Cryptocurrencies can be lucrative investment options, no doubt about that. They have outperformed other investment options in the past birthing successful investors in the process.
But having one or two cryptocurrencies in your portfolio is not enough. Sure one coin can make you a millionaire but it is like putting all your eggs in one basket.
The infamous 2018 price crash of several cryptocurrencies, including Bitcoin, best explains why this is not a good idea. If you are a small-scale investor, you might be better off investing in two or three crypto coins. But, if you’re trying to create a sizable portfolio, two to three coins won’t cut it.
You need to diversify your portfolio and diversify per asset class. Here is how you do it with cryptocurrency.
Oh, and remember to consult your financial advisor or do extensive research before executing any investment strategy. This video and other resources we provide are meant to be used as a resource material.
1) Invest on different types of cryptocurrency
Choose different types of well-performing cryptocurrencies and invest in them.
Different crypto projects have varying bases and technology powering them. This gives you the option to pick those in line with your investment goal.
Some of the options you have are privacy coins, altcoins, and tokens. You need to research different aspects such as the price of the cryptocurrencies, their past trends, and future potential.
We have a video specifically discussing the different types of cryptocurrencies. Check the description box below.
2) Industry diversification
The approach here is to ensure you have crypto coins that fall into different industries.
This way, if one industry takes a hit, the rest of your portfolio can soak in the impact without having a major effect on your returns.
You can invest in crypto coins in industries like finance, supply chain, and medicine.
Note that you can also diversify further by using a specific criterion when choosing the cryptos you want to invest in. For instance, you can mix new projects with well-established or alternatively direct your funds into one category.
A word of caution though – don’t plough your funds into a project you have zero to little knowledge about. Take some time to research and understand the industry before making a leap.
3) Time diversification
Although it may sound new, time diversification has actually been around for a while. It is proven and reliable when executed properly. With this strategy, you have to time the market and get your crypto assets at the right moment. Simply put, buy low.
Don’t buy when the cryptocurrency you like is the peak of its bull run.
Rather than buying your portfolio all at once, you instead buy parts of it at intervals. You can decide to buy 10% of your portfolio every month. In this case, it will take you ten months to assemble a complete crypto portfolio.
To get the most out of this strategy, set price alerts on the crypto coins/projects you are interested in. Not every platform has that feature by the way. MDM does.
4) Geographical diversification
Another strategy is choosing to invest in crypto projects from different parts of the world. Depending on your preference and risk tolerance, you can choose to mix between American, European, or even Asian blockchain projects.
Recently, there has been a shift to Asian projects as they are perceived as a good investment. They have a loyal following that boosts their chances of being successful.
5) The use cases
On your screen right now are the different use cases of cryptocurrency. You can also check the description box to watch our video on crypto use cases.
6) The analytical approach
The analytical approach is a slightly complex diversification strategy and varies depending on the investor. Here you diversify based on your funds, risk tolerance, and crypto market swings.
You can mix between relatively stable cryptos and the risky ones. Keep in mind that cryptocurrency, in general, is volatile. The most stable of them all, Bitcoin, just recently crashed before hiking to the top.
But there are cryptos that are more stable. Ethereum and bitcoin are the most preferred cryptos for safe stakes. Some of the moderately risky options are Stellar and EOS. Speculative tokens make up the highly risky options.
You can choose to have 60% of your portfolio accounted for by the relatively stable options, with the remaining percentage going to moderately risky crypto projects (say 30%) and 10% to the risky options.
Just remember that diversification is a great risk mitigation strategy used by many investors both in crypto and other traditional assets. But no strategy will guarantee 100% success. Everything is a risk. With every risk, comes the possibility of success or failure.
Review your portfolio and determine if it needs diversification. If it does, make the smart decision of executing a diversification strategy that suits you.