Diversify Your Crypto Holdings: Are you interested in building a cryptocurrency portfolio but want to keep the risk as low as possible? Of course, everyone wants the best of both worlds, namely low risk and high returns. With crypto prices seemingly always on a roller-coaster ride, it’s hard to find one, even among the giants like bitcoin and ethereum, that have settled down and moved away from high daily volatility levels.
That’s where diversification comes in. As every old-school securities investor knows, you’re usually better off with a portfolio of between five and ten stocks than just one or two. That same mathematical principle holds in the world of cryptocurrency. And in an era when cryptos are still relatively new forms of investments, it makes even more sense to diversify a portfolio of alt-coins.
Key Considerations when Diversify Your Crypto Holdings & Portfolio
What are some of the key things you should know about crypto diversification before attempting to amass a varied portfolio? Consider the following points:
- The “reversal” effect is constantly in play. What is it? The rule states that the best-performing cryptos can turn instantly and become bottom-feeders. Likewise, the worst coins can reverse and turn into segment leaders in the blink of an eye. The only way to counteract the reversal effect is to hold a basket of cryptocurrencies rather than one or two coins.
- When you compare, for example, the top 100 coins in terms of returns, the variability from month to month is amazingly high. Some returns are measured in the thousands of percent while others lose as much. Again, diversity to the rescue. There’s simply no sense in taking on a phenomenal level of risk when you don’t have to.
- Rarely does a leading coin continue to post top-notch returns for several months in a row. Profit levels tend to go in a cyclical, albeit unpredictable, wave of up-and-down months. The best way to avoid those ups and downs is to stock your portfolio with at least ten coins. Some investors try to hold an equal dollar investment in as many as 50 coins.
- If you use bitcoin as a sort of market benchmark, you’ll often notice that when its price falls back for a few months, some of the smaller coins advance in price. There are many reasons and theories for this phenomenon, but the fact is that it continues to happen time and again. That’s why a diversified portfolio is such a smart way to protect your alt-coin holdings.
- Another technique for diversifying, in addition to just buying lots of different coins, is to look at the stated mission of the coins you’re considering. Some specialize in being a means of retail exchange, while others aim to be a store of value or to operate within a given financial market. Still others focus on enabling smart contracts, online payments, and many other financial activities. Consider owning many different kinds of coins based on what their stated mission is.
If you talk to a dozen crypto investors about their favorite diversification techniques, you’ll come away with 12 different answers. One of the newer ways people are approaching the challenge of diversification is to pay attention to where the alt-currency is based, and then proceeding to build a geographic-based portfolio that includes coins from dozens of separate nations or regions.
Some other characteristics people examine in order to “balance” a portfolio include the following:
- Large and small-cap coins
- Coins that are less than one year old and those that are more than five years old
- Cryptocurrencies that grew rapidly from the ICO stage and those that gained ground very slowly
- Alt-currencies run by teams of two or three people and those overseen by huge teams of experts