Why Should You Diversify Your Cryptocurrency Investments?
The ultimate goal of any investment for any investor is to maximise returns while reducing risks. This is also why they set investing goals and use a variety of investment approaches in order to profit from market trends. As part of these techniques, investors typically distribute their wealth to more than one asset. In fact, the whole idea of diversifying one's holdings is to ensure that profit margins remain generally intact even if prices decrease, because a portfolio comprised of many types of assets would, on average, offer greater long-term returns while minimising the risk of any single investment. And this is the fundamental concept upon which portfolio diversification is predicated.
"Diversification is a risk management approach that mixes a wide variety of investments inside a portfolio," says Hitesh Malviya, founder of itsblockchain. Investors diversify their portfolios in general, he continued, by assigning different portions of the portfolio to different asset categories. Stocks, bonds, commodities, ETFs (exchange-traded funds), and other traditional asset types are examples.
"Despite some saying that crypto is not an asset class, cryptocurrencies have recently acquired substantial popularity and are now being viewed as an asset class worth investing in. Nonetheless, diversification is an investing strategy that can be used in any financial sector, including the cryptocurrency industry "Malviya said.
"With crypto becoming more widespread, many investors are flocking to the markets to get started on crypt trading and investing," he explained. "However, many investors assume that merely adding Bitcoin to their portfolio is sufficient."
Malviya explained that instead of executing a sound portfolio diversification strategy out of the around 11000 Cryptocurrencies currently accessible, investors tend to concentrate all of their assets to a single asset. "This strategy is problematic in and of itself, especially if the goal is to generate a profit."
Investing in a single asset can undoubtedly provide you with 100 percent of the gains or losses associated with that asset; nevertheless, it's important to keep in mind that not all crypto-asset gains are created equal. And, while Bitcoin's price has risen significantly in recent years, several other cryptocurrencies have outpaced Bitcoin by increasing in value significantly.
This is why it's critical to expand your search beyond Bitcoin and diversify your holdings across a number of different cryptocurrencies. Apart from the fact that you can reduce risk while earning significant gains, he explained.
5 reasons to diversify your cryptocurrency holdings:
1. Low transaction fees
Crypto transactions are convenient to execute both locally and globally, unlike traditional payments, which incur substantial fees when transacting internationally. Because no intermediary businesses or governments are involved, the costs of interacting with a cryptocurrency like Bitcoin are frequently lower than those of bank transfers. Furthermore, because there are no authorization formalities or extensive wait times, your transfer will be speedier. Additional fees, such as deposit fees, withdrawal fees, minimum balance fees, and so on, are not charged.
2. You have complete control over your money
As you may know, the most important aspect of cryptocurrencies is that they are not issued by any central authority, making them theoretically immune to government intervention. Governments and authorities are unable to manipulate or control it since they are unable to interfere. This gives customers the ability to manage their money in whatever way they wish without being bound by the restrictions of a traditional bank.
3. Extremely appealing to new customers
Cryptocurrency continues to attract investors from all walks of life, from the ultra-wealthy like Elon Musk to the 'aam aadmi', thanks to its high-return potential. In addition, the introduction of concepts like DeFi, NFTs, and crypto derivatives has increased interest and activity in the crypto market, signalling that crypto investments aren't going away anytime soon. As a result, there is clearly a lot of room for cryptocurrency investment expansion.
4. You have an unlimited number of options
Having a diverse set of options when it comes to investing in any business is critical. The number of options you have increases your investing possibilities accordingly. There are currently over 11000 cryptocurrencies available in the world, so you can invest in any of them. Every day, the crypto market expands, and every time a new coin is created, it is added to the market.
Don't worry if the availability of over 11000 cryptocurrencies overwhelms you; you can narrow your search to the top 50-100 coins. The top ten cryptocurrencies are typically preferred by most investors, but there are always others to consider. Coinmarketcap, for example, breaks down cryptocurrencies by market cap and provides more information about each currency, making it easier for you to make a selection.
5. Stable store of value
One of the most common reasons for investing in cryptocurrencies is the desire for a secure, long-term store of value. Unlike traditional money, the quantity of most cryptocurrencies is limited. As a result, any political or government entity's value cannot be depreciated due to inflation. Because of its cryptographic nature, governments cannot tax or seize cryptocurrencies without the owner's consent. This property appeals to a wide range of people, particularly those concerned about bank failures, hyperinflation, and other natural disasters.
What is the best way to diversify your cryptocurrency portfolio?
1. Diversify your business by industry
Make sure you get a variety of coins that can be utilised to solve problems in a variety of sectors. This will allow you to lessen the impact of crypto-unfriendly legislation and events on your investment. Make sure you do your homework and invest in both stable and fast-growing companies. You should also consider overall profitability and globally competitive areas like medical and banking.
2. Diversify geographically
Make certain that none of your funds are going to crypto projects in the same location or country—do extensive study on the performance of crypto projects in other parts of the world. This will protect your investments from regulatory uncertainty and give you another way to balance out your broad portfolio, even in volatile market situations.
3. Diversify by timing
While it is hard to totally remove market risk when investing, you may improve the value of your portfolio by being selective about when and where you invest. An interval-based investment approach is diversifying your investments by timing, often known as dollar-cost averaging. All you have to do is set aside specified amounts of money at predetermined intervals to invest in your selected tokens.
When prices are falling sharply, it's a wonderful time to buy new cryptocurrencies, and when things are going well and prices are rising, you're in a great position to sell and profit.
The tremendous volatility of the crypto market mandates the employment of appropriate risk management strategies. This is why, in order to avoid losing all of your hard-earned money, you must take a dynamic approach to budget allocation. Portfolio diversification is an excellent risk-mitigation approach for crypto investments when done correctly. It's important to note, though, that while diversification reduces risk, it also reduces return on investment.
As a result, the decision to diversify your crypto portfolio is totally up to you. Whatever decision you select, make sure you do your research and factor in your budget.