Due to the nature of cryptocurrency, it attracts many investors who are still quite young. As such, they may not be acquainted with something like diversification. However, it’s very important to learn how to do this properly. In this article, we’ll be going over some methods that can be used, but first, let’s define what diversification is.
Diversification is the act of varying your activity in a way that you do not have a central point of failure. While this is typically applied to investments where investors will spread their risk across several assets classes or sectors in order to protect their capital, it can be applied to almost everything in life.
For example, you could diversify your income by investing in masternodes or running a website. This would mean that if you were to get laid off from your main job, that all of your income was not coming from one source, allowing you to continue to provide for yourself. That makes sense right?
Your crypto investments should be handled the same way. It’s dangerous to have all of your eggs in one basket because that means a bit of bad news could send down the entire value of your portfolio, which rightly causes most people to panic. You can protect yourself from this problem by spreading your money out a little more evenly.
When investing in cryptocurrency, there’s a couple of places where you can diversify. If you’re planning to diversify your assets, then it may help you to write out a game plan for yourself instead of just randomly picking coins or tokens that you hope to do well. Investing is often a long game, and having a plan can help prepare a nest egg that can aid you for your entire life.
The first place where we can add some diversification is a market cap. The market cap of a coin or token refers to the amount of money that is held within that particular asset in total. For example, Bitcoin and Ethereum are currently the highest market cap coins, but what does this mean for you as an investor?
High market cap coins are typically more stable than lower market cap coins. That may sound silly to say in an industry that is as volatile as cryptocurrency, but it’s true. Investors looking for slow, mostly sure gains are best served putting their money here.
However, these assets have already achieved a large amount of growth, and it will be harder to make a very large return on them. They will appreciate in value, but it will likely be slower than some other assets.
Small-cap coins, while more dangerous than their large-cap brothers offer investors the opportunity to achieve much higher gains. This is particularly true of coins that are trading in the 1-10 cent range, where the market cap growth can be very large.
However, you are taking a much bigger risk here. It’s quite possible that these assets will never pay off. Coins in this class still have a ways to go in regards to adoption, usability, and development. Fortunately, we can have the best of both worlds by investing in both of these asset classes through diversification.
The exact percentages that you should allow to large or small cap assets is really a matter of opinion and your position in life. If you are still very young and you are investing only a hundred dollars here and there, then the small cap is likely the way to go. You’ll get more for your money this way, and you have plenty of time to wait for them to appreciate.
However, if one of your small caps does manage to produce significant gains, it would be wise to remove part of that investment, and then place it into a larger market cap coin for stability. This not only helps to lock in profits and to keep your gains from evaporating, but it also gives you some free capital to buy additional opportunities when your assets are experiencing a dip.
Some investors utilize a rule of thumb where every time an asset doubles, they sell half. You could utilize this motto to some degree, placing a portion of your small-cap gains into a large-cap asset for safe keeping.
The second place we can diversify is by market sector. What does your coin or token do? Is it a privacy coin, or does it offer supply chain logistics to corporations? We’ve already diversified by market cap, but we can spread our risk out further by putting our money into different sectors and businesses.
Why would we want to do this? Just like everything else, markets will have highs and lows in their lives. Let’s say that your entire portfolio is invested in ICOs from China. If tomorrow some bad news starts spreading around about how China will begin cracking down on these companies, it could send your entire portfolio into a tailspin.
For this reason, we want to diversify into multiple niches, and possibly multiple regions as well. The ones that you choose will mostly be up to you, but here’s a few areas that you could consider. Go through a coin or token aggregator, and try to pick out which coin you think has the best future in each of the niches listed below. These are just a few ideas, but there are of course many more.
When writing out the plans for your portfolio, evaluate your choices and decide whether or not you’ve focused too much of your exposure into one sector. If you find that you have, then it might be wise to place some of that capital elsewhere.
The problem with cryptocurrency is that generally, all altcoins are tied to Bitcoin. This creates a problem for investors, because one stint of bad news topples the entire market, even if you are diversified very well. If you’ve made some significant gains in cryptocurrency, then you may also consider putting some of that money outside of the space entirely.
This gives investors an edge in more ways than one. Not only are your assets protected from a collapse of the cryptocurrency market, but if that wave of red does happen, you’ll be in a very good position to pick up valuable projects at a steep discount with that money. Where should you put it though? That will largely depend on how much you have to invest, but here’s a couple of ideas.
Precious metals have historically acted as a hedge for basically all other markets. If other assets are going down, then metals are typically going up. However, their appreciation is much slower, which makes them a welcome break from the roller coaster that is cryptocurrency.
Crypto enthusiasts who are anti-fiat could consider putting some of their gains into gold or silver for safe keeping. Whether you want to buy and store these metals yourself or keep them in a vault for quicker liquidity is up to you. There are many gold sellers and storage facilities that will allow you to pay in cryptocurrency as well, which is a great bonus!
If you’ve made some very big gains, congratulations! You could consider investing some of that money in real estate. The property has the added bonus of being able to generate income via rent while you wait for it to appreciate, and as long as we’re not experiencing a housing bubble, it’s pretty safe.
Unfortunately, there is some upkeep involved here that’s not totally hands-off, and it’s much harder to sell it quickly if you have a pressing need for funds.
There are many smart contract based platforms now that will allow you to earn a steady income by lending out your cryptocurrency. If you’re looking for something that will provide you solid monthly income, then this could be a good option.
Cryptocurrency based loans are also secured by the fact that they are collateral based, so if someone ends up not paying, you just get their coins or tokens instead. If the market experiences a downturn, you may enjoy getting monthly payments to help sustain you or even to buy into the dips.
In closing, it’s important not to have yourself too focused in one area. Spreading your risk across multiple assets, sectors, and markets allows for you to have more peace of mind and to protect your capital from disaster. It also gives you the ability to act on buying opportunities to further your position or to create additional streams of income.
Diversification is not a hard thing to learn, and what you do will be largely based on your own needs. When you write up your investment plan, try to denote allocation percentages next to what you plan to invest in. For example, you could use something like this as a guide. This is purely a model to follow, and you should adjust the percentages and niches to fit your situation.Large-cap coins (30%)