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Crypto Diversification

Jaiya Gill

Crypto Diversification

As cryptocurrency becomes more popular, many people are starting to take notice and invest. Picking winners and losers amongst coins might not be worth your while...

One way to maximize profits and minimize risk is through diversification. Looking to diversify crypto is a way to not put all your eggs in one basket and balance potential upside with reduced downside. As the crypto market is highly volatile and prices can fluctuate unexpectedly, learning how to diversify crypto portfolios can play a crucial role for investors.

Reasons to Diversify Crypto Portfolios

When considering investing in crypto, looking at how to diversify crypto can have benefits including:

  • Lowering your risk: Rather than depending solely on one single cryptocurrency, your losses can be cushioned by other coins if it underperforms.
  • More Upside: Different coins have more potential and room to run. Diversification allows you to capture more upside without fully committing yourself to the risks. 
  • Cash Flow: Cryptocurrencies can be lended and interest can be earned on them. You can put this cash flow into other cryptocurrencies and expand your portfolio or use the cash to cover expenses, similar to having a dividend stock.
  • More Patience: There’s a lot of fluctuation and price movement in crypto, which can frustrate impatient investors and lead to poor decisions. A diversified portfolio gives investors more time to wait for an investment to pick up and they’re less prone to making decisions based on emotions.
  • You’ll Learn More: Diversifying your portfolio forces you to learn more about new assets and develop different investment strategies. 

The idea behind a diversification strategy is that a diversified portfolio is more likely to give better long-term returns, while also reducing the probability of significant losses. 

Methods to Diversify in Crypto 

There are a number of different strategies an investor can use to diversify crypto investments and mitigate risks. Everyone has different investment goals and risk tolerance, so it’s important to find the one that suits you. This includes:

Use Cases: One way to diversify crypto holdings is through different use cases or purposes. Some are used as a digital currency for fast and easy transactions without involving third parties, some have real-world applications, and others are used to store digital value. For example, Ethereum is built for smart contracts and launching new tokens for projects which have their own ICOs (Initial Coin Offerings). 

Location: Diversify crypto by geography or location by choosing projects from different places around the world. Some regions have more flexibility in crypto investing and may be more convenient and cost-effective than others. Some countries have put restrictions on or banned crypto projects. 

Risk Level: When looking to diversify crypto by risk level, it’s important to let your risk tolerance be your guide. Depending on your risk tolerance, you can adjust your allocation across a select few or many different crypto investments. Every asset comes with a degree of risk, and cryptocurrencies are typically on the higher end of the scale. 

Different Asset Classes: Digital investments are part of different asset classes, giving investors another way to diversify crypto holdings. Types of asset classes include NFTs, crypto that store value or are a medium of exchange like Bitcoin or Ether (ETH), and utility tokens which give users the right to use a product on a certain platform. 

One way to invest in a specific asset class is through a cryptocurrency index, which invests in a group of cryptocurrencies for a diversified portfolio. 

Industry: Another way to diversify crypto is by different industries. DeFi allows people to easily conduct digital transactions through peer-to-peer blockchain network, without a third party such as a bank. DeFi involves sending, lending, and investing crypto. Crypto has various other capabilities as well, including video games, music, supply chain, and other industries. 

Different Blockchains: Blockchains are the technology that allows cryptocurrencies to function and can determine their potential, how many transactions can get completed in a second, governance, and other key factors. Blockchains are the backbone of cryptocurrencies and are in high demand because of the solutions the technology enables. The most popular blockchain is the Ethereum blockchain.

Market Capitalization: A crypto with a large market cap may be more stable and have stronger fundamentals, but a crypto with a smaller market cap might have strong growth potential.

Timing: Completely eliminating market risk is nearly impossible, but you can be careful about when and where you invest. You can diversify crypto by timing, also known as dollar-cost averaging, which is an interval-based investment strategy. You can set aside planned amounts of money to invest in your chosen tokens at predetermined times.

Buy the entire crypto market in a single token.