This article is for informational purposes only. The information is not meant to be and does not represent financial, investing, trading, or other types of advice or recommendations.
People who invested in Bitcoin about a decade ago (when the price was about $1) probably made the best decision in their lives. And, it looks like it’s set to rise. The price hit its all-time high in October 2021, going above $66,000. JPMorgan has revised its forecast for Bitcoin to reach $146,000 in the long run, with a short-term price objective of $73,000 for 2022.
The Ethereum cryptocurrency is even more remarkable. It has increased by over 1000% in the last year. The amounts that crypto investors earned motivated many people to turn to the crypto market. This trend won’t put the stock market aside, but it will undoubtedly make some differences.
Many investors want to know how to identify these gems before rising. However, investing all of your savings in one stock or cryptocurrency, even if the returns turn out to be phenomenal over time, has shown to be foolish.
You'll have a better chance of succeeding if you properly consider your crypto portfolio allocation and rebalance it regularly. In this article, we’re talking about crypto portfolio diversification and the best ways to do it. But, let’s start from the beginning.
What is Portfolio Diversification?
Diversification is the strategy of spreading your assets across several asset classes to minimize your vulnerability to any one form of investment. This method should help you lower your portfolio's turbulence over time. The idea is that if your investments fail, you won't be too subjected to a particular investment or asset class.
What Is Cryptocurrency Portfolio Diversification?
Diversifying your cryptocurrency portfolio entails investing in various coins and tokens to protect against price fluctuations.
The theory behind diversification is that if Bitcoin's price falls sharply, other altcoins (alternative coins), like Ethereum or Litecoin, may increase at the same time, or at the very least, dip significantly less.
You need to invest in various coins or tokens to diversify your portfolio successfully. Ideally, you'll select a number of cryptocurrencies with varying intrinsic values or projected valuations. When investing, it would be best to look at the correlation between coins. Having uncorrelated investments makes a well-diversified crypto portfolio.
Many investors believe that simply adding Bitcoin to their investment portfolio would suffice. They think that Bitcoin encapsulates all of the benefits of cryptocurrency. As a result, rather than diversifying their crypto portfolio, they dedicate all of their cash to a single digital asset. Although Bitcoin has experienced significant price increases over the years, nothing beats a well-balanced portfolio that takes advantage of the crypto market's diversity. After all, there are around 10,000 cryptocurrencies available at the time of writing.
Why Should You Diversify Your Crypto Portfolio?
It is not uncommon for the price of Bitcoin to plummet by 50% in the blink of an eye. Investors that are significantly involved in the Bitcoin market will see their portfolio value plummet in such circumstances.
Spreading your resources across various digital assets is recommended to avoid such levels of risk exposure. This investing technique helps mitigate the size of losses sustained during market downturns. Because you just put a portion of your money in Bitcoin and spread the rest among a range of currencies, a 50% Bitcoin meltdown is unlikely to be as disastrous. This is due to the fact that the performance of the component crypto-assets in a diversified portfolio would compensate for the losses.
How to Do Crypto Asset Allocation?
You can do crypto portfolio diversification based on different criteria. Let’s see some of them:
Crypto Classes
This diversification method considers and combines a wide range of cryptocurrencies. Payment coins, stablecoins, smart contract cryptocurrencies, DeFi tokens, privacy coins, and other options are available. Take into account all of your possibilities and how you wish to invest your money.
Please bear in mind that the coins featured here are merely examples of various types of cryptocurrencies and are not intended to be investment advice. The goal is to build a well-balanced crypto portfolio that includes all of the different kinds of cryptocurrencies so that you may profit from any rise in demand.
Timing
It's difficult to completely eliminate market risk, but being cautious about investing can help you. A time-based investing approach is often known as dollar-cost averaging. All you have to do is put aside pre-determined quantities of money to invest in the tokens of your choice at pre-determined periods.
Industry
To analyze the potential of a particular coin, you may focus on its use cases. Invest in a wide collection of coins that may be utilized to address challenges in various industries. This will allow you to lessen the impact of crypto-unfriendly legislation and events on your portfolio.
You might put your money into cryptocurrencies from the medical, fintech, and AI (Artificial Intelligence) businesses, among others. If you choose excellent projects with great potential, you may even invest in various sections of the same business.
Geography
Make sure you don't put all your money into crypto projects that come from the same country or area. This precaution will protect your funds from regulatory threats. That's why the simplest method is to diversify your crypto portfolio by including projects from all around the world.
Products
You can also invest in a number of different services and products. Choose established blockchain platforms and look for innovative alternatives with a lot of potential for the future. New protocols, wallets, and other forms of products and services may all be your options. By investing in several aspects of the blockchain solutions sector, you can spread your risks.
Conclusion
The process of balancing a crypto portfolio is similar to that of balancing a standard portfolio. You may simply lower your total risk based on your profile and investing approach. Simply spreading your assets across several cryptocurrencies is all you need to do.
The level to which you diversify is debatable since both sides have advantages and disadvantages. Diversification, on the other hand, is widely acknowledged to be helpful. You may lower the risk of your investments by diversifying your assets and rebalancing your crypto asset allocation on a regular basis.
