Cryptocurrencies have become a very lucrative investment. This young industry has outperformed traditional investments and creates new successful investors every day. Due to the promising results, investors are shifting their interest and money to the cryptocurrency space by buying digital coins given the rise in Bitcoin price. In fact, Bitcoin has seen a spike in value to over $50,000 as of February 2021.
As a committed investor, two cryptos in your portfolio are not enough. It is certain that the two coins will earn you great rewards if they move in the right direction but have you thought of what will happen if they both go in the opposite direction?
If the second scenario was to occur, you would end up taking a huge loss, and that’s precisely why it is important to diversify your crypto portfolio. Regardless of the fact that most altcoins are linked to Bitcoin, it is still possible to diversify your portfolio. Below are some strategies to diversify your cryptocurrency portfolio.
What is Cryptocurrency Diversification?
Cryptocurrency diversification is the act of investing in different crypto assets across your portfolio in order to mitigate risk in any one asset seeing a significant loss. In essence, while some assets are doing poorly others in your portfolio will be performing better to ensure an even and steady increase across the portfolio over time.
Putting all your eggs into one basket is incredibly risky. For example, in 2018 the crypto market saw a significant crash in several cryptocurrencies, such as Bitcoin, which is why having all your money tied up in one crypto asset is a bad idea. If you are investing a small amount of money then spreading your investments across a few coins should be fine, but if you are investing a loss of capital then you will need to invest across a lot of coins to ensure you are mitigating risk appropriately.
Before you decide on a portfolio diversification strategy, make sure you take the time to learn about all your options and study the market carefully. It’s always a good idea to get a second opinion from an investment professional as well.
1. Diversifying the Type of Cryptos
This happens to be the most basic diversification strategy. The idea behind this strategy is to choose a variety of well-performing digital coins and to invest in them. Different cryptocurrencies have different technologies and bases powering them. This way, you can always pick cryptos that are in line with your specific investment objectives.
There are numerous options at your disposal, among them being altcoins, tokens, and privacy coins. If you have decided to work with this strategy, you will have to conduct thorough research using cryptocurrency exchanges, like OKEx, on aspects such as price, future potential, and past trends.
2. Industry Diversification
Under this strategy, the objective is to have, in your portfolio, cryptocurrencies that exist in different industries. If one of the industries was to take a hit, the rest of your portfolio would absorb the shock without a significant impact on your returns.
Consider investing in cryptocurrencies in industries such as Medicine, supply chain, and finance. It is also possible to diversify using specific standards when selecting crypto coins to buy. For instance, you could blend well-established projects with startups or, alternatively, invest your money in one category.
However, avoid investing your hard-earned money in a crypto project that you have little or absolutely no knowledge about. It is important that you take the time to do your research and understand the crypto space before investing.
Also, avoid ICO’s that promise the world but seem a bit shady. There has been a lot of ICO scams that promise huge returns but end up taking investors’ money and disappearing. It’s a good idea to completely vet the project and its founders. If you choose to go forward with the investment then start small and see what happens. Investing is all about risk mitigation.
3. Time Diversification
This concept might sound new to many, but it has been around for quite some time now. When executed properly, time diversification has proven to be a highly effective strategy. Under this strategy, you are expected to time the market and buy the digital assets when the moment is ripe.
Instead of buying your entire portfolio at once, you can build it at intervals. You could decide to buy about 10% of the portfolio each month. With such an approach, it will take you ten months to complete building your crypto portfolio.
This strategy helps you prevent poor timing, and the ramifications of bad timing are taken from the picture. However, timing the cryptocurrency market is not as simple as it might sound, especially if you are a newbie. It is hard at times to tell when the time is right.
For the strategy to be effective, consider setting price alerts on coins that you’re interested in. Such alerts will ensure you are up to date with shifts and trends in the market. A timely alert will also help you prepare adequately for market movements, allowing you to respond quickly to such changes.
4. Geographical Diversification
Another diversification strategy is buying crypto coins from various parts of the globe. Depending on your risk tolerance and preference, you could mix between Asian, American, or European cryptocurrencies.
Asian coins were recently perceived as an ideal investment, and investors shifted their money to projects in that part of the world. Asian coins are gaining popularity because they are backed by a loyal following, which boosts their odds of being successful.
5. The Use Cases
Newbie investors often make the mistake of making direct comparisons of crypto coins. It’s not only erroneous to compare crypto coins in that manner but also highly misleading. Different Cryptocurrencies have different use cases.
A perfect example is that Bitcoin is designed as an alternative digital currency, while Ripple was designed to facilitate transactions in institutions such as banks. Ethereum, which is used to power Defi protocols has proven to be a major player in smart contract technologies.