The market capitalisation of cryptocurrency has reached $4 trillion, capturing the imagination of investors worldwide. While most crypto portfolios are made up of Bitcoin and some Ethereum, these aren’t the only options.
A well-diversified crypto portfolio is a collection of various cryptocurrencies, brought together to reduce the overall risk of the portfolio. That said, diversifying a portfolio isn’t a walk in the park. Follow these six tips to get started:
1. Focus on Core Holdings
The first step in building a diversified crypto portfolio is to allocate a significant portion of your portfolio to established cryptocurrencies. It might sound a little counterintuitive, but you can only diversify if you have strong core holdings.
For instance, Bitcoin and Ethereum each have a proven track record. These assets are less risky compared to alternative coins.
2. Incorporate Stable Coins
Next, you can incorporate stablecoins in your portfolio. These are tied to real-world assets like fiat currencies, such as the U.S. dollar or even gold.
Stablecoins like USDT or USDC are less volatile than traditional cryptoassets. As a result, they act as a buffer against market downturns and provide liquidity for new investment opportunities. This will make your entire crypto portfolio much more resilient to economic uncertainties.
Moreover, stablecoin transactions can settle in minutes with minimum fees. This is especially beneficial if you wish to make cross-border transactions.
3. Diversify Across Sectors
Another way to diversify your crypto portfolio is to make investments across various crypto sectors. Consider the following sectors:
- Banking and finance
- Artificial intelligence
- Media and publishing
- Infrastructure
- Privacy
Investments made in rising industries are more likely to withstand market downturns and bring better returns on investment.
4. Use a Portfolio Tracker
Knowing how your crypto assets are performing can be super helpful, especially when diversification is the goal. The best thing you can do is to use a crypto portfolio tracker. A tracker will give you a holistic view of your portfolio, aggregating your holdings from multiple exchanges and wallets into a single, unified dashboard.
Crypto portfolio trackers also facilitate 24/7 real-time tracking. The result? You can do informed rebalancing. Your portfolio might need market-cap-based diversification or sector-based diversification. With clear insights into profit/loss, there is a greater chance of efficient diversification.
5. Consider Alternative Crypto Investments
If cryptocurrency coins aren’t your thing, you can look into alternative ways to invest in the crypto industry. Here are some indirect methods to diversify your portfolio:
- Cryptocurrency and blockchain exchange-traded funds (ETFs)
- Blockchain exchange-traded products (ETPs)
- Decentralised Finance (DeFi)
- Mining
- Staking
These methods will give you exposure to the crypto industry without solely relying on the performance of individual cryptocurrencies.
6. Avoid Overdiversification
Yes, diversification reduces risk. Your crypto portfolio will expand and give you better resilience. But overdiversification can dilute your returns. When you’re holding too many assets, portfolio management becomes increasingly complex.
More investments often mean more transaction fees and brokerage commissions. Frequent buying or selling of assets can trigger capital gains. The last thing you want is to erode potential returns.
