How to Build a Diversified Cryptocurrency Portfolio – 2020 Guide
Bitcoin is considered to be one of the top-performing assets of the decade, even beating traditional financial instruments like Gold, stocks, and bonds. The asset has yielded massive returns to investors in just over a decade. Many institutional investors have started including a percentage of their investment portfolios; consisting of bonds, indices, stocks; to leading digital assets Bitcoin and Ethereum.
It is an accepted fact that prominent cryptocurrency tokens like Bitcoin and Ethereum have yielded massive returns to investors in the past. However, the cryptocurrency markets have expanded well beyond the list of top ten digital assets. The cryptocurrency markets now incorporate a multitude of utility tokens, security tokens, DeFi tokens, privacy tokens, staking tokens, and more.
Moreover, building a cryptocurrency portfolio solely with Bitcoin and Ethereum is not enough. To leverage maximum gains of this uprising industry whilst reducing the factor of risks, it is necessary to diversify portfolio holding multiple cryptos. In this guide, we explore the need to diversify a portfolio beyond Bitcoin and also one of the strategies of diversifying for a brighter outlook.
What is Crypto Portfolio Diversification?
Crypto portfolio diversification is the process of disbursing investment funds into different crypto projects to reduce the factor of risks if one or more projects failed to perform. The goal is to create diversification with investments in different areas/ niches so as to reduce the overall risks of investments. For instance, investors investing in Bitcoin in 2017 had the first-hand experience when the price of Bitcoin dropped sharply in 2018.
The basic idea is to reduce the factor of negative events. This can be done so by investing in multiple tokens so that you do not lose the overall value of your investments. With this purview, a savvy investor recognizes that it is safe to not put all their eggs in one basket i.e. Bitcoin.
It is important that you manage your trading operations at a reliable and trustworthy cryptocurrency exchange platform. This facilitates an investor to raise their overall experience of portfolio diversification.
How to Get Started with Portfolio Diversification
There are different strategies for diversifying a cryptocurrency portfolio. This may include building a portfolio taking into consideration different factors depending upon an investor. We have discussed one of the strategies that a trader can employ to build a portfolio catering to different properties of tokens including market cap, liquidity, stability, and functionality.
Whilst a portfolio should not be entirely made up of Bitcoin, the leading cryptocurrency should hold a considerable percentage of your investments. One of the factors is the rising trends of investment in Bitcoin from hedge funds, corporations, institutions, and investors. Moreover, leading financial companies have also started offering different services pertaining to Bitcoin.
Bitcoin asset is also gaining attention from retail investors thereby propelling its mainstream adoption. It continues to outperform conventional investment options like Gold in 2020. Assigning a percentage of your cryptocurrency portfolio to Bitcoin mitigates the risks by acting as a safe asset.
Ethereum and ERC-20 Tokens
Ethereum continues to hold the second position in the cryptocurrency markets. Moreover, the real value of Ethereum lies in its ability to facilitate the creation of smart contracts and decentralized applications. Its inherent utility subsequently facilitates strong fundamentals for its native token ETH’s valuation. Although there are a number of other blockchain networks, Ethereum continues to dominate the industry.
ERC-20 protocols are the utility tokens launched on the Ethereum blockchain network. These tokens act as a function of utility to a landscape encompassing a real industrial use-case. Many of these altcoins have attained success in their crypto projects. For instance, OmiseGo (OMG) is an ERC-20 token that yielded five times returns in 2020. In other words, an investment of $1 in January 2020 stands at a valuation of nearly $5 in November 2020.
Investing in altcoins facilitates a trader to leverage exponential growth in a relatively short span of time. At the same time, it poses threats of scams, project failures, and hacks. But these risks are offset by safe assets like Bitcoin. For more information about Bitcoin price and how to buy Bitcoin, click here.
Passive Income Tokens
Similar to dividends, some cryptocurrencies offer interest to token holders. Staking is a phenomenon that facilitates cryptocurrency rewards in exchange for holding cryptos in a wallet. Apart from diversification, staking also serves the purpose of enabling a passive income from holding crypto tokens.
Cosmos (ATOM) is a cryptocurrency token that yields an interest of 8-10% in exchange for staking operations. Dash (DASH) is another cryptocurrency token that yields an annual reward between 5-6%.
Cryptocurrencies are well-known for their volatile nature. Whilst volatility can add advantages if trades are executed correctly, it also poses a factor of risks. Stablecoins are cryptocurrencies that are used to mitigate the risks that arise from other tokens. These coins are pegged to the value of an asset such as fiat currency like USD.
Tether (USDT) is one of the most popular stablecoin which is pegged to the value of USD. It is advisable to secure a percentage of the portfolio to stablecoins. This eliminates the factor of risks to a certain degree.
Diversification is a strategy accessed by savvy investors to mitigate their risks in traditional markets. The advantages of diversification are equally relevant to the cryptocurrency industry as well. Moreover, diversification may play a strategic role in cryptocurrency investments when the industry is at a nascent stage. While it will not entirely eliminate the threats or double your portfolio value, it is an important tool when the markets are suddenly down.