Despite the fact that cryptocurrency is a unique kind of asset compared to other investments, the standard guidelines for investing are still applicable. This includes understanding the significance of diversification so that you may build a cryptocurrency portfolio that is both robust and diversified.

 

Investors who are used to the stock market will face new obstacles when attempting to diversify their cryptocurrency holdings. It is more difficult to find stable investments due to the danger and volatility of the cryptocurrency market, and there are currently no index funds available that would enable the purchase of a significant number of cryptocurrencies all at once.

 

This article will discuss the most efficient strategies to diversify your cryptocurrency portfolio, which will allow you to enhance it.

What exactly does it mean to have a crypto portfolio that is well-balanced?

A cryptocurrency portfolio that is well-balanced is one that incorporates many varieties of cryptocurrencies, each of which has a unique set of applications and degrees of risk.

 

The investor distributes a predetermined amount of assets across all of the cryptocurrencies and then rebalances their portfolio as required by purchasing further cryptocurrencies or liquidating holdings.

 

Maintaining a healthy equilibrium between your cryptocurrency holdings and the rest of your financial portfolio is an essential component of a crypto portfolio that is well-balanced. 

 

Due to the high level of risk associated with cryptocurrency investments, you should limit the proportion of your overall portfolio to a minimal amount. 

 

The percentage of your whole portfolio that should be invested in cryptocurrencies should not exceed between 5 and 10 percent at most, according to a general rule of thumb.

 

As the value of your cryptocurrency investments rises, you may find that you need to sell some of them in order to prevent your portfolio from being too heavily weighted in cryptocurrencies. 

 

If there is a bear market, having a portfolio that is comprised of 25% or 50% cryptocurrencies puts you in a big risky position.

7 different strategies to diversify your cryptocurrency holdings

You'll find all of the most popular tactics for diversifying your cryptocurrency holdings listed here. There are quite a few different ways to diversify your cryptocurrency portfolio. Take into account the fact that it is not required to mix all of them. You are free to select and choose the solutions that are most suitable for your circumstances.

1. Invest in established industry leaders

A straightforward strategy would be to disperse your capital across the digital currencies that have the highest market capitalization. You may, for instance, limit yourself to the ten or twenty most important cryptocurrencies. While they are still subject to price swings, they have a tendency to give greater stability than smaller coins.

 

By using this strategy, you would generally not include stablecoins. For instance, stablecoins like Tether (CRYPTO: USDT) and USD Coin (CRYPTO: USDC) are among the most popular cryptocurrencies. 

 

However, they are also designed to keep the value of one dollar constant. You should probably avoid investing in these cryptocurrencies since they aren't meant to grow in value over time.

2. Center your attention on cryptocurrencies that have a variety of applications

There are many different applications for cryptocurrencies, and considering these applications might be a useful method to choose an investment strategy. The following are some examples of use cases for crypto:

 

• Payment coins enable lightning-fast and inexpensive transactions anywhere in the globe.
• Blockchain-based decentralized finance (DeFi) systems provide an alternative to conventional banking and financial services.
• The usage of gaming currencies as a kind of currency in blockchain video games.
• Users of a metaverse platform may explore one another's virtual worlds and engage in conversation with one another there.
• Transactions made with privacy coins can not be tracked.

 

There are many different types of cryptocurrencies that may be categorized in this manner. You may construct your investment portfolio by first selecting a number of different use cases and then investing in one or two cryptocurrencies that correspond to each of those use cases.

3. Invest in blockchain networks that support smart contracts

Blockchain networks that are capable of running smart contracts are some of the most successful types of cryptocurrency initiatives. A smart contract is analogous to a piece of software that is executed on a blockchain. 

 

This is a competitive field since smart contract blockchains may be used for a wide variety of purposes, such as the introduction of decentralized applications (also known as dApps) and new cryptocurrencies.

 

Since every blockchain comes with its unique set of benefits and drawbacks, some investors choose to distribute their capital over numerous different blockchains. The following is a list of cryptocurrencies that are used by some of the most prominent smart contract blockchains:

 

• Ethereum (CRYPTO:ETH)
• Cardano (CRYPTO: ADA)
• Solana (CRYPTO: SOL) 
• BNB (CRYPTO: BNB)
• Avalanche (CRYPTO: AVAX) 

 

4. Separate your investments across Bitcoin, Ethereum, and others

Bitcoin (CRYPTO: BTC) and Ethereum are the two cryptocurrencies that get the closest to being a secure investment, despite the fact that there is no such thing as a safe cryptocurrency investment. 

