Portfolio diversification is a fancy way of suggesting that you can spread your money through a variety of asset groups. To put it another way, don't put all your eggs in one basket.
If you put all of your money into BTC, for example, the value of your investment could fluctuate dramatically, leaving you with a large gain or loss. However, if you spread your investment through BTC, XRP, ETH, LTC, and BCH, you will benefit from BTC's potentially strong success while limiting its risks by diversifying your portfolio into cryptos with a bright outlook.
Some can claim that common altcoins are inextricably linked to Bitcoin, making it difficult to diversify a cryptocurrency portfolio. However, if you look at crypto portfolios through a narrow prism, this is the case.
You could benefit more steadily with less risks if you used a well-balanced basket of carefully selected stablecoins and altcoins.
Why Diversify Crypto Portfolio?
Without a question, the cryptocurrency market is extremely volatile and often driven by speculation, so managing a non-diversified portfolio will leave investors vulnerable to unforeseen losses.
Yes, diversification won't shield you from a bear market or a market-wide correction, but it will substantially reduce the risk if one of your assets loses value or leaves the market.
Aside from that, in a bull market, investors can diversify their portfolio to increase their returns. You will greatly improve your odds of profiting from high-growth coins if you use a progressive and balanced diversification strategy.
It's worth noting, however, that certain crypto portfolios aren't worth diversifying. For example, if you've set aside $100 for crypto investments, it's not a good idea to spread that money around many different digital currencies or tokens.
If you have a budget of less than $500, it is best to play with just a couple of cryptos. Even if you hit gold in both, diluting your portfolio with $50 stakes in ten separate cryptos would not produce the desired results.
It's important to keep in mind that these investments come with fees. Managing a number of small investments is often time consuming.
How to Diversify Crypto Portfolio
There are a number of ways to diversify your crypto portfolio, but the most simple is to follow this formula:
Don't gamble more than 10% of your bankroll
Set aside about 30% of your bankroll for moderately risky bets.
About 60% of the stakes should be secured.
Safe bets include more secure cryptos like Ether and Bitcoin. They aren't absolutely secure, but they are more stable than most other cryptos. At the very least, you can have a few safe coins that are likely to appreciate in value over time.
Include a few medium-sized altcoins in addition to the secure stake. Try to identify businesses that are actively expanding, with a market cap of $100 million to $500 million.
Limit your gambling stake to a few speculative tokens or altcoins, which are mostly available through ICO.
Alternately, you could diversify your portfolio by combining cryptos with various return models. The following are the three major return models:
Staking coins: coins like Dash allow you to complete various tasks in order to earn extra money. For example, you can earn more money by protecting the networks.
Passive keeping coins: These coins allow you to gain a profit by holding a coin for an extended period of time in the hopes that its value will increase.
Interest-bearing coins: If you carry a coin for a certain amount of time, you will be rewarded with interest. It operates similarly to dividend stocks.
You'll need to sign up for major exchanges like Binance and Kraken if you want to create a crypto portfolio using either of the above methods.