Nothing is enjoyable if it isn’t spiced with variety. And while many people can attest to this adage, cryptocurrency traders can also vouch for it. Variety in an investment portfolio not only allows for more profitable opportunities, but is also the key to minimizing exposure to the market’s volatility and the associated risks that are part and parcel of the cryptocurrency industry.
Many proponents of Bitcoin maximalism firmly believe that the flagship cryptocurrency will outlive all other digital currencies and become the only significant digital asset needed in the years to come, regardless of where the asset’s price goes.
This mindset may sometimes be restrictive for investors who want to explore the cryptocurrency phenomenon fully. Approaching Bitcoin as the only or main cryptocurrency worth investing in can be a viable option if you’re a passive investor looking to use cryptocurrency to add diversity to a portfolio of different asset classes.
However, it would help if you spread the investments across more categories to stabilize your portfolio’s overall value. This recommendation is even more critical as the crypto market is more prone to turbulence than other well-established, long-existing asset classes.
Bitcoin, Ethereum, and other cryptocurrencies have been trading at better prices than several months ago, and analysts and experts believe a bull run is right around the corner. Thus, it could be an excellent time to allocate different funds to more cryptocurrency choices and enjoy their full potential.
Here’s what you need to consider when creating your cryptocurrency portfolio diversification strategy.
Why Should You Diversify Your Portfolio?
The motives behind cryptocurrency portfolio diversification are more limited than those behind portfolio diversification generally. This happens because the allocation strategy can only apply to several types of cryptocurrency assets.
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Investors can choose to broaden their crypto investments while preserving the same total portfolio exposure to the cryptocurrency market. Portfolio diversification is not a revolutionary idea but a fundamental investing principle. Any effort to create a multi-asset portfolio must have several components at its core.
Numerous Market Capitalization Assets
The market capitalization of a cryptocurrency is the total value of a cryptocurrency’s circulating supply, representing a reliable factor indicating the asset’s overall worth and the level of dominance held in the market.
When an altcoin does well in this regard, it is generally perceived as more trustworthy, based on the assumption that many individuals have added that asset. Cryptocurrencies with a lower market capitalization are considered novel, speculative, and thus less reliable.
Usually, a safer cryptocurrency is thought to have a higher market cap. Mid-cap cryptocurrencies can also prove profitable vehicles, given the expansion of the crypto market, especially if you keep an eye on their evolution.
By balancing your portfolio with different market cap assets, you may achieve the stability of large-cap currencies with the possibility of higher returns from smaller ones.
Different Crypto Blockchains
Cryptocurrencies are built and work on top of blockchains, or decentralized ledgers, that facilitate various solutions and applications. All employ different capabilities, directions, and reliability targets.
The most popular blockchain is Ethereum, which has taken the technology first used by Bitcoin and expanded its use cases to several other developments. Ethereum has brought smart contracts, decentralized Apps, and a DeFi ecosystem to the world, among other innovations in the Tech world.
No matter how popular a blockchain is, if you base your entire portfolio on it, it will be less versatile than one with assets from various ecosystems.
The following are a few of the notable blockchain ecosystems:
- Avalanche
- Cosmos
- Solana
- BNB Chain
- Polkadot.
More Coins And Tokens
Diversifying ownership of cryptocurrencies is another reliable way to add versatility to your crypto portfolio. Here are some of the most popular tokens and coins you can opt for:
- Governance tokens
- Gaming tokens
- Security tokens
- Payment tokens
- Utility tokens
- Non-fungible tokens
- Basic attention tokens.
Time Horizon
According to research from Pew Research Center for July 2022, roughly 16% of American adults claimed they’d purchased, exchanged, or utilized a cryptocurrency. The numbers are only expected to grow since 2022 was a harsh year for the cryptocurrency market, and 2023 provides more hope and sees increased demand.
The reasons individuals choose to add cryptocurrency to their portfolios vary significantly. Some may want to save up for retirement, while others see a bright future for the industry. The investment timeframe should be established accordingly, depending on the reasons behind your investment decision.
If you seek to complete your goal shortly, like saving up for a trip, your portfolio could benefit from including “safer” assets such as USDC, USDT, and other stablecoins. These are generally perceived as less risky options because their value is pegged against a stable investment, like the U.S. dollar.
The price volatility that’s an essential constituent of the cryptocurrency sphere is reduced due to this peg. Conversely, if you want to invest in cryptocurrencies for greater returns, look to riskier choices, as their highly fluctuating nature makes room for notable gains over time.
Legal and Country Limitations
The legal status of cryptocurrencies differs significantly from country to country, with some having it still poorly defined or in the process of transformation.
Some countries are restricting cryptocurrency’s usage, like Saudi Arabia or China, whereas others, like the U.K., Canada, and the U.S., maintain a crypto-friendly stance and tax the assets specifically.
A sound portfolio diversification strategy should consider legal and country risks to comply with the instituted regulations. Look for regions where crypto innovations are supported and consider country-specific limitations and restrictions.
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Newcomers Should Exercise Caution
If you lack experience in cryptocurrency, starting small with “blue chips” such as Bitcoin and Ethereum is a safe way to go until you gain more knowledge. While the benefits of portfolio diversification are undeniable, no one says you should wander into uncharted territory.
Doing thorough research and evaluating your cryptocurrency knowledge honestly and accurately will save you a lot of trouble down the road. Allocating your budget among different assets can prove advantageous if you consider your risk tolerance and the time horizon of the investment.
