How to Diversify Your Crypto Investment Portfolio?
Diversifying your crypto portfolio is one of the important things that you should do. As you already know that the crypto market is extremely volatile. As a result, you need to diversify your investment to reduce your portfolio’s risks.
You should know that not all cryptocurrencies are going to perform in the same way. However, the question is how to diversify your crypto investment portfolio? What are the things you should be considering?
Well, to help you out with this question, The Money Mongers team has layed down some points which will help you diversify your crypto portfolio.
Why Should You Diversify Your Crypto Portfolio?
When it comes to investing, diversification is one of the main rules. As people say, never put your eggs in the same basket. You should not only rely on one cryptocurrency and expect it to offer you good returns.
On top of that, the crypto market is super volatile. As a result, you never know what will happen to your investments. However, when you invest in multiple cryptos and focus on diversifying your portfolio, you are simply reducing the risk of your investments.
Also, if one of the cryptos in your portfolio doesn’t perform well, there will be other coins that will balance your investment.
How to Diversify Your Crypto Investment Portfolio?
1. Buy cryptocurrencies with different use cases
One of the first things that you should do is buy cryptocurrencies which solve different purposes. Cryptocurrencies are not just virtual currency, but most of them are made to solve a purpose.
For instance, Bitcoin can be used as a store of value that will bring you returns over a period of time. On the other hand, Ethereum can be used for smart contracts. Also, there are coins that solve the problems of dApps, DeFi currencies, and more.
Also, apart from cryptocurrencies, you can also choose to invest in stablecoins. Stablecoins have their value pegged to an underlying asset, such as fiat currency.
The thumb rule over here would be to figure out different problems in the crypto or financial world and invest in coins which have the highest potential to disrupt that specific niche.
2. Invest in different cryptocurrency blockchains
You can also invest in different cryptocurrency blockchains. Blockchain is the main technology that allows cryptocurrencies to function. Also, blockchain has a real world use case that can be used in different sectors.
There are quite a lot of blockchains available. However, the most popular one would be the Ethereum blockchain.
It facilitates the execution of agreements without a third party and allows dApps to be built on its platform.
However, there are other blockchains, too, like Cardano, EOS, and others which are giving a tough competition to Ethereum.
Hence, as an investor, you need to perform deep research about these blockchains and figure out which can actually disrupt the market. Or you can invest in different potential blockchains to stabilize your portfolio.
- Diversify by market capitalization
You can also diversify your crypto portfolio based on market capitalization. Among all the cryptocurrencies, Bitcoin has the largest market capitalization. But if you invest in Bitcoin at this moment, you might not be able to fetch huge profits.
However, on the other hand, there are multiple cryptocurrencies that have various market caps, which are worth considering.
Although, a crypto token with a significant market share is considered to be more stable. But cryptocurrencies with smaller market caps have strong growth potential.
But don’t just go with the market capitalization. You also need to do further research and figure out if the currency has real-world use. Only then the coin will be adopted by users, and the market share will obviously grow with it.
4. Diversify crypto projects by location
Next, you can also diversify your portfolio based on the crypto project’s location. However, one might think about what location has to do with cryptocurrencies.
First of all, when you invest in cryptocurrencies from different countries, you get wider exposure. Also, you get to know about different types of innovations and crypto businesses.
Also, when you invest in crypto projects from locations where crypto is regulated, the crypto project gets the chance to perform well. As a result, the value of your investment also grows.
For instance, El Salvador was the first country to adopt Bitcoin as a legal tender. There is also Portugal which is considered to be the crypto hub and tax haven for crypto investors and so on.
5. Diversify your portfolio by your risk level
The crypto market is extremely volatile. As a result, it is important that you let your risk tolerance be your guide for you.
Instead of investing in random cryptocurrencies, what you can do is invest in cryptos that are more stable. This way, you will be able to balance your portfolio.
When it comes to stable cryptocurrencies, you can choose to invest in Bitcoin or Ethereum. As these two coins have existed in the market for a long period of time.
Apart from these, you can also add some stablecoins to your portfolio to manage your portfolio risk. Furthermore, you can also consider investing a small amount of money in riskier or emerging cryptocurrencies.
It completely depends on how much risk you can handle. And based on that, you need to choose cryptocurrencies.
6. Diversify by timing
As you already know that it is impossible to completely eliminate the market risk when it comes to investing in crypto or anything.
However, you can increase the value of your portfolio by investing in the right asset at the right time. You should have a clear idea about when and where to invest your funds.
Diversifying your investments by timing, also known as dollar-cost averaging, is an interval-based investment strategy. In this strategy, you basically set aside a predetermined amount of funds that you would like to invest in your chosen tokens at a predetermined time.
This way, when the prices drop significantly, you invest your funds. And when the price goes up, you simply sell your assets for profit.
As the crypto market is volatile, as an investor, it is important that you are taking risk management approaches. So you don’t end up losing all your money at once.
Also, when you invest a small amount of funds, you get to monitor how good a coin is performing. And based on that, you can decide if you should invest more into the same coin or not.
So that was all for how to diversify your crypto investment portfolio. I hope the above tips have given you enough idea of how you should be planning out your investment strategy. In case if you wish to ask anything else, then do feel free to drop a comment below.