Learn How To Diversify Your Crypto Portfolio To Maximize Gains And Minimize Losses

If you’re a bullish investor who has just one or a few coins in your portfolio, it may be time to consider diversification. If you aren’t familiar with this concept, let us break it down for you. Simply put, it refers to the golden rule of not putting all your eggs in one basket but spreading your risk around instead so that even if the value of some assets decreases, your overall portfolio won’t suffer a significant crash. 

Let’s say you’re more interested in one particular cryptocurrency, such as Binance coin and keep an eye on the BNB price to see when to profit from it. However, it wouldn’t be a good idea to invest solely in it, as you would likely face more losses than gains. Whether you’re a seasoned investor or a beginner, diversification can reduce risks, provide resilience, and, above all else, minimize the number of sleepless nights.

Let’s take a look at some of the strategies you can use to diversify your crypto portfolio below.

Choose Cryptocurrencies With Various Purposes

One way to diversify your crypto portfolio is to pick crypto projects that have various purposes or use cases, as they are commonly referred to. While the majority of cryptocurrencies are a medium of exchange, many of them also provide additional functions. For instance, Bitcoin is a store of value, contributing to wealth-building due to its robust historical performance, and some even believe in its potential to become an alternative to digital gold. 

Ethereum, the 2nd crypto by market cap, supports decentralized applications and smart contracts, with many investing in it because they want to contribute to the broader blockchain ecosystem. Stablecoins such as USD Coin and Tether can also be a good addition to your portfolio, as they provide consistent value, helping you mitigate volatility. 

Diversify By Market Cap

Bitcoin is the pioneering cryptocurrency and has the largest market capitalization in the industry: more precisely, $1.90T at the time of writing, followed by Ethereum, with a market cap of around $330.19B. While Bitcoin has been dominating the crypto landscape for the past decade or so, there are many other altcoins that are worth adding to your portfolio. 

Even if a crypto project with a larger market capitalization has stronger fundamentals and provides more stability, it is better not to only stick to the biggest cryptocurrencies alone. This is because they are already well-established, so their growth potential may be lower than that of other altcoins. Besides, you want to reduce your portfolio dependence on Bitcoin and Ethereum alone as a way to lower risk and maximize gains. 

Invest In Various Niches And Industries

Cryptocurrency investment opportunities exist in several industries, ranging from fintech to gaming. The financial sector stands out among those industries where digital assets have seen widespread adoption, with DeFi enabling people to conduct transactions online via a P2P blockchain network, eliminating the need for an intermediary such as a bank. 

Simultaneously, the use of crypto in the gaming landscape and the metaverse has also gained momentum, and users are increasingly trading virtual currencies in a global virtual marketplace. Some crypto assets act as a service token, enabling users to access different features or services on a network. 

Consider Your Risk Level

Investing in crypto is all about your risk tolerance, so you should use it as a guide when deciding what projects to include in your portfolio. You won’t find balance in your portfolio by having many sleepless nights throughout the year.

If you want peace of mind knowing that you’ve chosen your investments right, consider devoting more funds to Ether and Bitcoin, as they are unlikely to crash in the short run. Based on your risk tolerance, you may choose riskier cryptos with more growth potential, maintaining your allocation to a relatively low percentage of your investment portfolio. 

Use The Dollar-Cost Averaging Method

Investing a one-off lump sum isn’t a good idea; instead, we recommend the dollar-cost averaging method, which is ideal for crypto investing, as it makes it easier to deal with the market’s ups and downs. Rather than aiming to time the market, you invest an established amount regularly. 

You may even choose to buy on dips, or when the market is experiencing a downward trend. What you wouldn’t do when using this method is invest a lump sum in one specific crypto project. Consider setting aside a small amount of money for market-dip opportunities. 

Consider The Geographical Location

Choosing cryptocurrencies from different regions around the globe can offer exposure to a range of innovations in the industry. With that said, you should avoid questionable crypto projects – especially in countries where digital assets are heavily regulated or banned. 

Instead, you should focus on those locations with a lot of growth potential, and remember that many countries are increasingly regulating crypto investments and introducing capital gains tax on cryptocurrency gains. As a rule of thumb, you should always do your research before choosing a crypto project to invest in. 

Choose Different Crypto Blockchains

Blockchain is the technology that backs up cryptocurrencies and enables them to function. However, blockchain-based platforms’ capabilities go beyond that, and their demand is high in almost every industry because of the features and solutions they provide.

As you may know, the Ethereum blockchain enables the execution of agreements without a third party and allows dApps to be built on the platform. Solana is another excellent example of a blockchain platform that hosts scalable, decentralized applications and numerous meme coins.

The Bottom Line

Investing in cryptocurrencies is a risky endeavor, as the prices tend to fluctuate a lot. As a crypto investor, you should be prepared to mitigate the risks involved, and one way to do this is to construct a well-diversified crypto portfolio. In this blog, we have offered some guidance on what you should consider when it comes to diversification, including geographical location, market cap, use cases, blockchains, and so on. 

While it may be tempting to invest in just your favorite cryptocurrency, doing so could be a recipe for disaster, given the volatile nature of the industry. Instead, you should research the cryptocurrencies with the best market performance and use cases and have a mix of different assets, as this will safeguard your funds and prevent massive losses.