5 Main Benefits of Diversifying Crypto Portfolio
Whether you are a seasoned cryptocurrency trader or just getting started, diversifying your assets can provide crucial benefits that are not always obvious to traders. Diversification reduces the likelihood of losses in any one coin and also reduces the risk of a single event like an exchange hack from having catastrophic consequences on your investments. A diversified portfolio also benefits traders who are holding a large number of coins by diversifying their risks and reducing the overall amount they need to hold in order to maintain their desired exposure to the overall cryptocurrency market. Here are the five main benefits of diversifying your trading portfolio.
Diversify by coin type:
The cryptocurrency market is extremely diverse, and there is a huge amount of different types of coins and tokens that are traded. If you have the same holdings in all coins, the market can become extremely volatile due to single events or pump and dump schemes. Diversifying by coin type allows for a greater spread of risk, which can reduce overall losses over the long term in any one coin.
Diversify by past success:
Some coins are more reliable than others, such as coins that have a good track record of staying on top of technological advances. A coin like Litecoin has been around for a long time and is regularly updated with new features, and has not suffered from any major security flaws. Diversifying into coins that have good track records helps to reduce overall risks. Tracking the success of cryptocurrencies in your portfolio is easy with a cryptocurrency portfolio tracker, so it is not hard to see which coins are doing well and maintain balanced exposure among coins of different types.
Diversify by Industry:
If you are looking for coins that have the potential to gain a lot of traction in the years ahead, there are some coins that still have many aspects left to develop. Take Ethereum, for example. It is highly unlikely that any other coin will become as popular and successful as ETH over the next few years. If you own Ethereum in your portfolio, it can serve as a hedge against losses in other cryptocurrencies. Diversifying by industry also allows for more reasonable exposure to project success and reduces overall risk on each coin held in your portfolio. Non-fungible tokens (NFTs) are an example of a growing crypto industry you can invest in to gain organic growth. With so many NFT ideas being implemented, ensure you do you research before investing.
Diversify by geography:
Since the cryptocurrency market is so young, there are many parts of the world that have not started investing in crypto yet. Africa, in particular, is a continent with a lot of growth potential for cryptocurrency investment. If you live in an area like Kenya or Nigeria, where most people are not yet familiar with cryptocurrency, and there are no exchanges available to invest in ETH or BTC, you can invest in ETH to help grow your wealth by driving adoption and interest in ETH coins. While Bitcoin and Ethereum are among the most popular cryptocurrencies in the world, it is also possible to diversify into less popular coins by region or industry as well. Whether you have only invested in a couple of cryptocurrencies or many in your portfolio, diversifying your holdings can reduce risks and increase the likelihood that you will make more money overall.
Diversify with an ETF:
Diversification is not limited to individual coins but also extends beyond the entire cryptocurrency market. You can invest in any number of new cryptocurrency portfolio funds and ETFs that can give you exposure to the entire market with a single investment. This is an attractive option for investors who are interested in traditional investment strategies but want to diversify their crypto portfolio by investing in other types of coins besides those that have solid price performance. First established in 1990, ETFs are similar to mutual funds that trade on exchanges and make investments in a basket of securities. Using an ETF can also help reduce overall risk by spreading risk among multiple cryptocurrencies rather than holding a small number of crypto assets.
Investment strategies for diversification:
There are a number of different strategies that you can use to diversify your portfolio. Some strategies involve investing more heavily in coins that have performed well, and others involve reducing your holdings in coins that have declined in value over time. Both strategies involve removing exposure from coins you are holding, but the main difference is that the “buy low, sell high” strategy involves buying into higher-risk projects while the “sell high, buy low” strategy involves selling your holdings in more reliable cryptocurrencies.
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Final Thoughts
Diversification is one of the most important factors in a crypto portfolio, regardless of whether you are a new or long-term crypto trader. If you are interested in investing your money and would like to have the best chances of success, diversifying your portfolio will help protect your investments against losses in any single cryptocurrency.
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