The last decade has seen a profuse adoption of cryptocurrencies across the fintech space. And yes, the engrossment with cryptocurrencies has spread to the betting space, with top bookmakers on betting sites like liontips accepting crypto payments.
With the enormous flexibility and deregulation that cryptocurrency promises, it is no surprise that it is becoming a favorite asset of investors. But then, given the volatility that fundamentally characterizes crypto investing, how can you keep your crypto investments safer?
The answer lies in diversification. But before we dive into the technical details of crypto portfolio diversification, what is a cryptocurrency portfolio?
A trader or investor’s crypto portfolio is basically a packet of cryptocurrencies an investor has bought. These portfolios typically include a variety of assets, such as altcoins and cryptocurrencies, and tokens.
What then does it mean to diversify your crypto portfolio?
The main objective of every investment for any investor is to maximize profit while reducing risks. This is also why they set investing goals and use a variety of investment approaches to profit from price movements. The diversification technique is efficient in slashing the risk exposure of crypto investors.
Diversification entails dispersing your investing funds across multiple assets or industries. Often, these assets with minimal direct correlation are chosen to make up a diversified portfolio.
This means that instead of one asset taking up all your funds, this fund is used to purchase different crypto assets.
Why Is Diversification of Cryptocurrency Portfolios Important?
Unlike most traditional assets, the market for digital assets is highly volatile. Several times a day, prices might abruptly shift in different directions to the benefit or harm of investors.
Putting all of your eggs in one basket might be risky and increases the risks of being burned in the market.
While volatility generally increases profitability, it also increases the risk of losing money. This is where portfolio diversification comes in:
- Spreading one’s funds across various digital assets is recommended to mitigate the size of losses sustained during market downturns.
- Diversification also helps investors get the best probable returns even if some of your portfolio’s components underperform.
- It prevents investors from making too many bad choices, typical of when they are immersed in increasing the yield of the individual assets.
- Diversification allows investors to benefit from the stability of well-known coins like Bitcoin and Ethereum, as well as the insanely high potential of mid-small-cap coins.
How can you diversify your crypto portfolio?
Alright, let us get deeper into some diversification techniques that could make you a fortune.
Diversification by Time
This method, commonly known as dollar-cost averaging, employs an interval-based investment strategy.
All you have to do is set aside predetermined amounts of money to invest in your favorite tokens at predetermined times.
This method removes the need to figure out the optimal timing to begin trading or buy a coin.
Divide your assets into three risk levels
What’s best for you depends on your risk profile, but there must be a balance. Divide your portfolio into three categories: high-risk, medium-risk, and low-risk assets, with suitable weightings for each.
A portfolio with a significant component of high-risk investments is unbalanced. It has the potential to offer you larger gains, but it also can flush loads of your precious dollars down the drain.
Diversification by location
This involves diversifying your portfolio across geographies. Don’t make all of your crypto investments in the same region.
Plan a comprehensive investigation on the performance of crypto initiatives in various parts of the world.
This will protect your assets from regulatory risk and provide you with another way to balance out your broad portfolio, even in volatile market conditions.
Consider keeping stable coins
To prop your portfolio liquidity, consider keeping some stable coins. Some of these stable coins include USDT and USDC.
Many Defi platforms use stable coins. This allows you to lock your winnings or exit a position fast and quickly.
When should a cryptocurrency portfolio be diversified?
Investors commonly ponder when is the best appropriate time to diversify your crypto portfolio.
The answer is quite ridiculous: anytime.
However, diversifying small investments may be more difficult due to the considerable extra costs such as transaction fees required.
If you have below $500 in cryptocurrency, it’s probably better to limit yourself to two or three coins, especially if you trade them daily.
But if your investments are in thousands of dollars, then it’s best to spread it across several assets to mitigate your losses.
The Disadvantages of Diversifying Your Crypto Portfolio
The drawback of crypto portfolio diversification is that it lowers your return on investment while lowering your dangers.
In addition, the gains created by your high-performing assets will be offset by losses from other investments.
The crypto has the beautiful notoriety for being extremely volatile. This makes it essential to effectively manage your risks.
Strategically diversifying your portfolio is an efficient means of achieving this. When done correctly, it saves you the nightmare of losing your full crypto portfolio in just one market downturn.