The need for a diversified cryptocurrency portfolio cannot be overemphasized in this adoption stage where the crypto industry is headed. There are more than a total of 11,000 cryptocurrencies according to the data from coinmarketcap. One could buy 20 of these coins and turn out to make losses if the individual did not critically look into the projects bought. It is important to consider factors such as use cases of these coins before buying and adding them to his/her portfolio.
On the other hand, diversification is not all about projects, it comes in and helps a trader cut down losses and break even when the market is in a downtrend or bearish condition. It has to do with risk management as to how much is allocated and distributed to different crypto assets in a portfolio. Diversification of a crypto portfolio helps any trader/investor to manage assets and track performance as regards profit and loss margin. This is possible by using a portfolio tracking service.
What is a Cryptocurrency Portfolio?
In literal terms, a portfolio is a sort of thin bag that contains a number of file jackets. In the finance industry, a portfolio is the range of investments which an individual or company holds in its name. A crypto portfolio is in no way different from the above. A variety or range of crypto assets such as Bitcoin (BTC), Ethereum (ETH) and other altcoins held by an individual trader/investor or a Hedge Company is referred to as a crypto portfolio. It is essential for traders to have one so as to track the performance of their assets daily, weekly or monthly. An exception to making use of a crypto portfolio is if the investor holds one type of crypto.
Why Diversify your Crypto Portfolio?
Diversifying your crypto portfolio is basically spreading your trading capital into a variety of crypto assets to reduce the risk of losses in case one of the assets underperforms. It is always a wise decision not to put all your eggs in one basket and experts understand this. For a retail trader or small-scale investor, three to five cryptocurrencies might be enough for a diversified portfolio as too many coins can crash the portfolio if the market slides.
It is important to note that diversification is different from asset allocation. Allocation has to do with investments in assets of different classes such as stocks, cryptocurrencies, metals such as gold and silver among others. Diversification on the other hand is investments across a variety of sectors of an asset class. Cryptocurrencies are an asset class and diversification in crypto is investments in different coins/tokens depending on their use case.
How to Diversify Portfolio of Cryptocurrencies
If you ask a number of experts in the financial markets, their bet would most likely be on a diversified portfolio as to one asset and crypto experts would bet the same. There is no 100% guarantee of performance even after research and asides that, the market could move sideways anytime. Diversification of your crypto portfolio would help break even and cut down losses when the market goes south.
Related to that, losses from a crypto asset can wipe away gains from the other. That is why after in-depth research on the coins you’re buying, you allocate the funds wisely and keep some stablecoins. Diversified crypto portfolio is better than one just concentrated on one asset because even in downtrends, there are coins that perform and add gains. Concentration on one crypto asset would end in missing out on gains of the other.
Crypto Portfolio Allocation and Best Strategy
There are different ways to diversify your crypto portfolio, but before doing that, one has to understand the different types or classification of cryptocurrencies so as to make wise decisions of diversification. Below are the different class or range of cryptocurrencies
Governance tokens: These are tokens that give their holders the right to participate in decision making on their platforms by voting. Examples of such are PancakeSwap, UniSwap, 1inch among others.
Utility Tokens: These are cryptocurrencies that facilitate their own native blockchain. They facilitate transactions on DApps built on their chain. ETH, EOS and SOL are utility tokens.
Stablecoins: As the name implies, they are coins with a stable value pegged to a fiat currency such as the dollar at a ratio of 1:1. They provide stability and do not suffer crashes in times of serious downtrend. Importance of having a percentage of your portfolio in stablecoins cannot be overemphasized.
Security tokens: These are basically tokenized or digital forms of the traditional securities such as bonds, stocks, ETFs, options and the likes.
Crypto products: There are different types of products available in the crypto industry that help diversify one’s portfolio. Examples are leveraged tokens, staking, lending among others are available on DeFi protocols.
XanPool: Diversify Your Crypto Portfolio
XanPool facilitates a one-stop solution for traders to diversify their digital assets portfolio. It does this by offering the buy and sell of more than 20 digital currencies.
In addition, it also offers DeFi tokens like Aave, stablecoins like USDT, blockchain platforms native token like EOS, and leading digital currencies - BTC and ETH. This ensures that a trader can build a diversified trading portfolio using XanPool's services.
The above listed classes of cryptocurrencies remains the decision of the trader/investor to choose from which suits but below are some worthy of mention precautions that would help.
Do not concentrate your funds in just one class of crypto. Make sure the funds are evenly distributed so as to avoid huge percentage loss when one crypto asset takes a hit.
Always do your own analysis and research. Do not buy an asset because it is rising or from sentiments.
Allocate a percentage of your portfolio to keeping stablecoins.
Invest whatever you can afford to lose. Nothing is guaranteed as you don’t control the market situation.
Understand times and seasons and how the industry evolves. This is very important in maximizing your capital to make profits.
Control your greed.
Pay attention to Bitcoin and make use of Crypto portfolio trackers such as coinmarketcap, coingecko among others.
Above all, the success or failure of any crypto portfolio is largely dependent on the trader/investor’s diversification strategy and diversification of a crypto portfolio is a skill every trader/investor should possess.