How To Diversify Your Crypto Portfolio and Why It Matters
Without a doubt, cryptocurrencies are profitable investment options. They have historically outperformed other assets, producing millions of successful investors in the process. As a result, many have shifted their focus to the crypto space, including leading crypto coins such as Bitcoin and Ether in their portfolios.
Every investor’s primary goal is to maximize profits while minimizing risks, which is why they set investment goals and employ a variety of strategies to capitalize on market trends. Investors may allocate their funds to a variety of asset classes as part of these strategies. The idea is to invest a varying percentage of your capital in multiple assets so that a drop in prices does not significantly reduce your profitability. This strategy captures the essence of portfolio diversification.
What is crypto portfolio diversification?
Diversifying your crypto portfolio is the act of investing your money in various crypto projects to reduce risk if one or more projects perform poorly. Implementing a diversification strategy also allows you to achieve the best possible returns even when some of the portfolio items perform poorly.
Savvy investors understand that putting all of their eggs in one basket is risky. If you are a small-scale investor, you may be better off investing in two or three cryptocurrencies. However, if you want to build a sizable portfolio, two to three coins will not suffice.
How to diversify your crypto portfolio?
Here are some of the best crypto diversification strategies:
Type of cryptocurrency
Because of its basic approach, this is a common diversification strategy. The idea here is to invest in various types of high-performing cryptocurrencies. Different crypto projects have different foundations and technologies that power them. This gives you the option of selecting those that correspond to your investment objective.
You can choose from privacy coins, altcoins, and tokens. When employing this strategy, you must research various aspects such as cryptocurrency prices, past trends, and future potential.
Diversify by industry
Invest in a diverse set of coins that can be used to solve issues in various industries. This will assist you in mitigating the negative effects on your investment in crypto-unfriendly policies and events. Make sure you conduct thorough research and invest in both stable and rapidly growing businesses. You should also consider overall profitability and globally competitive industries such as medicine and finance.
Remember not to invest your funds in a project about which you know nothing or very little. Before making a leap, spend some time researching and learning about the industry.
Diversify by timing
Although it may appear to be a new concept, time diversification has been around for quite some time. When done correctly, it is proven and dependable. This strategy requires you to time the market and acquire your crypto assets at the right time.
While it is impossible to completely eliminate market risk when investing, you can enhance the value of your portfolio by being selective about when and where you invest. Diversifying your investments by timings is basically an interval-based investment strategy. All you have to do is set aside specific amounts of money to invest in your chosen tokens at specific times.
This way, when prices are low, it’s a good time to invest in new cryptocurrencies, and when things are good, and prices are high, you’re in a great position to sell and profit.
Diversify by geography
Another strategy is to invest in cryptocurrency projects from around the world. Depending on your preferences and risk tolerance, you can mix and match blockchain projects from the United States, Europe, and Asia.
Make sure that all of your funds don’t go to crypto projects in the same region or country — do extensive research on the performance of crypto projects in various parts of the world. This will protect your investments from regulatory uncertainty and give you another way to balance your diverse portfolio even in volatile market conditions.
The use cases
Many inexperienced investors make the mistake of directly comparing crypto coins. It is not only inaccurate but also misleading to compare them in this manner. In terms of use cases, cryptocurrency coins differ. Bitcoin, for example, was created to be a virtual currency, whereas Ripple was created to facilitate payment transfers in financial institutions such as banks. Ethereum, on the other hand, is at the heart of DeFi protocols and smart contract technology.
Unless you have a compelling reason to put all of your eggs in one basket, a well-balanced portfolio should cover a variety of use cases.
Here’s a rundown of the most common cryptos and their use cases.
Bitcoin — Store of value & payment rail
Bitcoin Cash, Stellar, Dash — Payment
Ethereum, Cardano, Tron, and NEO — World computer
Tether, Dai, and PAX — Stablecoins
Analytical approach
The approach is a slightly complicated diversification strategy that varies depending on the investor. Diversify based on your funds, risk tolerance, and cryptocurrency market swings.
You can mix relatively stable and risky cryptocurrencies. Note that relatively stable crypto projects are not always safe; rather, they are more stable than alternative options. Ethereum and bitcoin are the most popular cryptos for safe investments.
You can allocate 60 percent of your portfolio to relatively stable options, with the remainder going to moderately risky crypto projects, say 30 percent, and 10 percent to risky options.
Why should you diversify your crypto portfolio?
The following are the primary reasons why you should consider diversifying your portfolio:
The crypto market is highly volatile. Diversification protects against unexpected negative market swings.
Due to price jumps.
It increases the chances of your cryptocurrency investment prospering.
You can’t rely on a single cryptocurrency, such as Bitcoin, to provide good returns.
It enables you to make the most of multiple coins that are performing well at the same time.
Conclusion
Diversification is a great risk management strategy that many investors use in both crypto and traditional assets. While it will not protect you from a market-wide correction or a bearish cycle, it will reduce your risk if one of your portfolio assets exits the crypto market or has a poor run.
As a result, keep in mind that investing is risky, but risks can be managed to some extent. You can significantly reduce the impact of global slashing events on your portfolio by making smarter investments.
Examine your portfolio to see if it needs to be diversified. If it does, make the wise decision to implement a diversification strategy that works for you.
