- Crypto portfolio apps are great for keeping track of your investments, but their totals do not represent the truth
- The valuations in a portfolio represent a theoretical gain if you were able to sell all your tokens at the current price
- The liquidity of the assets within your portfolio can make a huge difference as to whether you can meet that valuation or not
It’s one of the great joys of a cryptocurrency bull run – waking up in the morning and checking your crypto portfolio app to see that each of your coins has been earning you a small fortune while you’ve been sleeping. Seeing your portfolio, and therefore your personal wealth, explode in a matter of hours gives quite the serotonin hit, especially for new entrants into the space. However, what you see on the screen can bear little resemblance to what your portfolio is actually worth. Confused? We’ll explain.
Don’t Believe Everything You Read
The important thing to realize about a crypto portfolio valuation is that rather than it being a true reflection of the value of your investments, it is in fact a representation of the value of those investments if you sold them all now at the current price. This notion suddenly makes your portfolio’s value a little more shaky, and it gets worse when you are dealing with low liquidity coins – you know, the ones that do 10x in a couple of days and convince you that you’re about to pay off the car.
We can use FYI as a perfect example of this. If you had bought 100 YFI tokens at $200 each when it first launched on Uniswap, you would have seen your $20,000 investment balloon to $3.9 million last weekend. Quite rightly, this is enough for anyone to crack open the champagne – after all you’re a millionaire, right? Wrong.
Don’t Forget the Liquidity
As we have established, the value of an investment in your crypto portfolio is a fictional valuation and only refers to what you would get if you were to sell all your tokens at that price. It doesn’t take into account how your holding compares to the liquidity on exchanges, or whether the desire is there for buyers to even take them off you.
If you had sent your 100 tokens to Binance, where the highest volume was to be found, ready to sell, you would have been horrified to see that, at best, you would have been able to sell 0.2 of a single YFI at the current price. If you were to try and market sell your 100 YFI tokens you would have crashed the price massively, ending up with a hugely reduced profit compared to what your crypto portfolio app told you you were going to get.
It is vital therefore to factor liquidity into the mix – if your coin is a Uniswap gem then the chances are you are going to have to scale out slowly to get anything like what your crypto portfolio app tells you it’s worth. With something like Bitcoin on the other hand you can be sure that you will get what your crypto portfolio app says your holding is worth.
Crypto Portfolio Apps Have Their Place
The key with crypto portfolio apps is to remember that what they tell you your investment is worth is not the value of your investment right now but instead is the potential valuation if you are able to sell all your tokens at that price. The more liquid your coin, the more chance you have of meeting your portfolio’s valuation.
Crypto portfolio apps are useful guides as to what your crypto holdings are doing, but they should be used as a guide of informing you when your sell targets have been met and not as a measure of how rich you are.