In the traditional world of finance, the performance of different assets could vary under different market conditions. For example, real estate investment trusts could outperform general equities in a turbulence market, and defensive stocks could disappoint investors when the appetite for risk is heightened. That’s when diversification comes in. The main purpose of exposure to different asset classes is to balance risk and return in a portfolio.
In the cryptocurrency space, diversification could also be one of the ways to manage risk exposure. However, some would argue that it is impossible to diversify a crypto portfolio due to the fact that major altcoins are highly correlated with Bitcoin. However, with a carefully selected basket of altcoins — in conjunction with stablecoins — investors could able to navigate the market more effectively with manageable risk.
There has always been a debate about putting all your eggs in one basket. While in some cases concentrating on only one asset could maximize profitability, this also maximizes the risk exposure. On top of that, a heavy-concentration strategy gives investors no room for any errors in analysis, and it overexposes the investor to unnecessary risks.
However, over-diversification could also hurt investment returns. Some investors believe that the more assets they own, the better return they can have — and that’s not the right concept. It could increase investment cost, add unnecessary due-diligence efforts and lead to below-average risk-adjusted returns.
Financial professionals almost universally acknowledged asset allocation as the most critical decision in the entire investment process. Consensus research has proven that 80–90% of a portfolios’ risks and returns can be attributed to asset allocation. However, the allocation process is often the most ad hoc and ignored step in investment decision making.
Many investment advisors want to exclude cryptos from the allocation process as they consider the assets “too risky”. But one must evaluate the benefits of the asset class when combined with more traditional allocations.
4 Types of coins to diversify and allocate
Bitcoin- 25–33% of your portfolio
Bitcoin is currently the largest cryptocurrency based on market cap and makes up over 50% of the entire cryptocurrency world. It would be fair to say that the entire cryptocurrency market is highly correlated to Bitcoin’s price movements. Bitcoin is also the default base currency of the cryptocurrency world. Anyone that wants to buy any other altcoins or tokens, would need to purchase Bitcoin first in order to easily acquire any other coins. This is because local cryptocurrency exchanges usually limit the amount of coins that can be purchased by local fiat money.
Ethereum- 15% of your portfolio
Ethereum is one of the coins that is used alongside Bitcoin as a base currency since it is much faster than Bitcoin. The utility of Ethereum is also correlated to its price; the more developers and projects built on Ethereum, the higher the demand for ETH coins, which will lead to a price increase. Having a portion of your investments in established and credible coins such as Ethereum is vital in stabilizing your portfolio.
Passive Income Provider- 25% of your portfolio
XcelToken Plus is a great passive income provider. ERC20 token on the Ethereum Blockchain Platform, that is painstakingly crafted with the purpose of building, engaging and fostering a large crypto-community within the hospitality, retail and gaming sectors.
By holding a good portion of a passive income earner token, you will be rewarded regularly for keeping faith with the brand. As a keen investor, you want to be in a position of having a mix of risk in your portfolio ranging from high to low. A passive income earning-token is a must-have.
Stablecoins- 35% of your portfolio
Stablecoins are a great way to protect your portfolio from volatility and provide you with much-needed liquidity (or ‘cash’) whenever you have a need. Imagine putting all of your money into cryptocurrencies and the market takes a deep dive; you would lose a major portion of your investments. It is therefore important for you to always keep a portion of your portfolio in stablecoins so that you can cash-out when needed or simply buy more cryptocurrencies when prices take a dive. This action plan will also prevent massive losses in your portfolio.
A well-diversified portfolio goes a long way in ensuring success in the ever-evolving and volatile cryptocurrency markets. There are over 2,000 coins and tokens with varying degrees of risks and characteristics for investors to choose from. Having a balanced portfolio with all the four categories of coins could save you from lots of headache and worry. Lastly, investors should always perform thorough due diligence before investing in any coin.