7 Ways to Diversify Your Crypto Portfolio and Limit Risk
When it comes to investing, having a diverse portfolio is an absolute must if you want to negate risk. But this is especially true if you’re investing in cryptocurrency due to its high volatility. If you put your money all into one crypto coin and it crashes 95%, you’ll find yourself in a whole lot of financial hurt. On the other hand, if you only have one digital asset, and it goes up 5% while other coins around it double or triple in value, you’re bound to feel frustrated. This is why you should put your money into a variety of cryptocurrencies. Here are seven strategies for doing this.
Use these seven strategies to balance risk in your crypto portfolio:
Buy cryptocurrencies that accomplish different objectives
Another good way to diversify your crypto assets is by putting your money into coins that serve different purposes. People who are new to cryptocurrencies might just assume it’s nothing more than a medium of exchange, but it’s actually a whole lot more than that. For instance, Bitcoin, the cryptocoin with the largest market share, is meant to be used as a store of value, allowing you to grow your wealth. On the other hand, Ethereum, focuses on the creation of digital apps. Then there are stable coins such as Tether (USDT), which are pegged at the dollar and allow for consistent prices in a market full of volatility.
Look around at the different blockchains
The blockchain is the underlying technology that provides functionality to cryptocurrencies. The reason investors are excited about blockchains is because of what they can accomplish. As noted, the Ethereum blockchain concentrates on building apps on its platform. Another blockchain, EOS (EOS), specializes in such things as cloud storage, which Cardano (AD) makes security and scalability its main purpose. There are even blockchains that focus on gaming.
Focus on market capitalization
At the moment, Bitcoin is the cryptocurrency with the largest market capitalization, at more than $800 billion. This is an indication that the coin isn’t going to be going away. During the past few months, the price has bounced from highs in the upper $60,000s to the lower $30,000s. But because the price is already so high, odds that it will skyrocket tenfold are unlikely (although not impossible). On the other hand, there are lots of altcoins that have a smaller market cap, but with huge potential for growth. It’s not uncommon for a coin priced at 30 cents to shoot up to $3.00 within a few weeks. Of course, it’s impossible to predict which coins precisely will do this (otherwise everybody would be putting money into it!), but it happens routinely. On the other hand, those are also the kinds of coins that can easily fall by 90% as well, whereas Bitcoin isn’t likely to ever see its prices collapse to the same degree.
As cryptocurrency gains acceptance around the world, there are plenty of countries and locales that are encouraging innovation. For instance, Portugal is promoting itself as a tax-friendly place for crypto investing. El Salvador became the first country to adopt Bitcoin as legal tender. Several states in the U.S., including New York, Texas, Georgia, and Wyoming, are encouraging the crypto industry to set up shop there. On the other hand, it is best to avoid places where crypto is banned or restricted, such as in China.
Diversify by risk level
When you take the plunge and begin investing in cryptocurrency for the first time, you should first factor in your risk tolerance. In particular, how much are you willing to lose? Can you settle for modest gains, at least in the short term? A balanced portfolio for beginners should start with investments in Bitcoin, Ethereum, the two cryptocurrencies that have been on the market the longest and therefore are in no danger of collapsing. Adding stable coins that are pegged to the dollar is also a good strategy. Then you can decide which altcoins you want to invest in, doing so at a smaller percent compared to Bitcoin and Ethereum. Of course, if you have a high-risk tolerance, you can increase your investment in altcoins. If you choose wisely, you can really make significant gains!
Invest in different industries
There are lots of altcoins that focus on different industries. In particular, the finance industry has been able to easily adopt crypto. Cryptocurrencies are a dream for investors who are looking for decentralized finance, in which digital transactions are possible through a peer-to-peer blockchain network as opposed to a bank. It’s not only possible to invest in crypto, but to lend it out at a generous interest rate that dwarfs what banks offer.
Explore the different asset classes
There are different classes of cryptocurrency including those that are a store value or medium of exchange (i.e., Bitcoin and Ether), ones that allow the user to use a product on a certain platform (Golem, Filecoin), and non-fungible tokens (NFTs), which involve owning certified digital copies of assets, such as artwork, real estate, and collectibles (Enjin Coin). In some cases, NFTs fetch hundreds of thousands of dollars!