Investing in Small Cap Coins VS Large Cap Ones: Risk Tolerance
There are now more than 1,500 different cryptocurrencies, and as an investor, it can be exhausting trying to figure out exactly what to invest in. However, the first step you should make here is actually determining your risk tolerance. Risk tolerance is the amount of risk you are willing to take in order to make gains on your portfolio.
In most cases, younger people can take on more risk than older people, because they have more time available to them before they retire. Older people tend to be more conservative with their investments both because they have a larger nest egg that they are gambling with, and they will need the money much sooner.
In this article, we’re going to go over the pros and cons of investing in large or small cap cryptocurrencies. We’ll also discuss how you can use both of these asset classes in your portfolio together to get the best results for your money. However, first let’s talk about risk and how you can determine your specific risk tolerance. This will be important when trying to decide how much of your portfolio you should dedicate to which cryptocurrencies.
Are you risk averse?
When investing it’s important to find an approach that works for you. While smaller market cap assets do offer more opportunities, investing in them is not for everyone. Are you risk averse? If so then you may want to go with currencies that have a larger market cap. This will allow you to have a more hands-off investing approach.
If you are a very busy person or if you just don’t want to have to watch the markets or learn a lot about new projects, then this may be a good choice for you. This is particularly true if you find yourself having a heart attack every time an asset goes down for a bit.
However, if you don’t mind going with the flow and watching your holdings take a dive will not make you freak out, then you may be able to handle a little more risk. Investing in low cap altcoins is a lot of work, and you’ll need to be prepared to spend a good deal of your time researching these projects to find the best ones to put your money into. You may also need to watch your investments a little more closely.
The best way to invest however is to take a balanced approach. This option gives you the best of both worlds because you can make some very nice gains while still protecting yourself from total financial disaster. How much risk you want to take on is up to you, and there’s no hard set rule here, but it is important to identify your options and consider them carefully before making any large investments.
Small-cap coin investments
When someone says that they are investing in small-cap coins they are referring to assets with a low market capitalization. These coins or tokens are not yet proven in the market, and that means it’s more dangerous to invest in them. However, it also means that there’s a much bigger potential to make a large amount of money on these particular markets.
The reason being that there is still room for much growth potential. A small cap coin has yet to see its full potential reached. This particular cryptocurrency is likely still in the development stages, and they have not yet acquired a large audience.
If you are looking to invest in small market cap assets then you are looking for a project with potential that is not yet realized. This is easier said than done, and you’ll need to wade through many, many startups that just aren’t that great before you find your gems.
You may also need to be very quick in order to catch these new assets before everyone else. This means keeping yourself available on various websites or social media channels so you can keep an eye out for new and up and coming projects. Investors willing to take the risk on these new cryptocurrencies can see excellent growth in their portfolios.
How does this work? Well, these coins tend to be very low in price and very low in trading volume. That means it’s much easier for someone to come in and alter the price drastically just by producing a small amount of buying or selling activity. That’s exactly how people make money in altcoins, and you’ll need to decide whether to keep holding or sell and take profits.
Even if you fully believe in a project’s future, it might be a good idea to at least take some profits. Some people believe in taking half of the amount out for safe keeping when a cryptocurrency doubles in value.
When investing in small market cap coins or tokens, it’s important not to overextend yourself. Even a good startup with an excellent team can run into potentially devastating problems. For this reason, it’s important to diversify yourself to avoid big losses.
This is usually not difficult since most small-scale projects are also quite low in price. By evenly dividing your bankroll between these different startups and blockchain companies you can reduce your risk while still benefiting from the massive gains they are capable of.
Large-cap coin investments
Large market cap assets are the big ones that everyone already has or wants. This includes big-time cryptocurrencies like Ethereum or Bitcoin. It’s of course still very possible to make big gains on these cryptocurrencies as well, but it is not nearly as easy as it is with small-cap coins. When investing in a currency that is worth a penny it’s easy for it to fluctuate a cent or two on any given day. This can effectively double the price of your stack.
This is much more difficult for a large-cap currency, and it will require a dramatic event to happen for it to do so. However, it is not impossible. Bitcoin’s all-time high price was achieved in a very short time frame that surprised many holders.
Large market coins and tokens are however much safer bets for your money. These are much more established projects. In most cases, they already have working products, a user base, and big brand recognition. This keeps them from dropping quite as dramatically as coins with a smaller market cap would.
When an asset has a large trading volume it makes it much more difficult for people to trigger price fluctuations when buying or selling. A coin or token that has a daily trading volume in the billions will suffer much less from someone dumping or buying a few thousand dollars worth. This provides a good deal of stability that many people enjoy once a project gets to a certain level, and that can be a very good thing.
When building your portfolio you shouldn’t discount these types of projects immediately. While it is true that they have peaked much more so than other options, there’s still a place for them in your portfolio!
Cryptocurrency is still very new as far as financial markets are concerned, and even famous projects like Bitcoin or Ethereum still have room to grow. This growth will be slower and a little safer in most cases, but that’s the beauty of diversifying it literally gives you the option to have your cake and eat it too.
If an altcoin investment earns you a pretty penny, then it might be a good idea to diversify at least some of those holdings into something a little more solid. These large-scale projects will still give you plenty of growth potential, but your portfolio won’t be hit nearly as hard if one of your less proven projects turns out to be a real stinker.
This scenario can happen more often than you think. A coin may look like a winner this month, but then next month something unsavory surfaces and the whole thing goes south. By storing enough of your capital in large-cap currencies, this can be easily prevented. Keep in mind though that cryptocurrency as a whole is still volatile, and even high dollar assets can take an unexpected tumble.
In closing, when deciding whether to invest in small or large scale projects, you should really not assume it is a one or the other type of scenario. There are of course benefits to both approaches, and a healthy mix of both of them will give you a cryptocurrency investment portfolio that has a better foundation in the future.
If you use Cointobuy.io for your investing help, then you can even sort certain startups by their safety rating. The computer’s algorithm takes much of the work out of this for you, and projects are evaluated on several metrics to provide this number.
This can help you to identify which investments may be a greater risk than other options, and then you can distribute your funds appropriately to build a safer portfolio.