Why worry about diversifying your cryptocurrency portfolio? Good question ! Let’s try to formulate an answer.
Every good trader wants to make profits. To make a profit, you have to take certain risks. There is often a correlation between risk and profit. The higher the risk, the greater the benefit. However, don’t forget the other side of the coin. High risk also implies high losses.
Therefore, a good trader knows how to manage risk. Basically, trading is all about managing risk while growing your capital. So why choose to diversify your cryptocurrency portfolio?
What is diversification in cryptocurrencies?
The sole purpose of diversification is to manage risk by mixing a variety of different investment strategies. Your goal is to create a group of investments that exposes your portfolio to as many different areas as possible, which helps reduce the overall risk of your investments. The idea is that your portfolio can withstand negative events without losing too much value in your portfolio.
For example, your portfolio is 80% Bitcoin and 20% Ethereum. It is not a well-diversified portfolio. You are only exposed to two investments and these two investments are highly correlated. If the price of bitcoin goes down, you will likely experience a drop in the price of Ethereum. This means that the overall balance of your portfolio will decrease, which is a serious risk.
Therefore, you want to invest in other solutions that are not necessarily related to bitcoin. If the price of bitcoin crashes, you don’t lose the value of your entire portfolio, but only half of its value, because you were smart enough to diversify between two types of products. That’s why a well-balanced portfolio will help you weather the worst market crises.
How diversification of cryptocurrency portfolios can be applied and what techniques exist
Let’s take a closer look at some examples of portfolio diversification in crypto. Here are some possible crypto portfolio diversification strategies.
Diversify your portfolio by type of crypto
You can diversify your investments according to the type of cryptocurrency, such as the crypto vechain which helps fight against counterfeiting.
Be sure to analyze the different possibilities and how you want to allocate your portfolio.
Diversify your crypto portfolio by making investments in different industries
The idea of sector diversification is to expose your portfolio to as many sectors as possible. If a certain sector takes a hit, your portfolio can absorb it, because you’ve applied diversification.
For example, you can invest in cryptocurrencies in the following industries:
– Data and data analysis
It’s up to you to determine your values and how you want to invest. However, do not invest in a project if you do not know much about it, its values or the sector in which it operates. Always do some research beforehand to better understand the challenges and opportunities in the industry.
Diversify your crypto portfolio by different investments in different types of solutions.
Finally, you can invest in different types of solutions or products. For example, you can spread your investments between newly developed blockchain platforms , new protocols, and new tools or services such as wallets or data providers .
By investing in different segments of the blockchain solutions market, you spread the risk