Bitcoin’s 2009 debut introduced millions of people to cryptocurrencies. Bitcoin’s status as a decentralized virtual currency attracted enthusiasts who believe crypto can replace fiat currencies. Wild price swings attracted day traders and long-term investors seeking something extra for their portfolios.
The crypto playing field has significantly expanded since 2009. Investors can choose from over 18,000 cryptocurrencies. Dogecoin and Shiba Inu demonstrated how small cryptocurrencies could quickly gain momentum and produce astonishing gains in a short period of time. Spreading your funds across multiple cryptocurrencies helps you capture more upside for standout performances. Some investors are diversifying their crypto holdings in the same way they approach stocks and bonds.
What Is Crypto Portfolio Diversification?
Crypto portfolio diversification balances upside potential with a reduced downside. Investors start positions in established cryptocurrencies, such as Bitcoin and Ethereum. They also spread funds across smaller altcoins that have less traction. A crypto portfolio tracker lets you monitor crypto prices across your asset allocation. Some investors only have Bitcoin in their crypto portfolios. If Bitcoin appreciates, the investor will make a profit. However, Bitcoin can also tumble by 50%, leaving a Bitcoin-only portfolio in a precarious situation.
Buying multiple cryptocurrencies mitigates risk. Some cryptocurrencies may only fall 10% during a Bitcoin crash. Some altcoins can appreciate even when the broader crypto market is declining. Similarly, an altcoin may double in value during a timeframe when Bitcoin only increases by 20%.
Reasons To Diversify Your Crypto Portfolio
Portfolio diversification has many benefits and extends beyond crypto. Professionals recommend diversifying stock and bond portfolios so you’re not relying on one company to make or break your net worth. It’s why investors buy mutual funds, and you can even buy crypto funds on some platforms. Crypto portfolio diversification has several benefits:
- Lower your risk: You no longer depend on a single cryptocurrency. One of your cryptos can underperform, and the others can cushion the loss. You can further diversify your portfolio with several asset classes, such as stocks and bonds.
- More upside: Every crypto enthusiast knows Bitcoin, but altcoins have more potential. Their smaller market caps give them more room to run than Bitcoin. These assets come with more upside but also greater risk. Diversification lets you capture more upside without fully committing yourself to the risks.
- Cash flow: You can lend cryptocurrencies and earn interest on your digital assets. Altcoins tend to carry higher interest rates than Bitcoin, with some as high as 20%. You can act like a bank and collect interest on crypto you would have kept in your account anyway. You can put the cash flow into other cryptocurrencies to expand your portfolio or use the cash to cover expenses. It’s like having a dividend stock.
- More patience: Bitcoin has been a roller coaster for long-term investors. The cryptocurrency crashed 80% in 2018 and regained those losses in 2020. In the cryptocurrency’s earlier days, it went from $1 to $30 and back down to $5. These price movements can frustrate impatient investors and lead to poor decisions. Many investors regret selling assets at the wrong times and missing out on substantial gains. A diversified portfolio gives you more time to wait for a laggard to pick up steam. You can also invest in an active portfolio where professionals will hold onto the best picks that match your risk tolerance. Professionals are less prone to making decisions based on their emotions.
- You will learn more about investing: Diversifying your portfolio forces you to learn about new assets and develop an investment strategy. Reviewing more assets will help you learn more about investing and feel more confident with your crypto, stocks, and other resources.
Top Strategies for Diversifying Your Crypto Portfolio
Investors have many options for diversifying in other assets like stocks and bonds. They can find companies based on market cap, industry, revenue numbers, valuations, and other metrics. These more established assets have more criteria to distinguish optimal investments from poor picks. Cryptocurrencies have evolved to have several parameters. You can use these categories to diversify your crypto holdings.
Diversify By Value: Use Cases
Cryptocurrencies aren’t just virtual currencies that appease investors seeking returns. Some of these assets have real-world applications. For example, some cryptocurrencies simplify financial transactions, while others enable transparent budgeting and facilitate smart contracts. Cryptocurrencies rely on blockchain as their underlying technology and have many possibilities.
Diversify By Valuation: Geography/Location
Government regulations can get in the way of crypto investments. Some states are more restrictive of cryptocurrencies, while others provide more flexibility. You should look at where the cryptocurrency operates. Blockchains based in locations with favorable Bitcoin policies have less regulatory risk than cryptos based in places with more governmental oversight.
Diversify By Different Cryptocurrency Blockchains
Blockchains form the backbone of cryptocurrencies. These blockchains determine how many transactions can get completed in a second, a cryptocurrency’s potential, governance, and other key details. Investors can select from four types of blockchains.
- Public: These blockchains are decentralized. No one has control over the crypto supply or any other details. Bitcoin operates with a public blockchain.
- Private: A single authority controls the blockchain and can make decisions for the currency.
- Consortium: A group of people make decisions for the blockchain.
- Hybrid: An authority gets some control, but other parts of the blockchain are decentralized.
These four main categories branch into several subcategories based on crypto assets. Some cryptocurrencies operate under the Bitcoin or Ethereum blockchain. Cardano is an emerging blockchain with more scalability and efficiency than Bitcoin and Ethereum. Other virtual currencies have their own blockchains with specific functions.
Diversify By Risk Level
Every asset comes with a degree of risk, and cryptocurrencies are typically on the high end of the scale. Less mainstream altcoins with small market caps have greater risk than Bitcoin and other established cryptocurrencies. Risk-averse crypto investors may allocate most of their funds towards Bitcoin and have a few small positions in altcoins. Investors willing to take on more risk may put more of their funds into various altcoins.
Diversify By Industry
DeFi has made the most use of cryptocurrencies, and it’s how most people think of cryptocurrencies. However, cryptos have various capabilities that stretch beyond finance. Some cryptos are geared towards video games, the supply chain, music, and other industries.
Let Investment Experts Diversify Your Crypto Portfolio
Various forces move cryptocurrency prices. The latest crypto news, macroeconomic developments, and other insights can move the markets. The outlook for a cryptocurrency can change significantly in a few months. Knowing when to exit or buy more can increase your upside and minimize your downside.
Unfortunately, it’s difficult for most people to keep up with the latest news around their investments. Most crypto investors have full-time jobs, families, and other responsibilities. You can simplify your cryptocurrency portfolio by letting investment experts diversify for you. Investment experts can find cryptocurrencies before they become mainstream and spread funds across many assets.
