In this short Beginner guide, readers will learn about how to diversify crypto portfolio.
Cryptocurrency has come a long way. Statista’s financial research revealed that there are now over 4,500 currencies under the digital coin umbrella. Though only the top 20 are considered the most tradeable and make up the majority of the market, this massive adoption and population speak volumes about the state of crypto. As it cements its place as a viable investment and attracts more attention, it’s important to keep your own investments safe. So, if you are diving into—or already deep into—cryptocurrency, one of the smartest courses of action for you would be to diversify your portfolio.
With that in mind, below, let’s discuss some of the several methods of crypto portfolio diversification you can consider.
Invest in different types of cryptocurrencies
Of course, putting money into Bitcoin (BTC) is the main goal for a lot of first-time or even seasoned crypto investors. But, as FXCM’s trading heat map on cryptocurrencies shows, Bitcoin is not the only performing coin in the market. There are altcoins that are quickly catching up to Bitcoin. Ethereum (ETH) is perhaps the biggest rival to Bitcoin, but don’t discount coins like Stellar (XLM) and Litecoin (LTC) from your portfolio, as they are also breaking ground in the cryptocurrency market. Over the last 90 days, Ethereum showed the biggest positive movement, followed by Bitcoin, Stellar, and Litecoin respectively.
Keep in mind that different currencies have different types, so it’s good to know which is which and have an investment in every sector. For instance, Bitcoin is a transactional token whereas Ethereum is more of a yield-earner. On the other hand, tokens from EOS are often used for smart contracts. Not only does this spread the risk, it also protects you from significant financial loss in the event one cryptocurrency suddenly dips in value.
Spread your currencies among various industries
You can also leverage on various industries that are seeing more stability and growth. Since you can use your cryptocurrency as a tool for investment instead of traditional financial instruments, you’ll want to put your digital resources into different industries. Do your research and make sure you consider investing in both stable industries and fast-growing ones. As shown in Insider Monkey’s list, some of the fastest-growing industries in 2021 deal in sales, manufacturing, and casinos, and gambling. Cryptocurrencies are already in use as payments in casinos, for example, with Bitcoin leading because of its transactional nature. Of course, you’ll also want to look at overall profitability and consider globally competitive industries like medicine and banking.
It’s essentially the same way day traders and bond investors diversify, so you can avoid having all your eggs in one basket. If one sector suffers a hit, you can cushion the blow by having other ones to rely on. It’s basically a form of risk management and asset protection.
Diversify by time and location
Although you cannot truly get rid of market risk, you can leverage your portfolio by being mindful about your timing and where you invest. When things are in a continuous downward trend, that’s ample time to buy new cryptocurrencies (not all at once). When things are up and everything is skyrocketing, you’re in a good place to sell and profit. You basically have to time out your investment patterns whenever the market sees significant change.
As for location, analyze the performance of cryptocurrency projects in various regions of the globe. Even if you want to leverage in, for example, Europe, you still want to mix in projects gaining steam from Asia or America. This allows you to have another means of balancing out your diverse portfolio despite shifts caused by external issues. For instance, Asia has been considered one of the biggest catalysts for crypto projects for years, but as reported in Bloomberg’s cryptocurrency news column, China (the biggest mining player in the region) has suddenly seen a widespread ban on all projects in Inner Mongolia as of March 2021.
Applying these measures is simply an essential part of keeping your investments safe, as noted in our crypto safety guide by Ramaa Mohan. Any crypto investor can make use of these strategies, and you can either pursue one path or combine all three to ensure a balanced and diverse portfolio.
Hitesh Malviya is the Founder of ItsBlockchain. He is one of the most early adopters of blockchain & cryptocurrency enthusiast in India. After being into space for a few years, he started IBC in 2016 to help other early adopters learn about the technology.
Before IBC, Hitesh has founded 4 companies in the cyber security & IT space.
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