If you ask a seasoned investor what the secret to building a successful portfolio is, they’ll most likely tell you that you shouldn’t put all your eggs in one basket. It’s common advice, but it’s useful, especially for beginner investors who don’t know how to navigate their path toward making a profit.
Suppose you just entered the sector; you should know that instead of relying on a single investment, you should look for diversified opportunities, much like splitting the eggs between multiple baskets so you can transport them safely.
Diversification is crucial when you want to lower the risk associated with your portfolio because it allows you to spread your funds across several sectors and projects and not expose yourself to a single asset. Diversification in the crypto sector lowers the risk level because different assets perform well at different moments. A chart providing information about ETH price could show you how the crypto asset’s value fluctuates.
Table of Contents
Learn About Asset Allocation
The term diversification is often replaced by asset allocation because the notions refer to the same thing: an essential step in any investment strategy. Investors must consider a series of factors like their financial goals, risk tolerance level, and investment time horizon to establish what assets they should add to their portfolios. Mixing commodities like cryptocurrencies, bonds, and stocks can generate more income than putting the funds into a single project. However, the process of allocating assets is often considered one of the most daunting for young entrepreneurs.
How to Diversify an Investment Portfolio with Crypto
Choose Cryptocurrencies with Different Use Cases
Cryptocurrencies increase the level of risk associated with your portfolio, and it’s paramount to purchase more than one to manage it. Thousands of crypto projects are available on the market, and each is created differently. It means they have unique use cases, and choosing cryptocurrencies with dissimilar purposes would be great.
For example, purchase a cryptocurrency that is mainly used for making payments, like Bitcoin, and another one that supports Metaverse projects like Ethereum.
Expose Your Portfolio to Stablecoins
Stablecoins have particular features, and all seasoned investors allocate a portion of their portfolios to stablecoins because their value is pegged to another commodity. Nowadays, the most popular stablecoins peg their value to $1, which allows them to prevent any price fluctuation that might trigger a market crash. Adding stablecoins to your portfolio makes your finances available when needed. Also, you avoid the hassle of exchanging your cryptocurrencies for fiat money when making payments.
Look for Solutions
New platforms, blockchain, and protocols are launched daily, and new projects could help you boost your profit because you should support innovative technology that brings benefits to the sector. By picking projects according to the type of solutions they offer, you spread the risk associated with your portfolio between several market sectors. New projects might fail or succeed, but when investing in several, the ones that survive might cover the losses of the ones that are wiped out of the market.
Invest According to Geographical Solution
This strategy implies selecting the projects you invest in according to their geographical location. Over the years, the public has shifted from one region to another when it came to choosing blockchain projects, and recently, they preferred cryptocurrencies with Asian developers.
It’s crucial, however, not to let the location be the single factor when picking a project but also consider the following. The cryptocurrency must have a big community that invests resources in developing it. The more popular the project is among the public, the greater the chances of becoming profitable.
Diversify According to Value
We mentioned earlier that digital currencies have different purposes. While some aim to provide only fast and seamless transactions without the involvement of a third party, others work as digital stores of value. Ethereum is the most well-known blockchain supporting decentralized applications, while Bitcoin and Monero have been developed to function as digital currencies that allow cross-border transactions.
Considering that each project has a distinctive objective, each cryptocurrency has a fundamental value, and it’s recommended to diversify your portfolio, keeping in mind this factor. Evaluate the projects’ value before purchasing digital currencies. This method requires extensive research but is worth the effort in the long run.
Research Will Help You Avoid Spending Your Money on Pump-And-Dump Tokens
Adopt an Analytical Approach
Seasoned investors usually adopt this strategy because it’s more complicated and requires particular skills and aptitudes. Investors consider risk tolerance, available finances, and crypto market fluctuations when using this strategy. For example, during this period, they adapted their diversification strategy to the swings triggered by the bear market.
This approach implies mixing risky and stable digital assets. However, not even stable cryptocurrencies aren’t always safe in the crypto landscape. They are only slightly more stable than the others. Considering that Bitcoin and Ethereum are the largest cryptocurrencies by market cap, they are considered the safest digital currencies to add to an investment portfolio.
It’s advisable to allocate around 60% of the portfolio to more stable digital assets, 30% to moderately risky cryptocurrencies, and 10% or even less to risky projects.
Rebalance the Investment Portfolio Regularly
The key to maintaining a diversified portfolio is to reallocate funds periodically and adjust the amount of assets. You’ll notice that, in time, some digital currencies perform better than others, and you’ll want to invest more in such projects.
However, you must ensure your portfolio isn’t overweight or underweight in a specific digital currency. While you might want to sell some cryptocurrencies because their value falls, you should replace them with alternatives from another category.
Decide What Strategy Works Better for You
Diversification is a popular investment method, regardless of the specifics of a portfolio. You don’t want to put all the eggs in one basket because the market is volatile, and it’s best to manage the level of risk you expose your finances to. However, expect to lose some money while trading digital currencies.