An iconic investor had once famously advised “not to put all eggs in one single basket”. While the classic adage was meant for investment in general yet it applies to crypto investments too. One of the basic goals of investment, be it crypto or stock, is to build up or accentuate your wealth. And diversification is the keyword here. When you diversify crypto holdings, you create multiple avenues to generate good returns even when you are investing in the same industry. Just as “variety is spice of life”, diversification is the recipe for a proliferating crypto investment portfolio. Read more about crypto leverage trading.
The post below offers a brief guide on the best ways to diversify crypto holdings. But before that, let’s have a quick look at the benefits you will experience when you will diversify crypto holdings.
Also Read: how to invest in cryptocurrency
Why should you be serious about diversifying your crypto portfolio?
Protection from negative swings
Crypto market is radically volatile. Crypto prices could be $70,000 one day and might drop down to even below $20,000 in 7 to 15 days. Now, if you stick to just one crypto, you will have to accept whatever good or bad happens with it. This is one major reason why you should diversify crypto holdings.
When you diversify crypto holdings, you always have at least one other option to fall back upon if the first coin goes little under the weather. The idea is to arrange for protection or backup for your investment portfolio if things go wrong- a must have when you are dealing with something as wild as cryptocurrency.
More avenues to welcome wealth
As mentioned previously, when you diversify crypto holdings, you always have more roads to build and amp up your finances. For example, Bitcoin is predicted to touch a solid $100,000 by the end of 2022. But, did you know that Ethereum is also projected to go by 400% by the final quarter of 2022? So, if you only invest in Bitcoin, you will only profit from BTC upswings. But, if you diversify crypto holdings and invest in Ethereum as well, you will benefit from the high ROI offered by both the coins.
Put simply, when you diversify crypto holdings, you are offering yourself multiple streams of income and that too from just one industry. Crypto has historically shown to offer oversized returns- and so the more crypto you have, the better.
Tips to diversify crypto holdings
Now, we can finally get into the tips to diversify crypto holdings.
Focus on various “types”
The first step when you have plans to diversify crypto holdings is to gather a thorough understanding of the various types of cryptocurrencies. You have bluechip coins like Bitcoin or Ethereum that command high market share and high trading volume. They are backed by strong fundamentals that speak for their sustainable growth. And yes, they are more stable than other regular cryptos. When you aspire to diversify crypto holdings, make sure to have at least one bluechip coin in your portfolio.
Then, you can also count on stablecoins when you decide to diversify crypto holdings. These coins are always backed by a stable fiat as collateral and hence are more dependable compared to other regular cryptos.
Meme coins have been making big waves in the crypto scene for a while now. They are mostly based on market hype and, while they can boast high upswings, meme coins are not really sustainable. But, you can have them in your investment portfolio for short-term investment when you plan to diversify crypto holdings.
Diversify based in market capitalization
This point is somewhat in continuation with the previous point mentioned above.
When you have plans to diversify crypto holdings, invest in both high capitalization and decent capitalization coins. It’s self-explanatory why you should have coins with high capitalization in your portfolio. But, what a lot of investors don’t realize is that some news might show comparatively lower market capitalization at the moment but hold the potential to grow huge in the near future.
For example, KSM, or Kusama is a new coin that currently shows little more than $1 billion which is almost nothing in comparison to the $800 billion+ market capitalization of Bitcoin. But, KSM is a high potential coin that is designed to facilitate experimentation with dApps- one of the hottest things in the contemporary digital world. According to several analysts, KSM is poised to rise up as one of topmost cryptos in the near future.
This is what diversification is all about. When experts advise to diversify crypto holdings, they mean to make room for multiple different options with different kinds of potential.
Diversification based on risk factor
As mentioned time and again, crypto is a high-risk industry. However, some cryptos are riskier than others. We have already discussed that you will add in risky cryptos too when you diversify crypto holdings. But, in that case, you have to be careful about diversifying your investment capital as well.
Diversification of investment capital implies variable allocation of your investment fund. So, when you diversify crypto holdings, allot the maximum amount to the most stable coins, the next majority will go to decently stable coins- and the least amount should be reserved for high risk coins.
Diversify among various crypto-related assets
When it’s all about how to diversify crypto holdings, the discussion should not stick to cryptocurrencies only. Rather, you must focus on crypto-related projects that could add new dimensions to your overall crypto investment portfolio.
For example, you can include crypto ETFs in the list when you have plans to diversify crypto holdings. The crypto ETF funds allow you to indirectly invest in crypto zones yet at a much lesser risk. Also, crypto ETFs are less risky in comparison to directly owning cryptocurrencies.
Then, of course, you have NFT projects. Crypto and NFT share a deep connection. Both are built on blockchain platforms and both are a part of the new Web 3.0 revolution. Crypto is the only payment form that is accepted for buying NFTs.
Diversification doesn’t mean that you have to allot the entire investment fund to all chosen cryptos or crypto assets at the same time. It’s because just because the coming week will be an amazing time to buy one particular coin, doesn’t mean it would mean the same for some other coin. For the other coin, you might have to wait for a few more weeks. So, diversify the time of investment to make the most of the best timings of various coins.
You should also diversify crypto holdings based on geographical locations of cryptocurrencies. You never know which country will impose a sudden ban on crypto as China did recently. Thus, you must focus on coins from various parts of the world so that you can save yourself if one country starts giving cold shoulder to crypto.