What is Crypto Portfolio Diversification and Why it is Important
Crypto investment has grown exponentially in the past few years, and so have the strategies to invest. Currently, BTC, ETH, and altcoins have a cumulative market cap of over $1.3 trillion as of mid-May 2022.
The explosion of cryptocurrencies has presented an opportunity for people to get into crypto investing. However, many don’t know where to start.
Asset diversification can be a powerful tool in crypto investment. In this article, I shall take you through what cryptocurrency portfolio diversification is and why it is important.
What Is Crypto Portfolio Diversification?
Cryptocurrencies are inherently volatile and can damage portfolios, especially if an investment strategy doesn’t work out.
To reduce the risk of losing money, investors can spread their investments across multiple assets. The more types of assets you have, the less likely it is that a single investment will lose all of your money. You reduce the risk of a single digital asset slumping and irreversibly damaging your portfolio by broadening the base.
This is known as portfolio diversification.Cryptocurrency portfolio diversification is an investment strategy where one invests in various digital assets to cushion against crypto volatility. This reduces risks and grows investment over time. Learn more here: Click To Tweet
Why Is Portfolio Diversification Important?
Lack of investment knowledge can lead to many financial mistakes. If you only invest in one crypto asset, you could lose all of your money when the price drops. The collapse of Terra (LUNA) offers the best example.
Besides, if you also implement one investment strategy, you could wind up with a plan that doesn’t work out, denting your portfolio.
By diversifying your crypto investments, you mitigate these risks.
How to Diversify your Cryptocurrency Portfolio
Many people think that you have to buy and store thousands of different cryptocurrencies. This is not the case. In fact, it is better to have a few high-quality cryptocurrencies like BTC, ADA, DOT, or most top-20 altcoins in your portfolio rather than a large number of low-quality ones outside the top-200 by market cap.
The best way to diversify your crypto portfolio is to invest in multiple cryptocurrencies with different risk/reward profiles. The more diverse these risk profiles are, the more resilient against volatility your portfolio becomes.
This would help you grow yields in the long haul.
To learn more about this crypto diversification, check out our podcast here.
Dalmas is a very active cryptocurrency content creator and highly regarded technical analyst. He’s passionate about blockchain technology and the futuristic potential of cryptocurrencies.