In this article, I’ll be highlighting all you should know about crypto portfolio diversification. Your diversification approach may determine the success or failure of your crypto portfolio. Portfolio diversification is a skill that must be mastered before putting your money at risk.
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Why Should a Crypto Portfolio be Diversified?
Diversifying your portfolio can help you avoid investing risks and accomplish your financial objectives without putting your cash at risk.
If you’ve been following the cryptocurrency market for a while, you’ll know that most crypto assets are quite volatile. But here’s the deal: volatility isn’t always a negative thing. Diversification is an excellent strategy to safeguard your money against unexpected market fluctuations, reducing your exposure to losses that may otherwise occur.
Putting money on anything without a clear plan behind it, whether it’s cryptocurrency, forex, or stocks, isn’t investing; it’s gambling. Portfolio diversification is the act of investing in several assets or asset classes to reduce your risk if one or more of your investments underperform.
Portfolio diversity is not just a hedging strategy, but it may also increase your rewards if the cryptocurrencies in which you invested take off. The more currencies you invest in, the more likely it is that one of them will provide you with exceptional results.
Investing in many projects raises your chances of striking the jackpot while limiting the potential damage.
When Should You Diversify Your Crypto Portfolio?
When is the best moment to diversify your bitcoin holdings? Anytime. Diversifying small assets, on the other hand, maybe more difficult due to the large expenses required.
If you have less than $500 in cryptocurrency, it may be advisable to stick to a few coins, 2 to 3, especially if you are a trader. This is mostly due to the risk of diluting your capital by purchasing several coins. Fees will cost you a significant amount of money. Using services like Crypterium, which integrates the top 10 exchanges to constantly deliver the best prices and lowest commissions on each purchase, is one approach to save money on commission.
4 Coin Types to Diversify
Not all cryptocurrencies are created equal. While there are several methods to identify coins, there are four main groups to consider before embarking on a diversification approach. Understanding each of these groupings is critical for effectively diversifying your bitcoin portfolio.
1. Bitcoin
True, bitcoin is a single currency, not a group. Bitcoin, however, is the elephant in the room. The head of all cryptocurrencies and altcoins. Because of its large volume, it is one of the most volatile assets, but it is also one of the most profitable. Keeping bitcoin in your portfolio is simple plain sense.
2. Tokens Based On Ethereum And Erc-20
Ethereum was conceived as a smart contract-enabled alternative to Bitcoin. It didn’t take long for Ethereum to become one of the industry’s most popular currencies, and it is today the second most valued cryptocurrency by market valuation.
However, Ethereum is not the only player in the game. Many currencies are released utilizing the ERC-20 framework, adding to Ether’s power. Ethereum has faced competition from projects like Tron, EOS, WAVES, NEO, and others throughout the years. However, it is still the most popular.
3. Passive Income Earners
Some coins pay interest to holders, similar to how some equities pay dividends. Including a few interest-bearing coins in your portfolio not only assists to diversify your holdings but can also be a source of passive income. You may also get free coins by participating in airdrops and hard forks. Bitcoin Cash, which is a fork of Bitcoin, split into Bitcoin SV and Bitcoin ABC in November 2017. At the time of the fork, all Bitcoin Cash holders had an equal quantity of the two forked currencies.
4. Stable Coins
To be honest, cryptocurrencies are notorious for their volatility. While this is beneficial, there are instances when risk must be mitigated, which is where stablecoins come in. The vast majority of stablecoins are backed by physical assets or fiat currencies.
Tether, USD Coin, and Paxos are examples of stablecoins. Make sure your cryptocurrency wallet includes at least one stablecoin so you can readily exit risky assets under market stress.
How Should a Crypto Portfolio be Diversified?
The manner you diversify your portfolio is generally determined by a combination of factors. For example, you may examine your sector knowledge and experience, the economic environment in your nation, and what currenciencies you like or dislike.
The goal of this post is not to give numerical techniques for diversifying your cryptocurrency. Instead, we help you with basic models that will allow you to choose what works best for you.
The Newcomer
This is a wonderful alternative if you’re new to the cryptocurrency market and don’t know much about it. Diversification in this context sounds a lot like selecting a diverse assortment of coins and giving an equal share of capital to each asset.
The risk level here is medium-low.
The Bitcoin Maximalist
Bitcoin maximalists are completely committed to the top digital currency and may not even contemplate investing in other assets. Ethereum maximalists are in the same boat. A maximalist investor will put the majority of his or her money into a single currency, leaving only a little percentage for the remainder. While this might be rewarding on occasion, the dangers are quite high.
The risk level here is high.
The Conservative
Conservative investors would choose the largest and most popular cryptocurrencies on the market and distribute their funds evenly. In most circumstances, Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) would be among the preferable options.
The risk level here is medium.
The Whale
Whales allocate a substantial chunk of their assets to two or three cryptocurrencies and then purchase minor quantities of others.
The risk level here ranges from medium to high.
Conclusion
Diversifying your portfolio can help you avoid investing risks and accomplish your financial objectives without putting your cash at risk. Follow these steps to diversify your crypto portfolio, and you’ll be sure glad you did. Which of these methods suits you best? Are you currently diversifying your portfolio? Let us know in the comments section below. Cheers!
