Imagine waking up one morning to find all your investment gone simply because you only invested in one asset? There are many cryptocurrency assets out there; unfortunately, many traders and other novice level participants in the cryptocurrency industry assume that bitcoin is a shorter and fancier name for the only cryptocurrency. Cryptocurrency refers to a wide array of digital assets based on blockchain technology. The famous Bitcoin is just one of the thousands of such assets.
Therefore, as a trader, you shouldn’t stick to trading only Bitcoin. Have a sense of adventure and venture into other coins and tokens. For this reason, we are dedicating this article specifically for one purpose. Cryptocurrency portfolio diversification!
What is portfolio diversification?
Well, an investment portfolio is made up of all active assets that you have invested in. Portfolio diversification, therefore, means incorporating a wide range of assets in your investments.
For instance, a diversified cryptocurrency portfolio will feature different types of coins, tokens, and other digital assets based on blockchain technology. Does this have any significance in trading? Yes!
What is the importance of diversifying one’s portfolio?
As the adage goes, do not put all your eggs in one basket. The same principle applies to creating an investment portfolio.
When diversifying a portfolio, you spread your capital across different assets. At the same time, your loses are spread across these assets and get minimized. For instance, if you spare $10,000 for investment in cryptocurrency, spend half on Bitcoin, and another half on TRON. In case bitcoin’s prices crush, TRON investment will remain safe and unaffected by bitcoin’s drop.
However, some investors and analysts argue that this concept is not right.
According to the founder of HodlBolt company, Anthony Xie, cryptocurrency assets are highly correlated, and their changes in prices cut across the industry. He further added that no matter how hard you try to diversify, the cryptocurrency industry will remain to be one big basket of eggs.
In 2018, the Crypto Briefing Magazine published a report which supported Mr. Xie’s claims but added that the correlations are quickly fading as assets become more independent of each other. A good example being BNB coin whose success is tied to Binance performance and not Bitcoin’s (which still has a big influence on minor coins).
Therefore diversification is the way to go!
What factors should you consider before selecting assets for your portfolio?
There are several points to consider while diversifying your portfolio. It is important to get everything right since it will directly impact your investment.
1. THE USE
Most investors believe that all crypto assets are similar. However, each cryptocurrency is unique to its purpose of creation. Bitcoin and Ethereum are separated by what they can do, and they do not compete for the same niche of users. It is this reason that has led to an influx of crypto coins as each tries to address a particular problem in the industry.
Here are some examples of assets and their uses.
World Computer: Ethereum, NEOS, Tron, and Cardano
Store of Value: Bitcoin
DAPPs: Steem and Augur
Payment Network: XRP, Stellar and Bitcoin Cash
Crypto Exchange Utility Tokens: Binance Coin, KUcoin and Qash
Stable Coins: Tether, USDT, and PAX
As an investor, you would want to steer away from investing in assets with similar use cases. This will impact on your investments in case a use case is affected.
For example, combining Bitcoin, Ethereum, XRP, and USDT is a great way of diversifying your portfolio since each asset is in its use class.
As stated earlier, there are other factors to consider apart from the asset’s use, which is the main one. These factors include:
1. The liquidity of the asset
2. The size and age in the industry- bigger and older companies have better assets
3. The amount of investment on the assets by financial companies
Now that we know how to diversify a portfolio, you can make your adjustments based on your investment strategies and your risk tolerance levels. Of course, you would want to have assets with contrasting features on your portfolio. If you have a volatile asset like Bitcoin, then a stablecoin like USDT will be its contrast.
Investing in a volatile and dynamic industry. And it’s not getting any easier. To beat these challenges, you have to master the fine art of trading including being able to diversify your portfolio. Keep trading safely!
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