Many things that apply to the traditional stock market also apply to cryptocurrencies. This includes chart patterns, trading strategies and also investment advice. And perhaps one of the most common and essential investment tips is to diversify your portfolio.
Never put all your eggs in one basket — an anecdote that holds significant importance in the crypto market, especially given its volatile nature. Diversifying your crypto portfolio allows you to balance risk and returns. However, distributing your monies across different kinds of digital assets is easier said than done.
There are so many different coins and tokens to choose from, each with its pros and cons. Moreover, it's difficult to say which one will go up and which one will shoot for the moon. Keeping this in mind, we have created a convenient five-point checklist to help build a balanced crypto portfolio.
Having market leaders is always a wise choice
The top 10 cryptocurrencies have large market caps and are generally quite stable. This makes them relatively safe inclusions for your crypto portfolio. Some of these coins, like Bitcoin and Ethereum, may be very expensive. However, they are divisible by up to 18 decimal places, allowing you to invest in fractions instead of buying one whole BTC or ETH.
Diversify based on use cases
Different coins have different use cases. Some may be solely cut out for remittance and payment, while others may be the backbone of a crypto gaming platform. In addition, there are also metaverse coins, privacy coins, governance tokens, utility tokens, social tokens, etc. It's good to have a mixed bag of the best coins from each category.
Look for new coins with future potential
It's important to diversify by market capitalisation. Large-cap cryptocurrencies are stable, but newer coins with smaller market caps might have strong growth potential. Further, newer coins usually have lower prices. And these prices are not always indicative of future valuations.
So, go through the white papers of the various new entrants to ascertain their long-term plausibility. If you see potential, you can put some money behind it, but not more than you are comfortable losing entirely. Then, if the project grows, you can ride the gains; if not, you can just cut your losses and move on.
Also read: Crypto turf battle as Coinbase, Crypto.com and Binance race to set up shop in new countries
Crypto derivatives and other asset classes
Crypto derivates are another great way to diversify your investment portfolio. They allow you to invest in the burgeoning crypto market without as much direct exposure. As such, investing in crypto futures, options, contracts, etc, is an excellent option. You can also invest in companies with a large holding of Bitcoin or other cryptocurrencies. The valuations of these companies should increase if their crypto holdings appreciate over time.
Diversify based on the type of blockchain
Cryptocurrencies are driven by blockchain technology. However, not all blockchains function in the same way. Proof-of-work blockchains consume massive amounts of energy and have received a lot of criticism from lawmakers and governments across the globe. Some blockchains also support smart contracts and decentralised applications (dApps).
As such, their utility increases as they are the foundation on which other projects are developed. Blockchains also vary in terms of transaction processing capabilities, security levels, and decentralisation. These factors can influence a blockchain's use cases and future potential and, of course, its price valuations.
Conclusion
Before investing in the digital asset market, you must ascertain your risk appetite and disposable income. It is also essential to compare different coins, understand their fundamentals, look at their technical indicators, and so on, before putting any monies down.
Finally, remember only to invest as much as you are comfortable losing completely.
