Wouldn’t it be great if all of us profited from crypto with every investment? Actually, what if I told you that we’re already witnessing it today? Don’t believe me? Well, you might just believe this study from Cryptovantage which suggested that every 3 out of 4 investors made gains with crypto.
Okay, while not every investor may have profited, these numbers are a good start. So what’s the big secret behind them making a killing? The answer’s simple; a well-balanced and diverse cryptocurrency portfolio.
Today I’ll guide you through the best ways of creating a diversified cryptocurrency portfolio and go over some of its benefits.
How to Diversify Your Portfolio
Building a cryptocurrency portfolio is not different from your regular stock market portfolio. Even if you’re unfamiliar with creating a portfolio in the first place, these two steps will surely help you learn about the diversification of assets.
Divide your portfolio into low, medium and high-risk coins
A diversified cryptocurrency portfolio should vary in the weightage of coins. Having a larger number of high-risk coins will invite nothing more than an imbalance in your portfolio. This is because of the “High-Risk High-Reward” rule. You can make bigger gains from high-risk coins but lose just as much or even greater than your invested amount.
This is why your portfolio should be following your risk tolerance. Try to create a mix of all weightage of coins including low, medium and high-risk investments. This will allow you to have a balanced asset allocation and lesser risk when things go wrong due to the volatile nature of crypto.
Invest in Different Types of Crypto
Many cryptocurrencies are divergent when it comes to their aim and utility. To save time, I’ll bifurcate them into two of the most well-known groups; Payment Currencies and Blockchain Economies.
Bitcoin and Litecoin come into the category of being payment currencies. This refers to crypto assets that can retain their purchasing power in the future. These coins are meant to hold as their value is maintained over time. Moreover, they are safer investments than other cryptocurrencies.
Blockchain Economies are the next category which includes cryptocurrency blockchains like Ethereum. Unlike payment currencies, blockchain economies go beyond just being used for everyday transactions and widen the functionality of the blockchain technology with dApps.
Give a larger share of your cryptocurrency portfolio to the types of crypto that are more useful and likely to give you profits. Of course, I cannot perfectly elaborate and guide you on which type of crypto asset is better since technologies are evolving at a rapid pace and there’s no telling when one might be the cause of other ones’ to perish.
This is where you’ll need to make efforts to research the functionality of blockchain and how coins differ from each other.
Benefits of a Diversified Portfolio
One of the most apparent benefits of a diverse cryptocurrency portfolio is that as a trader there will be minimal losses (if any). For the most part, a good portfolio will give out far more gains than losses for any investor.
Cryptocurrencies are quite volatile and hence, investors can incur huge losses but this can be avoided when your investments are spread well according to the different crypto industries.
The crypto market doesn’t always profit too, you’ll witness times where there’s no major improvement in the prices of the majority of the digital assets for weeks or months on a straight. Therefore, it’s much safer to allocate your funds to various kinds of cryptocurrencies.
It’s also possible that when the crypto market is running low despite diversifying a cryptocurrency portfolio, you’re still down in numbers. It’s evident that when the market isn’t at its best, there may be a drop in your funds too but the overall loss is controlled since your portfolio share is allocated in a way to minimise them.
For instance, Bitcoin and Litecoin see a heavy price drop (causing your portfolio value to drop) then you’ve only invested some of your assets in Bitcoin and some in Litecoin. This means that you’re losing less than an investor who may have decided to go all out in Bitcoin. You can also think of this as a risk-management strategy.
Important as they may be, let’s keep our gains aside for a minute. Having a diversified cryptocurrency portfolio enables investors to be exposed and in turn, be learnt to various new operations of blockchain tech and other industries.
This also allows investors to make their strategies, rather than hiring one to do the job for them. Being unaware of a market you’re investing in is not a good practice in the first place.
To conclude, a cryptocurrency trader must thoroughly research the market and its trends before investing in these volatile digital assets. Diversification is a recommended practice since the nature of cryptocurrency markets is unpredictable.
Besides, investing a bulk of your funds on high-risk cryptocurrencies does bring benefits but also has the potential to cause huge damage to your investments which isn’t a good idea at all. Regardless, even with diversification, one has to be careful while selecting the digital assets for investment.
Thus, it’s wise to extensively learn about cryptocurrencies, their potential and risks beforehand.