Rebalancing Costs
Every rebalance incurs fees and potentially taxes. Don't over-rebalance. Find balance between maintaining targets and minimizing costs.
Managing Portfolio Risk
- Position limits: No single position >25% (or your threshold).
- Correlation awareness: Most crypto is highly correlated. Don't assume alt-heavy portfolios are diversified.
- Cash allocation: Keep some stables for buying opportunities and reducing volatility.
- Drawdown limits: Define maximum acceptable drawdown. Have a plan if hit.
Frequently Asked Questions
What is portfolio construction?
Deciding how to allocate capital across assets. Which coins, what weights, when to rebalance. The goal is to optimize return for your risk tolerance—not just pick winners but build a portfolio.
What is market cap weighting?
Allocating proportionally to market cap. BTC has the most, so it gets the largest weight. Simple, tracks the market, minimal decisions. The "index fund" approach to crypto.
What is equal weighting?
Same allocation to each selected asset regardless of size. More diversified, gives small caps more exposure. Requires more frequent rebalancing as assets drift.
What is risk parity?
Weighting by inverse volatility so each asset contributes equal risk. Low vol assets get higher weight. Results in lower portfolio volatility and often better risk-adjusted returns.
How often should I rebalance?
Depends on approach. Market cap: quarterly or when drift >5%. Equal weight: monthly or when any position drifts 25%+. Risk parity: monthly to recalculate volatilities.
What is the core-satellite approach?
Core holdings (BTC/ETH) provide stability and market exposure. Satellite positions (smaller alts, active picks) seek alpha. Typically 60-70% core, 30-40% satellites.
How many assets should I hold?
For diversification benefits: 5-15. Fewer than 5 is concentrated risk. More than 20 becomes hard to track and dilutes conviction bets. Quality over quantity.
Should I include stablecoins in my portfolio?
For risk management, yes. Cash allocation (stables) lets you buy dips and reduces drawdowns. In risk parity, stables get significant weight due to low volatility.
What is momentum investing in crypto?
Overweighting recent winners, underweighting losers. Momentum tends to persist in crypto. Monthly reranking based on 3-6 month returns. Higher turnover but potentially higher returns.
How do correlations affect portfolio construction?
Crypto is highly correlated internally—most coins move together. True diversification requires uncorrelated assets (stables, cash, perhaps traditional assets). Don't expect alt-heavy portfolios to be "diversified."