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Views: Allocating your capital between trades and assets has always been an additional factor for increasing and preserving profits over distance.
Investing in one asset is always accompanied by additional risks. It is not for nothing that there is a saying: “don't keep all your eggs in one basket”. An asset may have a strong price volatility or, even worse, a fall in the rate.
If you invest all your funds in one cryptocurrency, the success or failure of that asset will directly affect the entire portfolio. Diversification reduces dependence on the dynamics of a single coin.
But even for such a process, you need your own strategy and a clear plan that includes all possible scenarios of events to be as prepared as possible for the new realities of the market.
What is diversification?
Cryptocurrency diversification is an investment strategy in which a trader spreads his investments among several different cryptocurrency assets.
The basic principles of cryptocurrency diversification:
Investment allocation. Instead of concentrating all funds in one cryptocurrency, an investor divides his capital between 3-5 (or more) different crypto assets.
Selecting different assets. Diversification involves investing in cryptocurrencies with different characteristics - different algorithms, applications, market capitalization, etc.
Risk management. Diversification reduces risks associated with volatility and possible fall in the rate of individual cryptocurrencies.
Multi-currency portfolio. As a result, the investor forms a diversified portfolio consisting of different cryptocurrency assets.
Advantages of cryptocurrency diversification:
Risk reduction
Increased stability of returns
Ability to apply different strategies
Increasing the overall liquidity of the portfolio
Basic portfolio and its principles
A basic crypto portfolio should consist of several different assets to reduce risks. If you are still a beginner and only understand the principles of diversification, the following strategy will work for you:
60% - Bitcoin, Ethereum
30% - Litecoin, TON, Solana
10% - Pepe, NOT, HMSTR.
The principle of the portfolio is that the main capital is concentrated on assets that are least exposed to risks. Bitcoin and Efirium are the main coins on the market. They concentrate the main liquidity of the market. They are also traded on the ETF markets. Global confidence in these assets is fixed, and most importantly, they are less volatile. The bulk of the portfolio will be protected from sharp price fluctuations.
The rest of the portfolio should be allocated to fundamental altcoins. The projects should show positive dynamics in terms of development as well as user trust over the distance. The importance of the project to the cryptocurrency ecosystem is also an important aspect, and better yet, the project should be related to the real needs of people.
The smallest of all parts of your deposit should be allocated to high-risk assets with higher volatility. Even for such assets, there are criteria.
Typically, in the current market realities, high-risk assets include coins that belong to the massively famous crypto-games and memcoins.
It is important to understand that you should study the project before investing in it. The probability of a strong drawdown of the asset is very high and no one will buy back the bottom.
Why diversification is necessary
A diversified portfolio provides more stable returns in the long term. Fluctuations in the rates of individual cryptocurrencies are smoothed out due to the different dynamics of other assets.
The presence of different cryptocurrencies in the portfolio makes it possible to apply different investment and trading strategies depending on the characteristics of each asset.
Allocation of funds among several cryptocurrencies increases the overall liquidity of the portfolio. This makes it more flexible for transactions.
Diversification allows the portfolio to include both riskier speculative cryptocurrencies and more conservative stable assets to balance the level of risk.
When the situation in the cryptocurrency market changes, a diversified portfolio is better able to adapt to new conditions compared to investing in only one asset.
How to diversify your portfolio?
First, determine for yourself how much you are willing to invest in crypto-assets. Keep in mind that when investing in high-risk assets, it is better to use amounts that you are willing to lose in case of unforeseen circumstances.
Next, choose your key cryptocurrencies and allocate your capital from the most fundamental to less fundamental coins. The recommended structure is 60% in key cryptocurrencies, 30% in promising altcoins, and 10% in high-risk projects.
Once your portfolio is assembled according to all investment rules, periodically evaluate and rebalance it to meet changing market conditions.
Cryptocurrency diversification strategies
1. Diversification by market capitalization
Investments are distributed between large (“bitcoin, ether”), medium and small cryptocurrencies.
Allows you to get a return from both stable “blue chips” and more high-risk altcoins.
2. Separation by type of cryptoasset
The portfolio includes various categories of cryptocurrencies: payment, ecosystem, DeFi, NFT and others.
Provides diversification by functionality and application areas.
3. Diversification by geolocation or jurisdiction
Investments are spread across cryptocurrencies tied to different jurisdictions and regions.
Reduces risks associated with regulatory changes in individual countries.
4. Separation by technology or algorithms
The portfolio consists of cryptocurrencies with different protocols and consensus mechanisms.
Allows diversification of risks associated with technological features.
5. Separation according to the maturity of the projects
A combination of investments in large, established cryptocurrencies, and promising but riskier projects.
Provides a balance between stability and potential growth.
Conclusion.
The most important thing for asset valuation is to have a cool head and an open mind about coins. Remember that the responsibility for profit and loss is entirely on you, and it is necessary to conduct a detailed analysis and find the true reasons why you should invest in a particular project.
Do not make impulsive decisions when diversifying and strictly follow the plan of action you have outlined.
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