No one can deny that digital currencies are profitable assets. If you’re an investor you most likely know that they have outperformed other investment solutions over the years and brought profit to the entrepreneurs who knew how to integrate them into their investment portfolio. Unsurprisingly, many focused their attention on the crypto landscape and included crypto coins like Ether and Bitcoin in their portfolios.
As everyone knows, investors have a single purpose; they want to maximize their profit while minimizing the risks. For this, they develop several tactics and strategies and set investment goals that enable them to capitalize on market trends. To increase their profit chances, they often allocate their funds to various assets because diversification is one of the most successful strategies. If you’d ask a seasoned investor to recommend a strategy to boost your profit, they’d tell you to invest varying percentages of capital in several assets.
Cryptocurrency is a great investment opportunity in 2022, but it’s crucial to know how to build your portfolio to take advantage of the market.
What is diversification
Not even the most speculative investor would recommend putting all your funds into a single asset. Diversification is investors’ favorite investment strategy as it enables them to reduce the risk in their portfolio by allowing them to allocate their assets to several investment opportunities. For optimal results, you should invest in assets that have a low correlation with one another.
Surveys show that more and more investors are looking towards cryptocurrencies as diversification tools because they allow them to make a quick profit. This strategy may make sense if you have the same goal. Suppose you already have a crypto portfolio; you might find it a smart decision to invest your funds in various crypto projects to lower the risk of losing money. The diversification strategy provides you with the best possible returns when one of your crypto projects performs poorly.
As a savvy investor, you should be aware that putting all your eggs in one basket is too risky, and you should invest in more than three cryptocurrencies. The secret to building a sizable portfolio is diversifying your assets and following the market’s movements.
The benefits of crypto diversification
Investors usually rely on diversification for two reasons, it provides their portfolios with non-correlated assets, so when one tanks, the others might hold steady or even increase in value, and it protects their funds in case an investment project implodes.
Another great benefit of diversification when managing a crypto portfolio is that it can limit extreme outcomes. If one digital currency fails and you lose all your funds, the others can still stay afloat or even rise in value and protect your finances. You don’t want your entire crypto portfolio to be wiped out because you invested in one coin, and it performed poorly.
You should also be prepared to diversify to limit your winnings because you have to spread your funds across several investment projects instead of putting everything in one that might get a ride to the moon.
However, investing in multiple smaller projects is paramount in a decentralized finance ecosystem because it provides greater chances to make a profit from cryptocurrencies.
How can you diversify your crypto portfolio?
Here are some recommendations on how to diversify your crypto portfolio.
Type of currency
This is one of the most popular diversification techniques when it comes to including more assets in a crypto portfolio. The idea is to invest your funds in various high-performing cryptocurrencies such as Ether and Bitcoin. As you may already know, each crypto project has a unique technology and foundation to power it, and therefore it evolves differently in the market. Therefore, when you diversify the portfolio by investing in different types of digital tokens, you have the option to select those that match your objectives.
You can find tokens, privacy coins, and altcoins on the market. Suppose you choose to employ this tactic; make sure to research the various aspects of the type of cryptocurrency you prefer to learn more about their past trends, future potential, and prices.
Smart contract coins like Ethereum have gained great popularity recently. Smart contracts facilitate automated transactions between anonymous users, and the network relies on them to allow developers to create decentralized applications. Ether is the native coin of the Ethereum network and is used as an incentive for miners when completing transactions. If you check the ETH price you’ll immediately notice that it’s a valuable coin and the second-largest digital currency by market cap.
According to industry
Choosing a set of different digital tokens could solve issues in various sectors is wise. This will enable you to mitigate the negative effects on your portfolio in case of unfriendly events and policies. As you already know, investing in any kind of asset is risky because worldwide events can impact their evolution and price, and it’s best to use cryptocurrencies that impact different industries to reduce the risk. Research the market and invest in rapidly growing and stable crypto projects that allow you to boost the portfolio’s overall profitability.
Consider the timing
You might not have heard of diversification by timing, but it’s a popular concept in the industry. If you do it correctly, it can provide you with great results because it requires you to purchase crypto assets at the right time and research the market to identify the ideal moment for investing.
It’s impossible to completely eliminate market risk when building a cryptocurrency portfolio, but you can enhance its value if you’re selective about investing. You can diversify your portfolio by timing by setting specific amounts of funds in selected currencies at established periods. For example, you can invest in new cryptocurrencies when the prices are low and sell them when the prices are high to obtain profit.
Diversifying your cryptocurrency portfolio is crucial because the market is volatile, and this strategy can help you protect your finances against negative market movements.