 

Bitcoin is the most widely used cryptocurrency, while Ethereum has typically held the position of second place since its debut. Due to the fact that they are the dominant players in the industry, it is more probable that they will be around for the foreseeable future.

 

You might put more of your focus on Bitcoin and Ethereum if you wish to tilt the balance of your portfolio toward the cryptocurrencies with lower risk. 

 

For instance, you may put one-third of your cryptocurrency assets toward the purchase of Bitcoin, one-third toward the purchase of Ethereum, and the remaining funds toward the purchase of any other cryptocurrencies that pique your interest.

5. Consider investing in certain cryptocurrencies

There are other forms of crypto assets that may be invested in addition to cryptocurrencies. You might also put your money into cryptocurrency stocks, which are shares of firms that deal with blockchain technology and cryptocurrencies. 

 

These businesses are excellent additions to a diversified cryptocurrency portfolio because they provide a unique kind of exposure to the cryptocurrency market, which is distinct from investing directly in cryptocurrencies.

6. Invest in cryptocurrency tokens that are smaller but have a better potential for development

Finding those "diamonds in the rough" that are worth investing in is a fun and exciting part of investing in cryptocurrency. Smaller crypto initiatives have a far higher chance of failing, but they also have the potential to generate enormous profits if they are successful. 

 

The majority of your cryptocurrency holdings should be comprised of the top 25 to 50 cryptocurrencies; however, you should also think about filling out your portfolio with some lesser crypto tokens that you find interesting.

7. Rebalance the cryptocurrency holdings in your portfolio as needed

The process of rebalancing is an essential component of cryptocurrency portfolio management. Since prices fluctuate, it is possible that you will need to purchase and sell specific assets in cryptocurrency in order to keep your portfolio balanced. 

 

For instance, if the value of a few of your more modest assets rises, you may find that you need to exchange some of those investments for bigger cryptocurrencies in order to maintain the asset allocation you have chosen.

Benefits and drawbacks of maintaining a diversified crypto portfolio

The reduction in overall risk is the primary advantage that comes with having a cryptocurrency investment portfolio that is well-balanced. You don't have as much of a financial stake in the success or failure of a single coin when you have a diversified portfolio.

 

You also have a higher chance of investing in the cryptocurrencies that end up being the most profitable. Some cryptocurrencies will often go through phases in which they greatly outperform the rest of the market. 

 

This is a common occurrence that we witness. When you have a larger number of cryptocurrencies in your portfolio, there is a greater chance that some of those outlier cryptocurrencies will be invested in you, allowing you to benefit from their price appreciation.

 

The most significant disadvantage of maintaining a diversified investment portfolio is the amount of time it takes to do so, despite the fact that doing so is beneficial. Choosing an asset allocation strategy, locating the appropriate cryptocurrency, and rebalancing your portfolio are all activities that need time. Yet because of the extreme volatility of the market, even having a diversified crypto portfolio does not ensure financial success.

How Can 14DigitalXchange Help?

14DigitalXchange can help diversify a crypto portfolio in several ways. Here are some ways it can be done:

Offering a wide range of cryptocurrencies

One of the simplest ways to diversify a crypto portfolio is by investing in different cryptocurrencies. 14DigitalXchange offers access to a broad range of cryptocurrencies, including popular ones like Bitcoin, Ethereum, Litecoin, and more.

Offering access to different trading pairs

14DigitalXchange also provides access to different trading pairs, allowing investors to diversify their crypto holdings across different assets.

Providing access to different markets

By providing access to different markets, such as spot trading, futures trading, and options trading, investors can diversify their portfolios across different trading strategies.

Providing research and analysis

14DigitalXchange provides its users with research and analysis of various cryptocurrencies and the crypto market in general. This can help investors make informed decisions and diversify their portfolio based on current market trends and insights.

Take Away

Putting up a diversified crypto portfolio may seem to be a challenging task, but in reality, it is simpler than it first appears. It is not necessary to have a very large number of cryptocurrencies; simply five to ten would be an adequate starting point. 

 

Also, it is not something that has to take place instantly. You may start out by investing in only a few cryptocurrencies that you have a solid understanding of, and then progressively add more as you get exposure to further cryptocurrencies.