For any investor, the ultimate goal of every investment is to maximize returns while minimizing risks. This is also why they establish investing objectives and employ various investment techniques so that they can profit from market trends. Typically, investors allocate their capital to more than one asset as part of these strategies. In fact, the whole point of diversifying one’s holdings is to ensure that even if prices fall, your profit margins remain relatively intact because a portfolio made up of various types of assets will, on average, produce superior long-term returns while lowering the risk of any single investment. And this is the fundamental concept upon which portfolio diversification is based.
According to Hitesh Malviya, founder, itsblockchain, “diversification is a risk management strategy that mixes a wide variety of investments within a portfolio”. In general, he said, investors diversify their portfolios by allocating different percentages of the portfolio to different asset types. Traditional asset classes include stocks, bonds, commodities, ETFs (exchange-traded funds), etc.
“Recently, as cryptocurrencies have gained significant traction, they have also come to be considered as an asset class worth investing in, despite some arguing that crypto is not an asset class. Even still, diversification is an investment technique that applies to all financial markets, including the cryptocurrency market,” Malviya said.
“With crypto becoming mainstream, several investors are flocking to the markets to get started on crypt trading and investing. But more often than not, many investors believe that simply adding Bitcoin to their portfolio is sufficient,” he added.
Malviya explained that investors tend to devote all of their funds to a single asset instead of implementing a solid portfolio diversification strategy out of the roughly more than 11000 Cryptocurrencies currently available. “This approach in itself is problematic, especially if the purpose is to make a profit.”
Surely, investing in a single asset can give you 100% of the gains or losses associated with that asset; however, it’s vital to remember that not all crypto-asset gains are equal. And although Bitcoin has had substantial price increases in recent years, several other cryptocurrencies have outperformed Bitcoin by gaining significant value.
This is why it is essential to start looking beyond the scope of Bitcoin and diversify your investments in several other cryptocurrencies. Other than the fact that you can minimize risk and obviously earn substantial profits, he said.
5 reasons to diversify Crypto portfolio:
1. Cheap transaction fees
Unlike traditional payments, which incur high fees when transacting overseas, crypto transactions are convenient to execute both locally and globally. The expenses of transacting with a cryptocurrency like Bitcoin are often cheaper than bank transfers because no intermediary entities or governments are involved. Furthermore, your transfer will be faster because of the lack of authorization requirements and long wait periods. There are also no additional fees, such as deposit fees, withdrawal fees, minimum balance fees, and so on.
2. Complete control over your funds
The most significant feature of cryptocurrencies, as you may know, is that they are not issued by any central body, making them potentially resistant to government interference. Because governments and authorities are unable to intervene, they are unable to manipulate or control it. This allows consumers the freedom to manage their money in any way they want without the constraints of a traditional banking institution.
3. Highly attractive to new customers
From incredibly wealthy investors like Elon Musk to any ‘aam aadmi’, cryptocurrency continues to attract investors from all income levels thanks to its potential for high returns. Furthermore, the rise of concepts such as DeFi, NFTs, and crypto derivatives has heightened interest and activity in the crypto market, implying that crypto investments aren’t stopping anytime soon. As a result, there is obviously a lot of room for investment development within cryptocurrencies.
4. Unlimited choices
When it comes to investing in any industry, having a wide range of options is crucial. Your investment possibilities increase proportionally with the number of options you have. Currently, there are over 11000 cryptocurrencies in the world, so you have the option of investing in any of these. The crypto market is growing every day, and every time somebody creates a new coin, it is added to the market.
If the availability of more than 11000 cryptocurrencies overwhelms you, don’t worry; you can filter down your list to the top 50-100 cryptocurrencies. Typically most investors prefer the top ten cryptocurrencies, but there are always more to consider. Sites like Coinmarketcap break down cryptos by market cap and provides further information on each currency, so it can become easier for you to make a decision.
5. Stable store of value
The need for a reliable, long-term store of wealth is one of the most prevalent motives for investing in cryptocurrency. The supply of most cryptocurrencies is finite, unlike traditional money. This makes it impossible for any political or government body to reduce their value through inflation. A government can also not tax or confiscate cryptocurrencies without the owner’s consent due to their cryptographic nature. This property is highly appealing to people, especially those who are worried about bank failures, hyperinflation, and other disasters.
How to diversify Crypto portfolio
1. Diversify by industry
Make sure you invest in a diverse set of coins that can be used to tackle issues in various industries. This will help you mitigate the negative effects of crypto-unfriendly policies and events on your investment. Make sure that you do thorough research and invest in both solid and fast-growing businesses. You should also evaluate overall profitability and industries that are globally competitive, such as medicine and finance.
2. Diversify by geography
Ensure that none of your funds are going to crypto projects in the same region or country—conduct thorough research on the performance of crypto projects in different parts of the world. Doing so will shield your investments from regulatory uncertainty and provide you with an additional means of balancing out your diverse portfolio even in uncertain market conditions.
3. Diversify by timing
Although it is impossible to completely eliminate market risk when investing, you can increase the value of your portfolio by being careful about when and where you invest. Diversifying your investments by timing, also known as dollar-cost averaging, is an interval-based investment strategy. All you have to do is set aside predetermined amounts of money to invest in your chosen tokens at predetermined times.
This way, when prices are dropping significantly, it’s a good moment to invest in new cryptocurrencies, and when things are going well and prices are soaring, you’re in a terrific position to sell and profit.
The crypto market’s extreme volatility necessitates the use of effective risk management approaches. This is why a dynamic approach to budget allocation is essential so that you don’t end up losing all your hard-earned money. When done in the right way, portfolio diversification is certainly an effective risk-mitigation strategy for crypto investments. It’s crucial to remember, though, that while diversity lowers risks, it also lowers the return on your investment.
Therefore, it is entirely up to you whether or not to diversify your crypto portfolio. Whatever your decision be, just make sure that you do your homework and consider your budget.