Why is it appropriate for a cryptocurrency trader's portfolio to be diversified? What are the various methods for diversifying a cryptocurrency portfolio?
Bitcoin is generally recognized as one of the best-performing assets of all time. Bitcoin has previously been named the best-performing asset of the decade, outperforming traditional financial instruments such as gold, stocks, and bonds. This cryptocurrency has already returned nearly 300 percent in the year 2020. We also saw a variety of retail investors, hedge fund managers, and asset managers diversify their trading portfolios in 2020 by adding a percentage of Bitcoin alongside bonds, commodities, and equities, among other things.
Though well-known cryptocurrency assets such as Bitcoin and Ethereum gained popularity in 2020, the digital currency space has expanded far beyond the top ten assets. More than 8000 coins have been introduced to the markets, based on various use-cases, properties, utility, and features.
Why Should Your Cryptocurrency Portfolio Be Diversified?
A diversified crypto portfolio is one that invests in a variety of digital currency tokens in order to reduce the chance of one or more failing to perform. Diversification's key purpose is to reduce the effect of negative incidents by not placing all of the eggs in one basket. When the price of Bitcoin plummeted by more than 50% in 2018, investors who bought during the 2017 bull run were dealt a harsh blow.
Investors may shield themselves from such harmful incidents through investing in several cryptocurrencies. Furthermore, a diversified cryptocurrency portfolio allows you to profit from coin price volatility by investing in cryptocurrency ventures at a low valuation that can produce huge returns. As a result, a well-diversified crypto portfolio helps to reduce risks while also increasing the likelihood of profiting from cryptocurrency investments.
How to Diversify Your Crypto Trading Portfolio: What is a Crypto Diversification Strategy?
Investors diversify their trading portfolios based on a number of variables, including personal interests. Crypto diversified strategies combine a variety of coins based on risk, property, token type, functionality, and other factors.
Diversification based on industrial – use case
Multiple use-cases from various sectors, including real estate, healthcare, banking, supply chain, governance, and more, are part of the blockchain landscape. The blockchain network is used to create decentralized applications for various use cases. The utility token used by these dApps is dependent on their ecosystem. The success or failure of the project determines the value of these altcoins.
Such altcoins, in addition to including secure assets like Bitcoin and Ethereum, enable a trader to invest in a blockchain project at a low price. Any of these ventures are expected to produce big returns in the coming years as technology matures. To take advantage of the long-term benefits of these ventures, investors should include any of these tokens in their cryptocurrency portfolio.
Diversification based on solution
Coins that promote new protocols, solutions in an established market, and service providers in the crypto and blockchain space are among the investors in this section of the strategy. New protocols, such as DeFi, crypto exchanges, wallet service providers, and other solutions in the cryptocurrency industry are possible. An investor will benefit from the growth of the blockchain ecosystem's supporting infrastructure by investing a portion of their portfolio in solution-based cryptocurrencies.
Furthermore, as the industry matures, such technologies are likely to gain considerable traction. Investors should take advantage of this potential for long-term investment and trading portfolio stability. Furthermore, if one or more options are likely to work, investors should expect considerable profits. For example, in 2020 alone, newly implemented DeFi protocols produced returns of over 600 percent.
Diversification based on inherent property
The cryptocurrency space has evolved to include a plethora of tokens with a variety of inherent properties and functionalities. Tokens are classified according to their characteristics, such as privacy coins, stable coins, staking coins, and so on. In the coming years, one or more of these segments will almost certainly become more common.
For example, traders have begun to favor privacy coins, and the increased trading volume may result in an increase in demand for privacy coins. Staking has also become a common practice for passive cryptocurrency investment. Cryptocurrency tokens are staked by investors in order to earn a consistent return. As investors increase their crypto holdings in stablecoin investments, the market for stablecoins has more than doubled in 2020. An investment in stablecoins also protects an investor from unexpected price swings in cryptocurrency.
Diversification based on geography
The geographical position of a crypto project is one of the factors that determines its popularity. A crypto diversification strategy allows coins to be allocated a percentage depending on their geographic regions. Some Asian ventures, for example, have a wider group of people. The success or failure of a project is influenced by the size of the group.
It may be beneficial to combine projects from different geographical regions, such as Asia and Europe, because of this aspect. This aids in the development of a well-balanced crypto portfolio with a regional emphasis.
Final Thoughts
In the cryptocurrency markets, Bitcoin and Ethereum remain the most common investment properties. Cryptocurrency ventures and protocols, on the other hand, have the potential for exponential development in the coming years. Furthermore, diversifying a crypto trading portfolio provides an investor with tools that aid in risk mitigation and, as a result, improve the potential for returns.
Although the digital currency space has a lot of potential, diversifying with strategy allows a trader to get the most out of it.