Why Every Crypto Investor Should Diversify Their Portfolio
The practice of investment is a very speculative and risky endeavour. Prices go up and down willy-nilly, in an instant, and it can be destructive to many people’s financial accounts.
It has been around for a while now, and investors from all over the world have discovered various assets to invest their money into. We didn’t mention cryptocurrencies for nothing, as they’ve proven to be some of the most lucrative investment values among their counterparts.
But while Bitcoin and other altcoins lead to huge profits, investors still had to endure the moments of price drops and losses. Thus, they began looking for methods to mitigate losses that accompany price drops.
In a search for loss mitigation
Some have stayed away from the most speculative assets like currencies and stocks, even the cryptocurrencies themselves - sticking with commodities such as gold and silver; others have invested full-on in government bonds that prove to be more stable in the long-term; while some used a method called diversification that is probably the most suitable option for crypto traders.
Diversification is a strategy of mitigating financial risks by investing in various assets all at the same time. In the case of cryptocurrencies, it means to not stick with just Bitcoin which, to be fair, might be somewhat counterintuitive but in the long run, it’ll help avoid some unnecessary financial risks.
Why people choose concentrated portfolios
Before reviewing the mechanics behind crypto diversification and its benefits, let’s take a look at why people choose non-diversified portfolios for their investment. In 2017, we witnessed the biggest spike in Bitcoin’s price - it reached almost 20,000 US dollars. The world suddenly realized that Bitcoin is the most lucrative currency that they can ever invest in. And so did this blockchain-based financial medium became the most beloved asset for many investors.
This is a universal attitude in every other investment market. When a single asset, for example, gold, shows a drastic amplitude in price spikes, the investors rush to buy some of it and then wait for massive profits. As you read Itrader review and get to know their services, you discover that many brokers like Itrader include singular cryptocurrencies in their trading offerings.
And while this can definitely be a source of fortune, single-asset portfolios are very risky at the same time. Sure, everyone wants a 300% increase in their investment values, but such assets are also prone to drastic drops. And if one was to put all their money into gold, and in just several days its price slashed by 100%, they’d lose a lot.
Now, if profits are more valuable in your cost-benefit analysis, and if you can easily handle massive losses - which is definitely not true for many traders - sure, go ahead and invest in Bitcoin and nothing else. Not to be overly pessimistic, it’s expected that over the next few years, Bitcoin’s price will increase due to its decreased supply. So, still not a bad prospect by any stretch of the imagination.
However, there are times when fortune is not on our side. And in those moments, we have to be equipped with every weapon that we can find in our arsenal. And portfolio diversification is definitely such a weapon.
The mechanics behind crypto diversification
So, here’s how crypto diversification works: when you decide to invest your money into digital currencies, instead of opting for the obvious choice, which is Bitcoin, you can take multiple altcoins and combine them with that heavy-punching A-lister.
This method works in two ways: first, it alleviates heavy risks that are associated with cryptocurrencies’ decreasing value - and as we’ve recently witnessed with Bitcoin, this can totally happen. By combining more stable altcoins, the whole portfolio takes a more balanced form.
Second, a diversified portfolio still retains some of the lucrative characters of its most speculative assets. Moreover, some diversified portfolios are even more profitable than the single-asset ones. For example, if you combine some of the most lucrative cryptocurrencies like BTC, OKB, XLM, and stablecoins, you’ll have much better chances to get profit, as well as get much more of it.
Consider using stablecoins and indexes
So, what are stablecoins? As the name implies, they’re digital currencies with more stable values. Unlike cryptocurrencies, with their dependency on the supply-demand market forces, stablecoins are tethered to conventional currencies, a basket of currencies, or other assets. So, this way, stablecoins themselves are diversified digital currencies.
One of the most popular running stablecoin today is USD Tether (USDT) which, as you might have guessed, is tethered to the USD. And when you combine USDT with the rest of the cryptocurrencies listed above, you get a portfolio that can yield some of the highest profits on the market.
Yet another asset that can greatly benefit your diversified portfolio is a basket of cryptocurrencies such as Fundstrat Crypto 40. FSTOK40 is an index that combines some of the top digital currencies by their market value, as well as liquidity. And by including it in the portfolio, you increase its stability.
Some of the most speculative assets
Since their creation, cryptocurrencies have been probably the most controversial assets in a world of investment, not to mention other industries. While they have certainly contributed to making certain individuals rich, many have lost their money by investing in Bitcoin.
One thing investors have to realize is that 2017, and just a several-day-period of it, was a singular moment and one cannot hope that it’ll repeat again. For what it’s worth, Bitcoin has been decreasing in value over these several months. So, developing a contingency plan can really benefit your financial stability.
When investing in cryptocurrencies, consider combining Bitcoin with other altcoins, as well as stablecoins and some indexes. This way, the portfolio will itself balance the risks and still retain some lucrative characteristics.