Cryptocurrency investments are subject to a lot of volatility and risk. As investors and traders, we must anticipate the risk. One way to do this is to diversify your cryptocurrency investments.
Diversification is a technique of spreading investment portfolios across a variety of assets. This is done to reduce risk while also minimizing volatility in the investment portfolio. This is a very important strategy for those of you who are actively investing in crypto. So, how can you appropriately diversify your cryptocurrency portfolio? Let’s have a look at the explanation provided in this post.
- 💰 Diversification is a risk-mitigation approach that involves investing in a variety of assets.
- 📊 Diversification can be done based on the type of crypto asset, industry and the origin of the crypto asset.
1. Diversification By Crypto Type
The simplest way to diversify crypto is by type. This is the most common and easiest diversification strategy in the crypto market. By having a portfolio that comprises of multiple high-performing cryptocurrencies, the profit margin remains reasonably intact even if the price drops.
When diversifying your crypto portfolio by type, that means you need to dig deeper into several aspects such as asset prices, past trends, and potential future trends.
It doesn’t stop there. The projects of each crypto also usually have different foundations and supporting technologies. Choose the option that best fits your investment objectives. The following are some examples of crypto types that can be selected as options:
🧰 Value asset store: Bitcoin
🔗 Layer-1: Ethereum dan Solana
💻 DeFi (Decentralized Finance) Token: Aave and Compound
Keep in mind that the crypto assets listed above are not diversification advice, but rather examples of each form of cryptocurrency available. Layer-1 is a digital asset that was originally created as a core part of a blockchain. Meanwhile, DeFi token is an asset that resides in an ecosystem of decentralized financial applications, such as lending and crypto exchange platforms.
2. Diversification by Industry
The second way to diversify crypto is by industry. The goal is to diversify assets depending on various use cases or ways to employ a crypto asset.
Bitcoin, for example, is designed to be a decentralized, faster, and safer financial system. This gives Bitcoin users a sense of security and independence when it comes to financial transactions.
Ethereum, on the other hand, has a decentralized network for smart contracts and applications. Ethereum is utilized for a wide range of creative applications in finance, web browsing, gaming, advertising, identity management, and supply chain management thanks to a combination of groundbreaking smart contract features.
Ensure that your capital is placed in assets with use cases that may be used to solve problems in a variety of industries while diversifying. As a result, if particular industries have laws or restrictions that make crypto assets less viable, these risks can be adequately handled.
Make sure you do your homework and invest in a good, fast-growing company. Aside from that, you must assess the overall profitability as well as the industry’s global competitiveness.
3. Diversification in terms of geography
Diversifying your crypto portfolio by investing in cryptocurrency projects from all over the world is also a good idea. Given that each country has its own set of rules, it would be preferable if investment funds were not given to projects in the same region or country. The portfolio, for example, includes crypto ventures from the United States, such as Solana, Europe (such as Aave and Polkadot), and Asia (such as Terra, and Polygon).
However, before selecting a project from a specific country, it is necessary to research how well it operates in that country. This move will preserve investment value from regulatory uncertainties while also providing an additional opportunity to balance a diversified portfolio in a tumultuous market.
This is a guide to diversifying your crypto asset portfolio. Although this is done to reduce risk, diversification measures do not ensure the elimination of all potential market risk. It’s only that when market volatility hits, the crypto portfolio will be more balanced, and the asset composition can be changed to the risk profile.
When investing in other assets, such as stocks, you should follow the same principles. Download the Emtrade app here if you want to learn more about stock and crypto trading strategies.
- Coinmarketcap, https://coinmarketcap.com/alexandria/article/the-importance-of-crypto-portfolio-diversification Accessed on: 15-12-2021.
- Antonopoulos, A. M. (2021). Mastering Ethereum. Stanford University Press.