Don’t put all your eggs in one basket
To guard your crypto portfolio against market fluctuations, it is helpful to know that finding several high-performing cryptocurrency investments is a well-known strategy, instead of relying on a single investment.
Diversification is where you invest across different digital assets and investments so your portfolio isn’t fully exposed to any single risk or asset. Different cryptocurrencies do well at different times depending on factors such as market sentiments, developments, or even political action. So it is wise to spread your investments out over several cryptocurrencies so that when one falls, the other coins could help to balance out any losses, provided that their prices remain stable.
Every investor’s primary goal is to maximize profits and minimize risks, and there are some important questions to ask yourself before you take the step to diversify your crypto portfolio:
- Are you looking for quick profits and a fast return?
- Or are you looking to build crypto savings slowly and steadily over time?
- Do you want to keep the spread over a few coins, or diversify more by putting your investments in a larger variety of cryptocurrencies?
The strategies for diversifying your crypto portfolio
1. Types of crypto and what they are used for
Sounds simple enough, isn’t it? Every cryptocurrency is different and has been created to serve a different function. For example, BTC was created to be a virtual currency, while XRP was created to facilitate payment transfers in financial institutions such as banks. ETH is the cryptocurrency at the core of DeFi protocols and smart contract technology.
Across the crypto world, you can choose from privacy coins, altcoins, and tokens, across different industries. It is very important to do your research, focusing on different factors such as prices, trends, and future potential of each coin and the industry they are in. Do remember to also spread them across different blockchains and place your investments across different crypto projects operating on the most popular blockchains, such as Bitcoin, Ethereum, Solana, Cosmos, Polkadot, Avalanche etc.
2. Dollar-cost averaging (DCA)
Dollar-cost averaging, or DCA, lets you reduce the impact of volatility on your crypto portfolio by putting in investments at predetermined time intervals regardless of how the market is behaving. It’s saying “I’ll invest 100 USD each in coins A, B, C, and D, on the first day of every month, no matter what happens.”
The most important thing when using DCA for cryptocurrency is to plan in advance and stick to it, no matter what your sentiments tell you. The strategy is best for people who plan on HODLing their crypto assets for the long term.
3. Time diversification
Time the market right – buy low, sell high – across your crypto investment basket. This is one of the most intuitive ways of investing. When your crypto portfolio is diversified, you’ll need to set aside specific amounts of money to invest in your chosen tokens at specific times. A great tool to use is Bit.com’s Rebalancing Market Making (RMM) Strategy, which helps you to effectively buy low and sell high.
This technique for diversification requires the crypto investor to be very well in tune with market movements, global financial news, and crypto news. One tip we can give is to set up price alerts for the list of cryptocurrencies you have invested in or are intending to invest in. Receive updates when the coin reaches your target price to buy or sell, so you’ll not miss a beat.
So, now that you have a diversified portfolio, what’s next?
Firstly, you’d like to check out if there are gaps in your crypto portfolio. Is there any untapped potential you see in the crypto market? Has there been any news recently of a groundbreaking development in a sector that you’ve not been investing in? If so, do more research and see if you could get a piece of the cake by reallocating your crypto assets.
Over just a matter of months, some of your cryptocurrencies will rise spectacularly, while others will fall drastically. But since your crypto portfolio is a diversified one, you might still have a good chance of seeing gains throughout your combined investment volume. It is important to reallocate your crypto investments from time to time. Some coins might even have been delisted by your trading platform. Over time, if you’re feeling an appetite for greater risk, you can also start putting a higher percentage of your portfolio into new coins and projects.
Diversification of your crypto portfolio is an important risk management strategy. Do bear in mind that diversification will not protect you from market-wide falls, but it will reduce your risk when one of your crypto investments starts to see major drops.
The crypto market is highly volatile and investing can be a risky business, but making smart investments, combined with a well-balanced, diversified portfolio based on your appetite for risks, and catered to your short- and long-term savings strategy, can bring you healthy profits.
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