Here it is, the perfect crypto portfolio for investors

Instead of trying to find the next trending meme coin, the best way to set up a successful crypto portfolio is by allocating funds to different sectors of the industry.

The true number of sectors in crypto is a bit subjective and not as clear as in the stock market. But after much research, I envision the most long-term value coming from three sectors: payments, smart contracts, and layer 2 blockchains.

Image source: Getty Images.

A disclaimer

This division of sectors takes into account a few factors. First, the goal is to minimize risk and increase long-term potential (sorry, Dogecoin fans). This means investing in cryptocurrencies with a proven track record and that provide real value to the industry.

Second, consideration of the current landscape must be taken into account to project which cryptocurrencies have the most upside. This involves some speculation, but analysis of current trends and demand can help investors determine which cryptocurrencies fit this criteria.

Third, and finally, there are some cryptocurrencies that could have made this list, but they lacked some basic qualities such as high throughput, decentralization, security, or offering a unique and novel solution.

The original payment crypt

No crypto portfolio is complete without some form of allocation to Bitcoin (BTC -1.26%). The world’s most valuable cryptocurrency was invented in the wake of the Great Recession in 2009 as an alternative to fiat currencies. With Bitcoin, users can protect their wealth because the total supply of the currency is limited to 21 million coins. Unlike fiat currencies, which continue to inflate, Bitcoin has grown into an attractive store of value for those looking to preserve wealth from inflation-prone fiat currencies.

In addition to its use as a store of value, Bitcoin was also created as a way to bypass the current ways of transferring money. With Bitcoin, money can be sent to anyone in the world over the internet without the need for a bank or wire company.

For these and a number of other reasons, Bitcoin remains the most valuable cryptocurrency despite the fact that thousands of others have existed since its creation. Today, the total value of Bitcoin is more than 40% of all value in crypto. Because of this overwhelming share, usually as Bitcoin goes, so does the rest of the market.

The undisputed smart contract manager

While Bitcoin laid the foundation for crypto, Ethereum (ETH -1.47%) took it a step further. With its invention of smart contracts, Ethereum offered users a blockchain that could be programmed to self-perform preconfigured actions when certain criteria are met.

Thanks to Ethereum, completely new use cases arose. Lending, loans, decentralized finance, NFTs and other decentralized applications can all be developed as a result of the invention of smart contracts.

Due to this news, Ethereum is the second most valuable cryptocurrency and currently accounts for almost 20% of all value in crypto. Despite the fact that other smart contract blockchains have been created in recent years, Ethereum still dominates its so-called competitors, making it a great long-term investment.

To quantify this, we can look at a metric known as total value locked (TVL). TVL is used as a gauge to measure and compare the value a blockchain supports in decentralized finance (DeFi), one of the primary uses for smart contracts. Today, Ethereum supports nearly $30 billion, more than 58% of the value in all of DeFi. The next closest is Tron with a paltry 10% and just $5 billion. It’s really not even a close race.

Layer 2 front runner

As one of the most widely used blockchains in the world, Ethereum’s network gets bogged down at times, leading to increased fees. This is where the use of Layer 2 blockchains comes in.

Layer 2 blockchains process transactions on their own network and then add them in bulk back to Ethereum. This gives users the best of both worlds — fast speeds and low fees while maintaining compatibility with Ethereum and its high levels of decentralization and security.

While some predict that Ethereum’s dominance will be uprooted by another smart contract blockchain, the more likely scenario is that the use of Layer 2 blockchains increases as users look to continue using Ethereum. In preparation for this reality, there is a familiar arms race among Layer 2 blockchains jockeying to become the premier Ethereum scaling solution.

There are a handful of Layer 2 blockchains and solutions on the market today, however Polygon (MATIC -3.47%) stands out from the crowd. Compared to other Layer 2s, Polygon has a rare combination of long-term potential, proven utility for real-world applications, and an ability to provide developers with a flexible and robust environment. As a result of this trifecta, Polygon finds itself at the forefront of the Layer 2 race.

With Polygon, users can still create NFTs, decentralized apps, blockchain-based games, Web3 applications, and much more, just at a cheaper price and much faster speeds, while maintaining compatibility with Ethereum. Due to this functionality, a number of well-known companies such as e.g Disney, JPMorgan, Starbucks, Coca Colaand Nike have all used blockchain in different ways as they begin to develop blockchain-based business models. While there are a handful of Layer 2 solutions out there, few have achieved as much as Polygon in such a short amount of time.

A final word

Even if the exposure is good, there is something called overexposure and this can be detrimental to your portfolio. Keeping it simple and finding the right balance can help reduce potential losses, but also help ensure returns are maximized.

By focusing on these three cryptocurrencies, your portfolio gains exposure to more than 60% of the value in all crypto due to Bitcoin and Ethereum’s disproportionate share, while providing exposure to upcoming trends Polygon is pioneering like gaming, DeFi , and Web3 . With this combination, your portfolio should reap the benefits for years to come.