As cryptocurrencies become more and more popular, many people are starting to invest in them. With the recent Bitcoin boom, cryptocurrency investing has been a hot topic for some time now. The problem (and the opportunity) is that most people don't know how to diversify their crypto portfolios properly.
Diversifying your crypto portfolio can be a challenge.
There are so many different coins out there, and it's easy to get overwhelmed when trying to decide which ones you should invest in.
Some choose to follow the hype and invest in those cryptos that are trending, like what happens in Dogecoin cryptocurrency, which initially happens to be a meme coin. Dogecoin's price reached its all-time high after Reddit groups and a CEO of an electric car company announced their fondness for dogecoin.
However, the coin's price plummeted after a few months. This is another reason why diversifying your crypto portfolio is essential.
To get an overview of the various ways to diversify your crypto portfolio and which coins or tokens you should invest in, read through this article.
What Is Cryptocurrency Portfolio Diversification?
Diversifying your cryptocurrency portfolio means that you invest in different coins and tokens to hedge against their price changes.
The idea behind diversification goes like this: If Bitcoin's price drops drastically, then some altcoins (alternative coins), like Ethereum, Litecoin, and Tron, might appreciate on the same event, or at least drop much less.
Hence, to effectively diversify your portfolio, you should invest in more than one coin or token. Ideally, you will choose several cryptocurrencies with different fundamental values or with different potential valuations.
Let’s explain that.
Value: Investing In Coins With Different Use Cases
Each cryptocurrency is created with a purpose.
Some are used as a digital currency for fast and easy transactions worldwide without involving third parties, while others are designed to be used as a digital store of value.
For example, Bitcoin and Monero were created for use as alternative currencies; Ethereum is built for smart contracts and launching new tokens by projects, which have their own ICOs (Initial Coin Offerings).
Since each cryptocurrency has its specific purpose, or fundamental value, it's more efficient to diversify your portfolio by dividing investment funds between different industries.
This method does require a lot of research. In the age of DeFi, it also requires understanding of the technology behind each cryptocurrency.
One thing that’s pretty much set in stone is that in diversification by fundamentals you should definitely avoid pump and dump coins.
Valuation: Diversify Based On Cryptocurrency's Project Location
A cryptocurrency's project location is also a good indicator of whether or not it's worth investing in.
Investing in projects located in regions with more leeway in crypto investing may be more convenient and cost-effective than other regions.
Keep in mind that there are countries that either put restrictions or completely banned crypto projects - a prominent example is BlockFi getting cease and desist order in July 2021.
With this, always check if the project has necessary licenses and avoid investing in any project from a country that has banned cryptocurrencies, even if the coin itself is legal in other countries.
Another aspect that is heavily influenced by the project’s location is its potential valuation. The number of loyal followers of a crypto project might depend on its location and marketing. Remember that a country where crypto is already widely used may succeed faster than in countries with less adoption.
Make A Plan For How Much To Invest And When To Invest It
Before you start buying cryptocurrency, make a plan.
- How much money can you afford to invest?
- Under what market conditions are you going to execute your buying positions?
- Will you buy at once or DCA?
Timing the crypto market isn't easy, even for experts. It might be worth waiting for a dip in the market. Make a list of the cryptocurrencies you want to invest in and set up price alerts. This way, you'll be updated each time the market reaches your target price.
Efficient capital allocation is a system of determining what investment projects are less risky than others. If you're just getting started, it might be good to start with a currency that is already established and fluctuates relatively little, like Bitcoin. By doing so, you'll at least have one pretty stable base. That is always a good idea in any portfolio.
Unless you’re going for a very short term speculation, do not put a significant percentage of your overall holdings into coins without much trading volume or history yet. This is just a rule of thumb. It's not necessarily going to be perfect for every person or scenario: If you want some wild speculation, go for it (within reason).
But the goal of diversification is that if you invest in a bunch of coins, some appreciate, some decline, some shoot up and one or two may fail - which is not going to be the end of your world.
Cryptocurrency markets are volatile.
If you don't want to get hit with massive drops on your portfolio but you’re not into active trading either, diversifying is your best option.
Adequate diversification can be done by investing in more than one cryptocurrency after understanding its fundamentals.
No matter what you choose to do, make sure that it's a strategy that works for you. Also, don't get too caught up in 'pump-and-dump' schemes.