Without a question, cryptocurrencies are profitable investment choices. In the past, they have outperformed other investment options, resulting in profitable investors. As a result, many investors have turned their attention to the crypto space, adding famous crypto coins like Bitcoin and Ether to their portfolios.
However, having one or two cryptocurrencies in your portfolio is inadequate for a serious investor. Yeah, when the coins move in the right direction, you'll get a lot of money, but what happens if they both move in the wrong direction? You end up losing a lot of money. This is why you can diversify your crypto portfolio by including other cryptocurrencies.
Crypto Portfolio Diversification
Diversification of your crypto portfolio is the act of investing in a number of crypto ventures in order to minimize risk if one or more of them perform poorly. When you use a diversification strategy, you will get the best returns even though some of your portfolio products are having a bad run.
Savvy investors understand the dangers of putting all their eggs in one basket. The price collapse of many cryptocurrencies in 2018, including Bitcoin, exemplifies why this is not a good idea. You could be better off investing in two or three crypto coins if you're a small-scale trader. However, if you want to develop a wide portfolio, two to three coins won't suffice.
You must first determine the best exchange for your needs before implementing a diversification strategy. The exchange you use has an effect on your overall experience as a cryptocurrency investor, as well as the success of your investment.
How should you begin diversifying your crypto portfolio?
“How can I diversify as most altcoins are linked to Bitcoin?”
This is a commonly asked topic, and one that is legitimately concerned. Although the section about most altcoins being related to BTC is partially right, there are still ways to diversify. All you have to do is take a fresh look at your cryptocurrency assets.
Types of cryptocurrency
Due to its basic approach, this is a traditional diversification strategy. The concept is to invest in a variety of different forms of high-performing cryptocurrencies. Different crypto ventures use different foundations and technologies to fuel them. This helps you to choose those that are suitable for your investment objectives.
Privacy coins, altcoins, and tokens are some of the choices available to you. When using this approach, you'll need to look at things like the price of cryptocurrencies, their historical patterns, and their future potential.
Industry Diversification
The strategy here is to make sure you have crypto coins from various industries in your portfolio. This way, if one sector experiences a loss, the remainder of your portfolio will withstand the blow without adversely affecting your returns. Crypto coins may be used to invest in sectors such as banking, supply chain, and medicine.
It's worth noting that you can further diversify your portfolio by selecting cryptos based on a particular criterion. For example, you can combine new and well-established projects, or you can put all of your money into one category.
A word of advice, though: don't invest in a project about which you know nothing or very little. Before taking the plunge, do some analysis to get a good understanding of the business.
Time Diversification
While it might seem to be a recent concept, time diversification has been around for quite some time. When done correctly, it has been proven to be successful. This strategy allows you to time the market and buy your crypto assets at the right time.
You don't buy your portfolio all at once; instead, you buy pieces of it at a time. You can opt to purchase 10% of your portfolio on a monthly basis. In this scenario, putting together a full crypto portfolio would take ten months.
Timing diversification assists you in preventing bad timing by eliminating the pressure of poor timing decisions from your shoulders. It is, however, difficult to time the crypto market, particularly if you are a beginner. It may also be difficult to decide what is the appropriate time to act.
Set price notifications on the crypto coins/projects you're interested in to get the most out of this strategy. Price notifications protect you by keeping you informed about market movements and changes. They also assist you in anticipating market fluctuations and allowing you to respond quickly to them.
Geographical Diversification
Another choice is to invest in cryptocurrency ventures from all over the world. You can combine American, European, or even Asian blockchain ventures, depending on your interests and risk tolerance.
There has been a recent trend toward Asian ventures, which are seen as good investments. They still have a devoted following, which increases their chances of success.
Use Case
Many novice investors make the mistake of explicitly comparing crypto coins. This analogy is not only inaccurate, but also deceptive. In terms of use cases, crypto coins are different. For example, Bitcoin was created as a virtual currency, while Ripple was created to help financial institutions like banks with money transactions. Ethereum, on the other hand, is a central component of smart contract technology and powers DeFi protocols.
Analytical Approach
The analytical approach is a more complicated diversification strategy that differs by investor. You diversify here based on the amount of money you have, your risk tolerance, and the volatility of the cryptocurrency sector.
You can combine cryptos that are relatively safe with those that are volatile. Keep in mind that secure crypto projects aren't necessarily safe; rather, they're more stable than other choices. For safe stakes, Ethereum and bitcoin are the most common cryptos. Stellar and EOS are two moderately risky choices. Speculative tokens are the most dangerous choices.
You can assign 60% of your portfolio to reasonably safe options, with the remaining 40% going to moderately risky crypto ventures (say 30%) and 10% to risky options.
Why do you diversify your cryptocurrency holdings?
The following are the key reasons why you should diversify your portfolio:
It's a dangerous world out there. Diversification protects against unanticipated negative market fluctuations and price jumps.
It increases the likelihood of your crypto investment succeeding.
You can't depend on a single cryptocurrency, such as Bitcoin, to have positive returns.
It enables you to get the most out of several coins that are doing well at the same time.
Conclusion
Many investors, both in crypto and conventional assets, use diversification as a risk reduction technique. Although it won't protect you from a market-wide correction or a bearish cycle, it will reduce the risk if one of your assets leaves the crypto market or has a bad run.
Examine your portfolio and see if it needs diversification. If this is the case, make the wise decision to adopt a diversification plan that is right for you.
Well written article. Keep it up