Even if the crypto market is unique, some traditional investing rules still apply. This includes the importance of diversification to ensure you create a well-balanced portfolio. You know the saying, never put all your eggs in one basket, a common anecdote seasoned investors follow to limit their risks. Given the volatile nature of the crypto market, investing in multiple digital assets is paramount to balance the returns and risks. However, distributing your finances across several digital currencies is easier said than done because there are so many different tokens to choose from that you cannot tell which would make a good fit for your portfolio. And in the current context it is challenging to tell which one will go down and which will skyrocket in value.
How does a well-balanced crypto portfolio look?
We mentioned that you must diversify your portfolio to lower the risks associated with crypto investing. But you may wonder how a well-balanced crypto portfolio looks because you’re new to the market.
Seasoned crypto investors state that the ideal portfolio contains multiple types of cryptocurrencies with different risk levels and use cases. You should allocate a portion of your funds to each digital token and rebalance, if necessary, according to their evolution on the market. Suppose you want to sell some assets; you need to rethink your entire portfolio before adding new tokens.
An essential step in creating a well-balanced portfolio is maintaining the balance between your overall investment portfolio and the one containing digital currencies. As you already know, crypto is a high-risk investment, and you should limit the amount of funds you put into it. The rule of thumb is to put around 10% of your overall investment portfolio into cryptocurrency. When your portfolio contains more than 50% crypto, it can put your finances at risk if the market registers a downturn.
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Effective ways to diversify your crypto portfolio
You can employ several strategies to diversify your portfolio, and you’ll find some of the most popular below. Keep in mind that it’s not necessary to use them all, but you can pick those that work best for your investment goal.
Invest in the market leaders
As a beginner, the simplest way to allocate your funds between different digital currencies is to pick the assets with the largest market caps. Let’s say you pick the first 10 largest crypto coins and add them to your investment portfolio. The market leaders tend to be more stable than new market entries, although they’re still volatile because that’s the nature of digital currencies.
However, just because you’re looking for more stable assets, it doesn’t mean you should add stablecoins to your portfolio because they don’t usually generate significant revenue. Tether and USD Coin are among the top-performing cryptocurrencies, but their value remains the same, and they won’t register any price changes.
Look for cryptocurrencies with different use cases
Research the market to find the different use cases cryptocurrencies could have and decide which one of them matches your trading style. Here are some examples of crypto use cases:
– Privacy coins that enable untraceable transactions
– Payment coins that facilitate fast and low-cost payments
– Metaverse platforms that power virtual worlds where you can interact with other users
– Gaming coins created to power blockchain video games
– Decentralised finance or DeFi platforms that work as alternatives to traditional financial services.
Each category includes several digital currencies you can buy. You could pick one or two from each category to diversify your portfolio.
Invest in smart contract blockchain networks
The blockchain networks that run smart contracts have gained great popularity over the years and adding one or more to your portfolio is recommended. A smart contract is a program that runs on the blockchain. These networks have several uses, from facilitating the creation of new tokens to the development of decentralised apps.
Because all cryptocurrencies have advantages and disadvantages, you might want to spread your money around more than one smart contract blockchain ecosystem. Ethereum, Cardano, Solana, BNB, and Avalanche are the most popular crypto networks that use smart contracts.
Divide your crypto portfolio into Ethereum, Bitcoin, and other cryptocurrencies
There are no safe crypto investments, but Ethereum and Bitcoin are the closest to keeping the risks at a low level. Bitcoin and Ethereum are the first two largest cryptocurrencies and the most likely to stick around in the long run.
What is Ether’s role in a diversified portfolio?
Considering that Ethereum successfully completed the Merge in September 2022, it’s worth discussing its role in a diversified crypto portfolio. Specialists think that its performance in an investment portfolio will be different in the next five years because its volatility has eased since the altcoin moved toward the mainstream. Suppose you didn’t buy Ethereum tokens until now. In that case, it’s the ideal moment to learn how to buy eth because it’s one of the most attractive tokens in the sector and is expected to generate major disruptions in the global financial system.
A way to create a less-risky portfolio is to prioritise Ethereum and Bitcoin, use one-third of your finances to buy them, and the rest to purchase other coins that catch your eye.
Buy cryptocurrencies powered by different blockchains
Blockchains are the backbone of digital currencies and impact how transactions are completed. You can choose from four types of blockchains:
– Private, where a single authority makes decisions regarding the cryptocurrency
– Public, where the cryptocurrencies are decentralised, and no one can control the supply
– Hybrid, where some parts of the ecosystem are decentralised while the others are controlled by a central authority
– Consortium, where a group of people decides the currency’s evolution.
We highlight that the most significant benefit of a diversified investment portfolio is that it lowers the risk associated with trading cryptocurrency. When you invest in several digital assets, your success isn’t tied to a single one. However, it’s time-consuming to allocate your funds across several cryptocurrencies, and you should be ready to do the necessary work.