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Despite the fact that bitcoin is a unique kind of asset compared to other investments, the standard guidelines for investing are still applicable. This includes understanding the significance of diversification so that you may build a cryptocurrency portfolio that is both robust and diversified.
Investors who are used to the stock market will face new obstacles when attempting to diversify their cryptocurrency holdings. It is more difficult to find stable investments due to the danger and volatility of the cryptocurrency market, and there are currently no index funds available that would enable the purchase of a significant number of cryptocurrencies all at once.
What exactly does it mean to have a crypto portfolio that is well-balanced?
A cryptocurrency portfolio that is well-balanced is one that incorporates many varieties of cryptocurrencies, each of which has a unique set of applications and degrees of risk. The investor distributes a predetermined amount of assets across all of the cryptocurrencies and then rebalances their portfolio as required by purchasing further cryptocurrencies or liquidating holdings.
Maintaining a healthy equilibrium between your cryptocurrency holdings and the rest of your financial portfolio is an essential component of a crypto portfolio that is well-balanced. Due to the high level of risk associated with cryptocurrency investments, you should limit their proportion of your overall portfolio to a minimal amount. The percentage of your whole portfolio that should be invested in cryptocurrencies should not exceed between 5 and 10 percent at most, according to a general rule of thumb.
If the value of your cryptocurrency investments rises, you may find that you need to sell some of them in order to prevent your portfolio from being too heavily weighted in cryptocurrencies. If there is a bear market, having a portfolio that is comprised of 25% or 50% cryptocurrencies puts you in a big risky position.
How to diversify your cryptocurrency portfolio
You'll find all of the most popular tactics for diversifying your cryptocurrency holdings listed here. There are quite a few different ways to diversify your cryptocurrency portfolio. Take into account the fact that it is not required to mix all of them. You are free to select and choose the solutions that are most suitable for your circumstances.
Invest in established industry leaders
A straightforward strategy would be to disperse your capital across the digital currencies that have the highest market capitalization. You may, for instance, limit yourself to the ten or twenty most important cryptocurrencies. Although they are still subject to price swings, they have a tendency to give greater stability than smaller coins.
Bitcoin and Ethereum are the two cryptocurrencies that are the most similar to traditional investments, despite the fact that there is no such thing as a safe cryptocurrency investment. They have a greater chance of longevity since they are the market leaders. Bitcoin and Ethereum are two of the safest cryptocurrencies, therefore you may want to give them more weight in your portfolio. Use one-third of your cryptocurrency assets to purchase Bitcoin, another one-third to acquire Ethereum, and the remaining funds to acquire any other cryptocurrencies that strike your eye.
When using this strategy, you would generally not include stablecoins. For instance, stablecoins like as Tether (USDT) and USD Coin (USDC) are among the most popular cryptocurrencies; nevertheless, they are also designed to keep the value of one dollar constant. You should probably avoid investing in these cryptocurrencies since they aren't meant to grow in value over time.
Zero in on digital currencies that serve a variety of purposes
There are several reasons to invest in cryptocurrencies, and you can learn more about them here. Some common applications of cryptography are as follows.
Coins used for payments allow for instant, cheap transactions anywhere in the globe.
When it comes to banking, blockchain-based decentralized finance (DeFi) networks provide a viable option. Online games built on the blockchain rely on gaming currency to function.
Users of a metaverse platform may participate in a variety of virtual activities and communicate with one another in a safe environment.
Using privacy coins, your financial dealings can't be tracked. These classifications apply to a wide range of cryptocurrencies. Investing in one or two cryptocurrencies that each have a specific use case is one way to go about constructing a portfolio.
Put money into distributed ledger technologies for smart contracts
Popular crypto ventures include blockchain platforms that facilitate the execution of smart contracts. In the same way that a computer program operates on a blockchain, so too does a smart contract. Competition is high in the smart contract blockchain industry because of all the possible applications. These include the introduction of new crypto currencies and decentralized applications (dApps).
