Why Crypto Portfolio Diversification Matters - Kalkine Media

October 19, 2023 12:41 PM AEDT | By Harry Wilson (Guest)
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Investors new and old are finding new ways to increase their portfolio’s potential through various crypto trading strategies. From dollar cost averaging and technical analysis to range trading and trend trading, there are plenty of ways to capitalise on the crypto market.

One powerful cryptocurrency trading strategy is portfolio diversification. This strategy helps to mitigate risk and gives traders the chance to enhance their skills. But is this strategy really worth dedicating time to?

In this article, we’ll understand the significance of portfolio diversification and explore the different ways to use this effective crypto investing strategy. Let’s begin!

What Does Portfolio Diversification Mean?

Portfolio diversification is a tried and true investment strategy. But what does it mean to have a diversified portfolio?

A ‘portfolio’ refers to a set of tradable assets that an individual owns and holds. When it comes to cryptocurrency, since this asset is solely digital, the term ‘portfolio’ refers to the coins a trader stores in their crypto wallets.

Portfolio diversification is when a trader chooses to spread their investments across several assets rather than just one. The main goal of this crypto strategy is to minimise risk and provide a sense of balance.

Why Does it Matter to Balance Your Portfolio?

When considering which crypto trading strategies to use, you should not overlook the importance of diversifying your portfolio.

The underlying principle of portfolio diversification is that assets have varying attributes and perform differently in changing market conditions. For example, during a certain time period, the crypto market may undergo changes. This can be caused by economic, political, or other external factors. As this occurs, it may cause one asset to rise in value whilst, at the same time, another asset remains steady. Other assets may also drop in value.

When a trader diversifies their portfolio, they can capitalise on these changes. Any drops in value from certain assets can be offset by the rise of others. This helps to mitigate the effect of market volatility on the trader’s portfolio.

Also, by doing the research work to bring in variation in crypto assets, you’re giving yourself the chance to excel as a trader. Too often, crypto investors buy assets that they don’t know anything about, which limits their potential for success.

Rather than buying a few at random, you can research the various coin types, industries, and use cases. Over time, this will set you apart as a well-rounded trader.

Examples of Portfolio Diversification

There are lots of different ways to balance your portfolio. You can opt to do this alone by doing research and carefully planning out your investments. However, if this seems too daunting, you can use a crypto broker.

A crypto broker will help you plan out your portfolio and provide tools (such as trading bots) that can assist you as you trade. You can find a broker by joining a platform such as https://the-quantum-ai.net/. This way, you connect with a broker who can guide you and help you in using the portfolio diversification trading strategy.

Whether or not you use a broker, it’s still wise to learn the different options you have to balance your cryptocurrency portfolio. If you’re ready to step up your game as a crypto trader, check out our examples of portfolio diversification:

By Coin Type

There are thousands of different types of cryptos, each with unique use cases and purposes.

As the crypto sector evolves, different coins can fall in and out of the limelight. For example, whenever the benefits of crypto transactions are shown through the media, there tends to be a noticeable increase in interest in stablecoins. On the other hand, as the gaming industry grows, many keen traders turn towards gaming tokens. By buying crypto assets of varying types, you can capitalise on this fluctuation in interest.

Different Types of Cryptos

Here are the main types of crypto coins to diversify your portfolio:

  • Stablecoins - Cryptos whose value is pegged to that of another currency or commodity, such as fiat currency (dollars, euros, or pounds).
  • Security Tokens - These digital form of traditional investments represent the ownership interest or stake in a particular asset.
  • Utility Tokens - A token that owners can use to access a product or service within an ecosystem that’s based on blockchain technology.
  • Gaming Tokens - Assets that are used in video games or gaming platforms. These tokens typically represent in-game currencies, items, or bonuses and are used in place of fiat currency.
  • Memecoins - Coins that have originated from or been inspired by internet memes. Typically, these assets have no real-world uses but do tend to generate large and dedicated communities.
  • NFTs - Short for ‘non-fungible tokens’, NFTs are unique digital identifiers that are present on a blockchain and cannot be replicated. They can represent any real-world objects, such as art and music.

Tip - If you trade through a crypto exchange, we suggest checking beforehand which crypto assets they support. Some exchanges only have a small list of coins, making it harder to create a diverse portfolio.

By Market Cap

You can also diversify your portfolio by market cap. You can calculate a coin’s market cap like this:

Market Cap = Price x Circulating Supply

Alternatively, you can rank coins by market cap through a crypto marketplace such as CoinMarketCap.

Traders can use this to see which coins are most popular and currently dominating the market. Rather than assuming that coins with high prices are better investment options, you can make an objective view of an asset's performance.

Here’s how traders typically categorise crypto coins by market cap:

  • Large-cap - More than £10b
  • Mid-cap - Between £1 and £10b
  • Small-cap - Less than £1b

Buying coins with varying market caps is a good trading strategy as it can balance the risk of your portfolio. Small-cap coins are very volatile and considered high-risk investments. On the other hand, large-cap coins are less volatile, whilst mid-cap ones are somewhat volatile whilst still having large growth potential.

By Industry

With growing popularity over the years, crypto has flooded into all kinds of other industries. Blockchain technology has transformed many sectors, leading to many industries being keen to adopt and utilise it.

Since each industry can fluctuate on its own, it can impact the prices of crypto assets. If you want to capitalise on these prices, you should try spreading your trades by industry focus.
Check out a few of the industries that have been employing blockchain technology: 

  • Transport
  • Healthcare
  • Environment
  • Government
  • Insurance
  • Supply chain
  • Banking
  • Real Estate

By Country

Sadly, the crypto market has an uncertain future. In countries worldwide, governments are taking different approaches to the issue of cryptocurrency regulation. In some countries, certain crypto assets are accepted as legal tender. However, in other countries, cryptocurrency is subject to hefty taxation and restrictions.

This variation can largely sway the value of crypto coins. So, by buying coins from different countries, you can lessen the impact of both regulatory uncertainties and regional price changes.

Summary - Why Balance Is Important

Overall, portfolio diversification is one of the best cryptocurrency trading strategies to reduce risk and hedge against issues such as market uncertainty and regulatory changes.

The best part is, creating a diverse portfolio is actually more simple than it may first seem. There are lots of ways to diversify your portfolio, including by coin type, market cap, industry, and country. Using this strategy allows you to provide a foundation for steady growth and long-term success within the volatile cryptocurrency market!

Risk Disclosure: Trading in cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory, or political events. The laws that apply to crypto products (and how a particular crypto product is regulated) may change. Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading in the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed. Kalkine Media cannot and does not represent or guarantee that any of the information/data available here is accurate, reliable, current, complete, or appropriate for your needs. Kalkine Media will not accept liability for any loss or damage as a result of your trading or your reliance on the information shared on this website.


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