Trading in crypto can be a lucrative way to earn money and an important hedge against inflation in fiat currencies. As is this the case with any trading in financial assets, crypto also comes with risks of its own. That’s why it’s essential for investors to balance a crypto portfolio and diversify to lower the risks.
In this article, we will explore a few different ways investors can diversify their portfolios without jeopardising the profits that they can yield. The key is to balance the types of cryptos you’re investing in.
1. Invest in the Big Coins
It may seem obvious advice, but investors looking for ways to include as many different cryptos in their portfolio often overlook the big ones. Regardless of how complex and well-created, every portfolio should include Bitcoin and Ethereum as the most popular and largest cryptocurrencies.
These cryptos are known to fluctuate, as are the altcoins, but in the long run, they are the safest assets to buy and holdin the world of crypto. The value of the largest coins out there will also indicate further changes in the market. Some crypto exchanges also offer portfolio management services that can help novice investors decide how much of their assets should go towards Bitcoin.
2. Explore Altcoins
Altcoins is the term used for all cryptos other than Bitcoin. At least a portion of your portfolio should be dedicated to them since it’s a good way to balance between the big names and smaller coins. At this point, when the market is quite advanced, even the smaller altcoins have a market cap in the billions of dollars.
Its always best to divide the portfolio between a few larger altcoins, such as Tether, and a few niche coins that usually have a specific use. Tether, which is available in many exchanges, has a market cap of over $110 billion. In fact, in 2019, it surpassed Bitcoin in trading volume. Crypto exchanges allow users to trade in a great variety of altcoins, and the process is the same as buying or selling a large crypto. To explore the different Tether exchanges and their offers, use this resource.
3. Include Stablecoins
Stablecoins are somewhat controversial among crypto enthusiasts as they go against the main principle of cryptos. Their value is tied to the value of a fiat currency – usually the US dollar. This makes them much less volatile than cryptos, but they have all the features, such as smart contract usability.
Including stablecoins in your crypto portfolio is a good idea, as they balance it out and make it less volatile. However, stablecoins are a no-go for those using cryptos to escape government control.
4. Diversify By Use
Once you’ve covered your ground with the biggest coins and some stablecoins in the portfolio as well, the next diversification should be done by use. Cryptos can be used in many ways, and various industries have already accepted them. For the purpose of portfolio diversification, there are four main use cases to focus on.
- Value Storage: Similar to fiat money, some cryptos are ideal for storing and potentially increasing value without the usual worries about inflation.
- Smart Contracts Crypto: Platforms like Ethereum are pivotal for executing smart contracts, widely used across various industries for enhanced security and efficiency.
- Privacy Focus: Privacy-centric cryptocurrencies are increasingly vital as online tracking grows, offering anonymous transactions without centralised oversight.
- Decentralised Finance (DeFi): Engage with cryptocurrencies that are fundamental to decentralised finance networks, challenging traditional banking systems.
5. Different Industries
Another way to diversify and balance a crypto portfolio is to make sure that you have enough cryptos from each industry they are used in. At this point, cryptos are used in almost any industry, but we’ll focus on the ones that need to be in every portfolio.
- Finance: The main industry in which cryptos are used. Decentralised finance, without government control or regulation, initially attracted users to crypto and made them popular. Bitcoin is the main such crypto, but there are also many altcoins that operate based on the same blockchain. Crypto exchanges themselves are based on the same principle, as they don’t have a centralised system, making them more difficult to temper with.
- Data Storage: Decentralised cryptocurrency solutions are a perfect match for the data storage industry. That’s why it was one of the first industries to accept and rely on cryptos.
- Supply Chain: Worth billions of dollars and has benefited greatly from introducing smart contract cryptos in its daily operation. Automated payments based on the pre-set terms work perfectly with the strict demand of the supply chain, with its countless moving parts and tight schedules. It’s useful to keep some of these crypto in the portfolio since it’s an industry that won’t go away any time soon.
Conclusion
Balancing your crypto portfolio is key to managing risk while maximising profits. Start by including big coins like Bitcoin and Ethereum, which are essential for any portfolio. Diversify by adding altcoins—smaller cryptocurrencies with significant market value. Most crypto exchanges allow the investors access to hundreds of altcoins to choose from. Including stablecoins can reduce volatility since their value is tied to fiat currencies like the US dollar.
Diversify based on crypto use, such as storing value, smart contracts, privacy-focused coins, and decentralised finance tokens. Finally, include cryptos used in different industries like finance, data storage, and supply chains to ensure your portfolio is well-rounded and resilient.
**Disclaimer** :
This article is for informational purposes only and not intended as financial advice. The content is not sponsored by or affiliated with any entities mentioned. Readers should seek independent financial advice before making investment decisions.