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How to Diversify Your Cryptocurrency Portfolio and Limit Risks

How to Diversify Your Cryptocurrency Portfolio and Limit Risks

With a whopping market capitalization of $2 trillion and some coins climbing by 9 million percent in value in just over 10 years, it’s easy to see why the advent of cryptocurrencies has kicked off a full-scale modern-day gold rush.

And yet, while the next Bitcoin is certainly out there, crypto remains a high-risk investment. So, following your gut instinct is not enough to limit losses – but diversifying your crypto portfolio might be. Use the strategies below to allocate your capital wisely, maximize gains, and limit risks.

Choose a Legitimate Trading App and Beware of Scams

Today, there are nearly 19,000 cryptocurrencies in circulation. While some are legitimate, the world of crypto is still undermined by scams and, just in 2018, crypto investors lost over $1.36 billion to fraudsters.

Whether you are a newcomer or a seasoned investor, betting on coins that have been around for just a few weeks or months can only add risk to your strategy. Instead, consider building the bulk of your portfolio around cryptos that are well-established, like Bitcoin or Ethereum. After all, the Squid Game token incident is still very fresh in the mind of investors!

Even more importantly, look for online investing platforms that are reputable, like the crypto and stocks app on this page.

Invest in Coins with Different Market Cap

Branching out into coins with different market capitalizations is a great strategy to avoid risks while growing your capital gains.

Ideally, you’ll create a robust base for your portfolio by investing half of your capital in long-established tokens, like BTC or ETH, which can offer stability and lower risk, but lower returns. You can then balance this out by buying some higher-volatility coins with smaller market caps but more room for growth and a promising future.

Invest in Cryptos Created with Different Uses in Mind

The main aim of portfolio diversification is to build a range of “non-correlated” assets – or those assets that are not affected by the same economic factors and, therefore, won’t all drop or rise at the same time. For example, alternative assets, like commodities, hedge funds, and real estate, might rise when stocks dip, or vice-versa.

In traditional portfolios, this strategy allows you to endure tougher markets and minimize losses, but in crypto, things are more complicated.

Most crypto tokens fall within the same digital asset class, causing them to rise and fall in value together. In turn, the best way to minimize risk is to opt for a range of assets within the same class but with different use cases.

Each cryptocurrency is designed with a different purpose, including:

  • Store of Value (i.e.: Bitcoin)
  • DeFi Tokens (i.e.: Maker)
  • Payment Coins (i.e.: Litecoin)
  • Stablecoins (i.e.: Tether)
  • Smart Contracts (i.e.: Ethereum)

Ideally, you should aim to build a portfolio in which each asset type is fairly represented.

Invest in Different Blockchain Infrastructures

Blockchain – or the public ledger used to secure crypto transactions – is the underlying technology behind most cryptocurrencies. While the infrastructure that enabled the Bitcoin phenomenon is the most popular one, different cryptos use different blockchain systems, each with its own purpose and features.

Among the most established ones are Ethereum, Cardano, and EOS, but there are also emerging infrastructures like Ripple, IBM, and Chainalysis worth considering.

Diversifying your crypto portfolio by blockchain means that you are protected if one of the systems is compromised. And, at the same time, if one of the blockchains finds new, revolutionary uses, you’ll be one of the first ones to benefit from it.

Branch out into Different Locations and Industries

New uses for cryptocurrencies are found every day. From an alternative to standard currencies, cryptos and blockchain technologies have evolved to disrupt a range of industries, including finance, healthcare, governmental organizations, travel, information, and more.

While a lot is yet to be explored about the potential of cryptos, branching out into coins that are actively providing solutions in different sectors – like DeFi or entertainment – can help you grow your capital gains when new applications are found.

On the other hand, diversifying your portfolio by industry and geography is essential to protect your investments from crypto-unfriendly regulations and blanket bans, such as the one issued by the People’s Bank of China in 2021.

Beyond Crypto: Expanding into Other Digital Assets

While cryptocurrencies represent a single asset class, there are alternative assets in the digital world you can leverage to minimize your portfolio’s risk. For example, Non-Fungible Tokens (NFTs), or the digital representation of a physical asset, are finding new uses in art, entertainment, real estate, notary services, and intellectual property.

While NFTs are still considered complementary assets to cryptocurrencies, they are not as closely correlated to the main tokens’ fluctuations. In turn, they provide a safety net to investors looking to tap into the unexplored potential of digital assets.

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by Brian Perry // Brian Perry is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.