How To Diversify Your Crypto Portfolio.
Cryptocurrency has come a long way, and according to Coinmarketcap, there are now over 5,300 currencies under the digital coin umbrella. Although only the top 20 are considered the most tradeable and make up the bulk of the market, this massive adoption and population speak volumes about the state of crypto.
So, if you want to or already have invested in cryptocurrency, one of the best things you can do would be to diversify your portfolio. The success or downfall of your crypto investment may be hinged on your diversification strategy. Portfolio diversification is an art you need to master before putting your capital at risk.
What’s crypto portfolio diversification?
Crypto portfolio diversification is the act of ploughing your money into different crypto assets to mitigate risk if one or more projects perform poorly.
Savvy investors know that it is risky to put all their eggs in one basket. The infamous 2018 price crash of several cryptocurrencies, including Bitcoin, best explains why this is not a good idea.
If you are a small-scale investor, you might be better off investing in two or three crypto coins. But, if you’re trying to create a sizable portfolio, two to three coins won’t cut it.
How to get started.
There are several ways to diversify your portfolio, you have to look at your portfolio from different perspectives.
With that in mind, below, let’s discuss some of the several methods of crypto portfolio diversification you can consider.
Type of cryptocurrency
The idea here is to choose different types of well-performing cryptocurrencies and invest in them. Different crypto projects have varying bases and technology powering them. This gives you the option to pick those in line with your investment goal.
Some of the options you have are privacy coins, altcoins, and tokens. When using this strategy, you need to research different aspects such as the price of the cryptocurrencies, their past trends, and future potential. Make sure to analyze the different possibilities and how you want to allocate your portfolio.
Geographical (regional) diversification.
A simple strategy of choosing to invest in crypto projects from different parts of the world.
Depending on your preference and risk tolerance, you can choose to mix between American, European, or even Asian blockchain projects. Recently, there has been a shift to Asian projects as they are perceived as a good investment.
In addition, they have a loyal following that boosts their chances of being successful.
However, you can decide to mix your investments with some European and American projects to have a more geographically balanced portfolio.
You may wonder why time diversification? Time diversification is one of the oldest and most proven diversification strategies.
It is proven and reliable when executed properly. With this strategy, you have to time the market and get your crypto assets at the right moment.
Rather than buying your portfolio all at once, you instead buy parts of it at intervals. You can decide to buy 10% of your portfolio every month. In this case, it will take you ten months to assemble a complete crypto portfolio.
Timing diversification helps you avoid bad timing by taking away the responsibility of poor timing decisions out of your hands. However, it is grueling as timing the crypto market is difficult, especially if you’re a newbie. It can also be hard to identify the right moment to act.
To get the most out of this strategy, set price alerts on the crypto coins/projects you are interested in. Price alerts cover you by ensuring you stay up to date with trends and shifts in the market. Additionally, they help you prepare for market movements and allow you to react quickly to these changes.
The use cases
Ethereum, on the other hand, powers DeFi protocols and is key in smart contract technology.
Here is a breakdown of the common cryptos and their use cases.
Bitcoin — Store of value & payment rail
Bitcoin Cash, Stellar, Dash — Payment
Tether, Dai, and PAX — Stablecoins
Ethereum, Tron, Cardano, and NEO — World computer
Based on this, you can decide to invest in crypto projects with different intended uses. A well-balanced portfolio should cover different use cases unless you have reason to put all your eggs in a single basket.
You can try to reduce risks as much as possible, however, don’t expect to find the golden crypto diversification portfolio.
Therefore, remember that investing is risky but you can manage risks to a certain extent. By making smarter investments, you can drastically reduce the impact of global slashing events on your portfolio.