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.
The primary goal of any investor is to maximize earnings while minimizing risks, which is why they define investing objectives and employ a range of methods to profit from market movements. In some strategies, investors allocate their capital to a variety of asset types. The goal is to invest a different amount of your capital in different assets so that a price drop of one asset does not significantly reduce your return of investment.
However, others prefer investing only in one or two profitable assets. Let’s take a look at both options and help you decide which one is better for you.
What's Crypto Portfolio Diversification?
The process of allocating a variable portion of your money to diverse assets in order to increase profit and decrease risk is known as portfolio diversification. A well-diversified portfolio is made up of assets that have distinct performance characteristics so that the likelihood of the prices of two or more assets to correlate is avoided.
Diversification is a foundational element of smart investment strategies, and it's no different with cryptos.
Many crypto investors just hold a single crypto asset, such as bitcoin. However, this strategy does not yield the best risk-return relationship, as the return is solely dependent on the price movement of a single volatile asset. You get 100% of the profits or losses connected with a single asset when you invest in it, but not all crypto-asset price movements are the same.
Over the course of a year, there may be dramatic increases of the top crypto assets, which implies that investing in a particular asset takes from you the opportunity to gain from the sometimes unanticipated high growth of another asset. Holding only Bitcoin might have been a good strategy in the past, but frequent fluctuations imply that you might want to think about a more diversified portfolio.
Spreading your investments over a group of crypto assets is one way to acquire exposure to prospective winners. If your differentiated portfolio is adapted every once in a while to track the top assets of the month, you'll have an equal chance of increasing your returns across multiple assets rather than just one. Moreover, you'll have a better chance of catching more than one winner each month if you create a portfolio focused on multiple assets.
Concentrated vs Diversified Crypto Portfolio
Keeping all your eggs in one basket has always been a point of discussion. While focusing on a single asset may increase profitability in some situations, it also increases risk exposure. Furthermore, a heavy-concentration approach leaves little space for analysis errors, and it overexposes the investor to unneeded risks.
The other opposite is also discussable. Adding too much diversification to your portfolio may reduce investment returns. It's important to remember that the gains created by your high-performing assets will be offset by losses from other investments.
Some investors feel that the more assets they possess, the higher their return will be. However, this isn't always the case. It might raise investing costs, add needless due diligence, and result in risk-adjusted returns that are below average.
Why Is Crypto Portfolio Diversification Important?
In the conventional financial world, the performance of various assets might fluctuate depending on market circumstances. In a stormy market, real estate, for example, may beat general equities, while cautious companies may fail investors when their risk appetite is high. If they create a diversified portfolio, this won’t happen because they might gain from riskier assets.
The basic goal of diversifying asset classes in a portfolio is to achieve a balance between risk and return.
Diversification might be one of the approaches to limit risk exposure in the cryptocurrency market. Some claim, however, that diversifying a crypto portfolio is unfeasible owing to the significant correlation between big cryptocurrencies and Bitcoin. Investors may navigate the market more successfully with manageable risk if they use a well-selected mix of altcoins in combination with stablecoins.
How to Diversify Your Crypto Portfolio?
The most crucial factor to consider when diversifying your crypto portfolio is price correlation. The efficacy of this technique is harmed if you have too many of these items in your portfolio. Let’s see some options for diversifying your portfolio:
Types of Crypto
This strategy of diversification takes into account and incorporates a variety of cryptocurrencies. You can choose from payment coins, stablecoins, smart contract cryptocurrencies, DeFi tokens, privacy coins, etc. Consider all of your options and how you want to invest your portfolio.
Please keep in mind that the coins listed here are only samples of different types of cryptocurrencies, not investment advice. The idea is to have all of the different types of cryptocurrencies well-represented in your portfolio so that you are constantly well-positioned to profit from any surge in demand.
Industry
You might also concentrate on digital asset use cases to assess the viability of such applications. Make sure you invest in a diverse set of coins that can be used to solve problems in a range of businesses. This will help you mitigate the negative effects of crypto-unfriendly policies and events on your portfolio.
You could invest in cryptocurrencies from the medical, finance, AI (Artificial Intelligence), and other industries. You could even invest in different branches of the same industry if you pick quality projects with great potential.
Be careful not to invest in a project if you don't understand it, its ideals, or the industry in which it operates. Always do preliminary research to have a better grasp of the difficulties and possibilities facing the industry.
Geography
Make sure that none of your funds are going to crypto initiatives in the same country. This safeguard will keep your money safe from regulatory risks. The most straightforward way is to diversify your crypto portfolio by including projects from various parts of the globe.
Solutions
You can also invest in a variety of solutions and products. For example, pick established blockchain platforms, but also find some new solutions that have great potential. Find new protocols, wallets, and other types of products and services. You may spread your risks by investing in multiple parts of the blockchain solutions industry.
To Wrap Things Up
The majority of recommendations will tell you that you need to diversify your crypto investments. While it is a common practice among investors, there are advantages and disadvantages to diversifying your portfolio. A diversified portfolio, as previously said, decreases overall risk.
Losses from certain coins can be compensated by gains from other coins, allowing you to maintain a steady status. With each coin you possess, your portfolio has more potential to profit. Not every investment will pay off, but with the right asset allocation and diversity, you'll have a better chance of making money in the long term.
A diverse portfolio also needs more effort and research to manage. To make great investments, you must first understand what you are purchasing. When you have a vast portfolio, your odds of fully comprehending everything drop. If your assets are spread over various platforms, you may need to utilize numerous tools and apps to access them.
Lendary is a platform that will help you get a more diversified crypto portfolio with reduced risk, coming at the beginning of 2022. Subscribe to be the first to know about new and safe crypto investment opportunities.
