Micro-Caps - Identification, Portfolio Allocation & Risk/Reward
What Is A Micro-Cap Altcoin?
Generally speaking, altcoins with market cap valuations of less than $50 million, or even $100 million are considered micro-caps. These are typically projects that are still very much in development and are in the process of establishing a user base, as well as a clearly defined brand. These projects can often readjust and reshape their primary focus and vision during development. Many of these projects also tend to fail, which makes this an extremely high-risk investment arena.
Micro-caps also tend to have exceptionally low trading volumes, which is at the heart of Micro-cap investment success. If a Micro-cap project goes on to experience even modest success, the surge in volume has no option but to simultaneously pump the price of the token. If a token performs relatively well with a daily volume of $3000, what do you think will happen when that volume increases to $100K, or even $50K? That’s right, the token value will experience an enormous spike.
This is why investing in micro-caps is an absolute must. However, due to the enormous risks associated with this particular sector, correct allocation, in terms of portfolio construction is imperative. This is where many investors tend to be somewhat foolish, or perhaps ignorant. Either way, the outcome remains the same regardless of the motivation. So, how does an investor gain access to potential gains, while simultaneously protecting their portfolio?
Healthy Portfolio Allocation For Micro-Cap Exposure
This is where, as an investor, you have to be on top of your game. You have to get your formula right! A poorly constructed portfolio is likely to become a poor portfolio. Portfolio construction and allocation are very much tied to the risk/reward ratio. In regard to micro-caps, the ratio is exceptionally high, and as a result, requires minimal investment in order to produce significant gains. Investors who navigate this particular niche need to be aware of the inherent risks involved.
Personally, I believe a healthy allocation level to be in the vicinity of 10% of one’s entire portfolio. More risk-averse investors can modify this benchmark, in accordance with their own particular risk profile. I would however suggest that one needs to remain above 3% in order to experience the benefits of such a strategy. It’s pointless to incur risk without ensuring that the potential reward is in harmony with the risk/reward ratio.
In the unfortunate and unlikely scenario of a complete failure, the maximum loss is now capped at 10% or 5% of your portfolio. Many new investors choose not to examine and study the risk aspect of their altcoin investments. As a result, many end up placing the majority of their portfolios at risk and often pay dearly for it. If a coin or token has tremendous upside potential, it is usually accompanied by significant downside potential.
Final Thoughts
This is the world of micro-cap investing. It’s definitely not for the faint of heart. However, that being said, it has the potential and ability to change lives. One really needs to analyze and study the risk/reward ratio prior to establishing an investment strategy. Simply throwing money at altcoins, and particularly, micro-caps is a sure way to get REKT. Practice effective and safe risk management, and remember to always do your own research. See you next time!
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.
