Introduction
Cryptocurrency investments can be difficult to manage at the best of times, largely due to the volatility of the market. You may have read that diversifying your cryptocurrency portfolio is key when trading or investing, but is that really true? In this guide we look at why, when, and how you might want to consider diversifying your cryptocurrency portfolio.
What does diversifying your cryptocurrency portfolio mean?
Diversifying your cryptocurrency portfolio refers to the purchase of multiple assets. This is, typically, a good strategy to help with risk management. For instance, in traditional stock markets one might have shares in the medical industry, financial industry, and retail industry. In cryptocurrency, you might invest in Bitcoin, XRP and Litecoin.
In theory, investing in multiple assets could help to minimise risks in the event that one coin suddenly plummets. Due to ongoing market volatility, however, minimising the risk of loss isn’t always feasible. This is because cryptocurrency prices tend to move in the same direction, at the same time. As Bitcoin holds the majority of the market share, it often dictates what happens to other cryptocurrencies. If it rises, the rest of the market usually follows. If it falls, other token prices are likely to experience a dramatic drop in value.
How can you diversify your cryptocurrency portfolio?
With traditional stocks you can target different industries to help mitigate your risk for loss, but in this sphere, it’s important to look at different cryptocurrency types. After all, cryptocurrencies aren’t all the same.
Here are some examples of the different types of cryptocurrency you could invest in:
- Centralised cryptocurrencies such as Ripple (XRP)
- Bitcoin, which aims to be a digital asset to replace Fiat currency.
- Platform-based currencies which allow for the construction of decentralised applications (dApps) such as Ethereum
- Privacy driven coins such as Monero
- Stablecoins which are pegged to fiat currency
Your decision to diversify your cryptocurrency portfolio should come from technical analysis, solid market understanding and what you want to achieve.
What to be aware of before you diversify
Projects and tokens can disappear overnight, bear markets are increasingly common and scams are quite common. Any decisions you make to invest in new coins need to be influenced by thorough market research. Keep on top of the latest news and pay attention to trends. There is always a risk involved with investment, but the right choices could put you well ahead when the cryptocurrency market takes a bullish turn. Another important tip: don’t spread your investments too thinly. Focus on two or three coins of different types that could maximise your returns. Remember to diversify your portfolio, not dilute it.
The verdict
Cryptocurrency is still a fairly new industry. New coins and projects come to market all the type. There’s a wide variety of cryptocurrency that gain popularity at different times. Don’t be afraid to dip your toe in the water but support your decisions with deep market understanding. Diversifying your portfolio could be extremely beneficial. However, when purchasing multiple assets remember that risk in cryptocurrency is always fairly high. Don’t invest more than you can afford to lose.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.