We are all familiar with the phrase “don’t put all your eggs in one basket.” The logic is simple – if all your eggs are in one basket, what happens if you drop the basket? There will be no more eggs. But if you have a set of baskets and several eggs in each of them, and if you drop one basket, you will lose several eggs. But there are still plenty of baskets.
What does crypto diversification mean?
Portfolio diversification follows a simple philosophy: if an investor invests in one asset and the price of that asset falls, it will hit his entire portfolio. Due to diversification or investing in a number of assets, poor performance of one asset will not be enough to damage the entire portfolio.
The investment portfolio has some diversification, but crypto assets do not. Diversification in cryptocurrencies means investing in a number of crypto projects, rather than one or two.
You may ask: Why would crypto investors want to diversify their crypto portfolios?
For the fact that the main advantage of crypto-diversification is protection from risks. Although it is almost impossible to reduce the risk associated with cryptocurrency by investing in a number of crypto assets, as well as benefiting from passive income from stablecoins or pos algorithm coins, a crypto investor reduces the impact that the volatility of any asset will have on his portfolio as a whole.
Ultimately, this reduces the risk of irretrievable losses, because even if one asset fails for one reason or another, other assets will perform differently: some may retain their value, and some may grow, which in general will put the investor in a better position.
Diversification cryptocurrency also gives you the opportunity to learn about the different coins and designs. While most people are now aware of Bitcoin and Ether, they may not realize that there are thousands of other tokens available, with different purposes, that will have different values, and may have different financial metrics over time.
The final advantage of diversification is the ability to increase productivity. Some people may take a look at Bitcoin’s bullish growth (especially the current rise from $ 12,000 to over $ 40,000 at the time of writing), and wonder if it makes sense to invest in other cryptocurrencies? If you supported the winner, why bother?
However, while Bitcoin has impressive bullish moves, it has had equally notable crashes. In fact, in December 2017, the price of Bitcoin fell by 45% from December 17 to 22. This can put a lot of pressure on investors to be able to time the market perfectly.
A diversified portfolio means that the investor is less vulnerable to a single asset taking such a big hit, and has more flexibility in entering and existing in the market thanks to more stable returns.
Is it possible to diversify the cryptocurrency?
A common question that arises in crypto diversification is: Is diversification even possible? Most altcoins have some correlation with Bitcoin, so some crypto traders and analysts argue that investing in altcoins is not a true form of diversification.
This may have been true in the past. However, a number of crypto projects are available today that have different goals compared to Bitcoin, which can lead to differences in price characteristics as the market becomes more resilient. Over the past couple of years, “growing crops” has evolved into a way to generate revenue from cryptocurrencies by generating revenue, rather than speculating on potential price increases.
This gives risk-averse investors the opportunity to start investing in cryptocurrencies with more predictable returns, and also provides large owners with the opportunity to earn passive income from their existing assets.
The best strategy crypto-diversification
So, now that we’ve covered why crypto investors diversify their crypto portfolio, the next question is: how? Here are our top crypto diversification strategies.
- Diversification of the cryptocurrency type
As mentioned earlier, there is a wider range of crypto projects than ever before, which gives crypto traders a greater choice of investment opportunities. However, please note that randomly selecting coins and investing 10% of the funds in each is not the best approach.
Instead, different types of available cryptocurrencies are identified, their utility and potential, and then each of these types is presented in the investment portfolio. Different types of cryptocurrencies include:
- Transactional coins: Coins intended to be used as a currency, such as Bitcoin.
- Smart contract tokens: These are protocols such as Ethereum, Binance Chain or Polkadot that allow the use of blockchain technology to develop decentralized applications, run smart contracts on their own platform, as well as for peer-to-peer payments.
- Revenue-generating tokens: stablecoins and coin stacking of the pos algorithm.
- Service tokens: tokens are integrated into the existing Protocol of the block chain and can be used to access its services.
- Stablecoins: Coins pegged to traditional currencies and assets that can provide more stability and less volatility than traditional crypto tokens such as USDC and PAXGold. They are often used to hedge against the market.
- Diversification by industry
Similar to investing in stocks from different sectors to protect themselves if a particular sector is affected, crypto investors can also invest in cryptocurrencies that belong to different industries. Some of the industries with crypto-projects include:
- Decentralized financing
- Data and analytics
- Supply chain
- Artificial intelligence
It is also possible to apply the same approach to regional diversification or invest in crypto projects from different parts of the world.
- Diversification over time
Time diversification means simply investing in time. You may also have heard that this is called ” dollar value averaging.”
If a crypto investor has $ 50,000 to invest, diversification over time means that instead of investing the entire $ 50K at one time, the trader will invest over time, say, $ 1,000 to $ 5,000 per month. This reduces the risk that the crypto investor will have to accurately calculate the time in the market to get the maximum profit.
For example, suppose a trader invested their $ 50,000 in Bitcoin in September 2017, when it was valued at $ 3,500, and then it was sold in December 2017 at $ 17,000. A crypto trader would have reached an income of $ 242,857. Not bad for a three-month investment.
However, what if he had invested his money in $ 17,000 worth of Bitcoin, only to see it rise to over $ 19,000 and then drop to $ 8,000 in March? The value of his investment will more than halve, to $ 23,529.
This is a risk when trying to time the market. Instead, by investing a small amount at a time, the investor benefits from both highs and lows. If the market falls, he will only spend a few thousand of the total amount he could invest at this high price, so it’s not such a big loss. He just keeps investing over time, getting more of the asset he believes in. This reduces the average amount it spends per Bitcoin over time, which means that the average profit per Bitcoin also increases as its value increases.
In conclusion, on Crypto Diversification
For long-term investors, diversification makes sense as a way to minimize risk and maximize the potential return of their portfolio. It’s the same with cryptocurrency.
At a minimum, the diversification of crypto savings by assets that generate passive income at the expense of profitability, and assets that provide value at the expense of price increases, leads to greater profits over time. If a crypto investor wants to become more advanced, he thinks about further diversifying his assets by investing in different types of cryptocurrencies, in different industries and different regions.
As mentioned earlier, the market is full of offers and tools needed to diversify the cryptocurrency portfolio, including the ability to earn income from your cryptocurrency. All you need is desire and patience.