Use these seven strategies to balance risk in your crypto portfolio.
Diversification is one of the fundamental principles of investing that helps reduce a portfolio’s risk. When it comes to building a cryptocurrency portfolio, managing risk in this burgeoning, volatile market is essential to protecting your bottom line. If you want exposure to the innovation of the crypto industry, it may not be enough to invest in a single cryptocurrency, such as market leader Bitcoin (BTC). Rather, allocating to a variety of digital assets will help you profit from growth in the overall crypto market. Using diversification strategies to reach your investment goals will not only protect your money but will also expose you to more crypto assets for the long term. Here are seven strategies to diversify your crypto portfolio.
Buy cryptocurrencies with different use cases.
One way to diversify your crypto holdings is by investing in cryptos with different use cases, or purposes. Cryptocurrencies are used as a medium of exchange, but they are not limited to transactions in exchange for goods and services. Bitcoin, for example, can also be used as a store of value, or a means to preserve and grow wealth, since it has produced outsize returns for investors. Another option, Ethereum, the second-largest crypto network on the market, has smart-contract functionality that allows the creation of digital programs, so this is an investment in a blockchain network where decentralized applications, or dApps, can be built. Crypto investors can also allocate some of their portfolio to stablecoins, which have a value that is pegged to an underlying asset, such as fiat currency. The consistent value of stablecoins, such as Tether (USDT) and USD Coin (USDC), helps temper the crypto market’s volatility.
Invest in different cryptocurrency blockchains.
Blockchain is the technology that allows cryptocurrencies to function. But the capabilities of blockchain platforms go far beyond that, and they are in high demand in nearly every sector because of the solutions the technology enables. Most popular is the Ethereum blockchain, which facilitates the execution of agreements without a third party and allows dApps to be built on its platform. A competing blockchain is Cardano (ADA), which focuses on security, scalability and efficiency. EOS (EOS) blockchain specializes in web services, such as cloud storage, dApps and smart contracts. EOS also supports millions of transactions per second, and simpler upgrade and modification of dApps. And these are just a few examples of the blockchains at the heart of the evolving crypto industry.
Diversify by market capitalization.
Bitcoin is the cryptocurrency with the largest market capitalization, which currently stands at about $810 billion. Bitcoin may occupy the largest chunk of crypto market share, but there are many other altcoins with varying market caps that are worth considering. A crypto with a larger market cap may be more stable and have stronger fundamentals, but a crypto with a smaller market cap might have strong growth potential. For example, Kusama (KSM), with a market cap of about $1.3 billion, is a promising crypto that allows developers to experiment with their dApps on its platform before they are deployed on the Polkadot (DOT) network.
Diversify crypto projects by location.
Choosing cryptocurrency projects from different places around the world can expose you to a wider variety of innovations by crypto businesses. It’s best to steer clear of crypto projects in areas where crypto is banned or restricted and focus on areas where innovation is growing. For example, Portugal is considered a crypto hub and a tax haven for crypto investors. El Salvador was the first country to adopt Bitcoin as legal tender, and the South American nation plans to create a “Bitcoin City” that has no taxes and is funded by cryptocurrency. In the U.S., Texas, Wyoming, New York and Georgia are attempting to draw the crypto industry to their states.
Invest in different industries.
Cryptocurrency opportunities can be found in different industries. The finance industry is the place where crypto has been most adopted. Decentralized finance, or DeFi, allows people to easily conduct digital transactions through a peer-to-peer blockchain network, without a third party such as a bank. DeFi involves not only sending crypto but also lending crypto and investing in crypto. Crypto’s use in the world of video games has taken off, and a growing number of users are trading virtual assets in a global virtual marketplace.
Branch out to different asset classes.
Digital investments are part of different asset classes, giving investors yet another way to diversify. The most common asset class, encompassing Bitcoin and Ether (ETH), the native cryptocurrency of the Ethereum network, includes cryptos that are a store of value or medium of exchange. Another asset class is utility tokens, which give users the right to use a product on a certain platform. Some examples of utility tokens include Basic Attention Token (BAT), Golem Token (GLM) and Filecoin (FIL). Non-fungible tokens, or NFTs, are yet another class of digital investments. NFTs are a digital representation of ownership. NFTs have penetrated the mainstream via digital art, creating a new outlet for artists to showcase their work to audiences. Beyond art, NFTs can represent unique digital ownership of many things, such as real estate, collectibles and even individual identities.
Diversify by risk level.
When constructing a diversified crypto portfolio, it’s important to let your risk tolerance be your guide. The principles that guide asset allocation in a traditional portfolio can also apply here. To balance a crypto portfolio, you might start by allocating more to the cryptos that are more stable, such as Bitcoin and Ether, because they have been on the market the longest. You could add stablecoins to help manage portfolio risk. Then, you may decide to add a smaller percentage of riskier emerging crypto projects with various use cases. Depending on your risk tolerance, you can adjust your allocation across a select few or many different crypto investments.
Use these 7 strategies to diversify your crypto portfolio:
— Buy cryptocurrencies with different use cases.
— Invest in different cryptocurrency blockchains.
— Diversify by market capitalization.
— Diversify crypto projects by location.
— Invest in different industries.
— Branch out to different asset classes.
— Diversify by risk level.
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7 Ways to Diversify Your Crypto Portfolio and Limit Risk originally appeared on usnews.com
