Risk management and diversification of an investment portfolio are key to the sustainability of the financial operations. Even though the crypto market is still relatively young, diversifying the portfolio can be a key factor in winning the fight and becoming part of the small percentage of investors who make real money.
Diversification
Diversification is important for investors who want to maximize returns from their trades and assets, according to experts. This applies to long-term investors as well as those who participate in "day-trading" (trading financial assets in a single daily session).
Fidelity, one of the world's most important and well-known financial institutions, backs up this assertion. They describe diversification as the “practice of spreading your assets around so that your exposure to any one form of asset is limited,” according to an article on the official website. This strategy is intended to help you reduce your portfolio's volatility over time.”
Diversifying a portfolio of cryptocurrency
Many people outside of this room have shown interest in cryptocurrencies and have even planned to invest as a consequence of their launch. Diversification refers to the addition of various types of assets to an investment portfolio in the strict sense of the word. Many digital currency investors, on the other hand, have only considered Bitcoin and one or two other common altcoins. Certain cryptocurrency exchanges have made it possible to invest with very little money, in some cases as little as $10. Diversification loses its emphasis when capital is scarce, so it's best to hold your portfolio to the minimum number of financial instruments possible.
What is the safest way to diversify your cryptocurrency portfolio? There isn't a single correct answer. Cryptocurrencies may make up the entirety of a portfolio. If this is the case, the investor's risk profile is implicitly high. To put it another way, they are willing to risk more money in the hopes of making more money. This is attributable to the fact that the overwhelming majority of cryptocurrencies are extremely volatile. Diversification, on the other hand, retains its relevance in this field. In fact, some currencies are more stable than others, and diversification within the same general parameters is still possible.
Analyze the volatility of your preferred cryptocurrency assets
If you decide to hold only crypto assets in your portfolio, you'll need an unusual understanding of how price stable they are. Despite the fact that the price of Bitcoin fluctuates wildly, Nakamoto's is one of the most liquid assets throughout the industry. Other smaller altcoins react much more quickly and with larger changes.
It is important to consider factors such as market capitalization (CoinMarketCap). This metric is inversely proportional to volatility in general; a small capitalization renders an asset more vulnerable to market volatility. Technical analysis can also be used to determine the degree of uncertainty as well as provide data on patterns and goal levels.
Determine your level of risk.
The decision on how to allocate the investment capital would largely be based on the investor's risk profile. Conservative investors, on average, fill more than 80% of their portfolio with more stable assets, reducing their risk of both losses and gains. Violent investors, on the other hand, devote more than 85% of their portfolio to risky assets with possible price shifts. In any case, we recommend keeping the number of assets in your portfolio to a minimum so that you can keep track of and control each open position. Each trade must have proper risk management, among other items.
Cryptocurrencies as part of a diversified investment strategy
However, the inclusion of other types of financial instruments would need to be evaluated in order to achieve true diversification. This is essential to “balance risk and reward in your investment portfolio,” according to the Fidelity post. They also advise dividing investment assets into various groups or divisions.
It is recommended that you use a controlled broker or platform for this type of trading. They typically offer a broader variety of instruments to invest in in addition to offering control.
Bonds are known for their stability and low risk, while indices and stocks are known for their high volatility. A variety of technological and fundamental assessments will assist you in determining the structure of your portfolio. It's important to remember that resources like leverage raise the asset's volatility.
Keep an eye on the situation and update as needed.
The job isn't over until the portfolio is put together. To grow in line with consumer and investor expectations, it will, of course, necessitate ongoing maintenance and monitoring. As a consequence, knowing when to close a deal is crucial in order to prevent more losses or collect money. This will necessitate a variety of techniques, including trend tracking, technological analysis, and news event monitoring.