It's Time to Diversify Your Portfolio | by Cryptogeek
It's been three months already since the Bitcoin price correction started. Some of the Bitcoin investors are probably frustrated by this state of things while others are enjoying gains from altcoins. The newly acquired data reveals that altcoins are going stronger so probably it's really better to diversify your crypto portfolio for the sake of better stability of your balance and relative independence from the only big player (Bitcoin).
- Bitcoin's Leadership Weakens
- Diversification of Crypto Portfolio
- How to Choose Coins For Your Portfolio?
Bitcoin's Leadership Weakens
The majority of the payments made in cryptocurrencies are processed via the products of BitPay Inc., the leading company in this sphere. This month, BitPay shared an interesting fact — in 2020, 92% of the crypto payments were made in BTC while in 2021, the share of Bitcoin dropped to only 65%. We won't hurry to call it "the beginning of the end" for Bitcoin or something like this. Rather, it is only a sign of a natural rise of interest and awareness of people in other cryptocurrencies. The number of people eager to try cryptocurrencies grows day by day. Companies and communities developing altcoins and ecosystems with utility tokens put a strong effort into creating useful and strong products and promoting them globally. So it seems that in 2021 cryptocurrencies have finally made a predictable step out of Bitcoin's shadow. Please note that another reason for the decline of payments in Bitcoin is that people prefer to save Bitcoin and spend other crypto coins. It will be interesting to learn what will be the share of payments in Bitcoin by the end of 2022.
In general, it seems that Bitcoin's dominance is declining. For crypto traders hoping to earn on expensive Bitcoin, the last three months were not the easiest time. Experts expect the downward trend to stop by the end of the second third of January 2022 as in the middle of the month the price decline stopped at the relatively high level of $43k. Some market observers expect that at this point, Bitcoin can start the growth with a trajectory close to the one it had in the fourth quarter of 2020. The time will show. The US lawmakers are discussing the crypto mining impact on the environment this week. The result of their work can affect the market, too. We hope you have some bitcoins to hold for the case if BTC goes up again. However, it's a wise thing to have several other crypto coins — some strong veterans of the market (whether it's Litecoin, Dogecoin, or something else) and several fresher coins as if you guess what is the next cryptocurrency to explode 2022 you might earn much more than you usually get when Bitcoin goes up. So let's talk about the benefits of diversification.
Diversification of Crypto Portfolio
Diversification of your assets is the way to lower your risks while boosting your potential profits via splitting your balance between several assets. This method has existed for centuries and cryptocurrencies are only one of many asset types for which diversification can be applied. It is quite a standard risk management strategy for investors.
Now let's explain in short what diversification is in case you don't know. If you have only one asset then you can earn as much as this asset gains but not more. If this asset drops by several percent you lose the respective percentage of your wealth. More than that, if your asset drops you lose money even if the rest of the market goes up. That's why investing everything in the only asset is reckless. If you have several assets and the combination is good, then most of your assets will grow (some will grow faster than others) and some of these coins will go through corrections but the overall balance will be keeping its head above the surface. As a result, a properly diversified investment portfolio makes more money than a single asset. The downside of diversification is that it lowers risks alongside returns.
By diversifying your portfolio, you can spread risk and avoid having too much exposure to one asset. pic.twitter.com/pcyvRxjvff— Binance (@binance) November 28, 2020
More than that, depending on the scale of your trading activity, you might need to have more assets. The bigger your trading volume is, the more diversified your assets should be. It's worth saying that diversification cannot save your balance from shrinking in times of bear market or other situations when the entire crypto market goes down. The main use of this strategy is minimizing losses when some of the currencies drop in price. It is important to choose the currencies that perform well and have the potential to grow further but it is important no less to rebalance the set of chosen coins. Sometimes there's a need for weeding out the coins that don't satisfy your expectations and adding some new ones to preserve the potential of your balance.
How to Choose Currencies For Your Portfolio?
You can control the performance of your portfolio using a spreadsheet or by keeping all the assets at the same multi-currency wallet that automatically displays the total value of your balance in a single preferred currency. Also, you can use one of the multiple portfolio tracker apps to analyze the performance of your investments.
A diversified crypto portfolio can include Bitcoin, stablecoins, altcoins, and NFT tokens. All of these assets are of the same class (cryptocurrencies). It is advised to make a broader allocation (diversify your portfolio using different classes of assets) but in this article, we are going to focus only on cryptocurrencies.
Now, let's see how you can assemble a portfolio. First, you might decide how you will distribute your balance between low-risk assets, medium-risk assets, and high-risk assets. All these categories are important as high-risk assets can skyrocket anytime and bring unexpected extra profits. However, it's better to limit the share of high-risk assets as they can appear to be worthless. To keep your balance rock-solid it's better to give preference to low-risk and medium-risk coins. It's important to have some stablecoins in your portfolio as they are key for using many exchanges and DeFi platforms.
When you add new coins to your portfolio you should make sure that the balance between different parts of the portfolio structure won't be violated. Even if you believe that the coin you want to add will skyrocket soon don't forget that it shouldn't replace your low-risk assets. When you consider adding some assets, it's better to double-check everything you can learn about the project behind this coin and make sure that it is worthy, the team has reputation and experience, the market performance shows signs of real potential and poise. Your research shouldn't be surface-level. Read the users' reviews, read the profile press articles about the project, see why this project is criticized and why it is praised, get the full picture. Most of the time you are quite able to distinguish trash coins from good ones. So don't lose money on worthless coins, do research and invest wisely!
For sure, if you haven't diversified your portfolio yet, you still can make returns from simply holding BTC coins. However, we've shown you how you can make your balance more predictable and safe. Exploring the new grounds might be a life-changing experience. So looking at some fresh altcoins that already turn heads doesn't seem to be a bad idea at all.