The fact that each blockchain has its own set of pros and cons means that some investors want to diversify their holdings.
Some of this altcoins one can use to diversify the crypto HODL portfolio is Polkadot, an asset which has steadily gained popularity recently due to many innovations and partnership with big players in the industry. Chainlink also serves as another example in this category as its network possess various potential applications including supply chain management, insurance and finance.
Uniswap tops up the list as another crypto portfolio recommendation. Uniswap’s unique automated market makes the asset serve as a potential gainer in the market. Despite their promising characteristics, it is still advised that one’s investment choice should solely depend on one’s knowledge of their preferred asset.
Look into the stocks of digital currencies
There are other forms of crypto investing than cryptocurrencies. Stocks of firms involved in cryptography and blockchain technology are also available for investment. These firms are excellent diversifiers for a crypto portfolio because they provide exposure to the crypto market in a way that investing in cryptocurrencies itself does not.
Cryptocurrencies with smaller tokens have more growth potential, therefore invest in such.
Searching for "diamonds in the rough" is a big part of the fun of investing in cryptocurrency. There is a higher chance of failure for smaller crypto initiatives, but if they succeed, they may reap huge rewards. While the majority of your cryptocurrency holdings should be in the top 25 to 50 coins, it's a good idea to diversify with a few tokens that catch your eye.
However while selecting such, it is important to note that thousands of cryptocurrencies available in the market hence making it difficult to select the one with genuine potential growth. These assets are majorly made up of altcoins as the asset’s class posses low capitalization and are less renowned compared to other large crypto assets.
Adjust your crypto holdings as needed by rebalancing
When managing a cryptocurrency portfolio, rebalancing is essential. You may need to purchase and sell certain crypto assets as values fluctuate, but this is necessary to keep your portfolio well-balanced. If any of your smaller assets suddenly skyrocket in value, for instance, you may have to swap them out for more substantial cryptocurrencies in order to maintain your preferred asset distribution.
The ups and downs of maintaining a diversified crypto holdings portfolio
Reduced risk is the primary advantage of a diversified crypto portfolio. To protect yourself from the ups and downs of the bitcoin market, it is wise to maintain a diversified portfolio.
Additionally, your chances of putting your money into the most profitable digital currencies are increased. Some cryptocurrencies have extended periods of outperformance, when they vastly outpace the market as a whole. You may increase your chances of owning such outlier coins and benefiting from their price appreciation by diversifying your portfolio.
The biggest disadvantage of maintaining a diversified portfolio is the time it takes. It takes time to find the best cryptocurrencies, determine your asset allocation, and rebalance your portfolio. Furthermore, due to the uncertainty of the market, even a well-balanced crypto investment portfolio may fail to meet its goals.
Examples of portfolio from Big crypto personalities
Mark Cuban, owner of the Dallas Mavericks, has been an outspoken advocate of cryptocurrencies for years, and his blockchain wallet serves as a model for other investors. More than a hundred different types of cryptocurrencies are stored in his Ethereum wallet, with some of his greatest holdings being:
The ApeCoin Ethereum Token (APE)
A Domain Name System for Ethereum (ENS)
A Protocol for the Oceans (OCEAN)
Rarible (RARI)
Governance OHM (GOHM)
In a tweet dated October 2021, Elon Musk disclosed his cryptocurrency holdings, saying that he only had Bitcoin, Ethereum, and Dogecoin (DOGE). Since he prefers simplicity, his portfolio consists of just the two market leaders and Dogecoin, which he dubs "the people's crypto."
Creating a diversified crypto portfolio may appear difficult at first, but it's really rather simple. You don't have to have a huge portfolio of cryptocurrencies to get started; five to ten should suffice. The process might take some time and is not urgent. A good strategy is to begin with a small investment in a handful of cryptocurrencies you understand well and then expand your portfolio as you gain experience and knowledge.