As the cryptocurrency market continues to evolve, with Bitcoin (BTC) hitting record highs above $100,000, diversifying your crypto portfolio has never been more important.
The volatile nature of cryptocurrencies, paired with the rise of meme coins, makes a balanced approach absolutely crucial.
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With the cryptocurrency market reaching a total capitalization of around $3.7 trillion, this article explores eight strategies you can use to diversify your crypto portfolio and minimize your risks.
Why Balance Your Crypto Portfolio?
Diversification is a fundamental principle of investing that most investors should abide by, whether you’re a beginner or a seasoned trader.
Like with any form of investing, whether in stocks, exchange-traded funds or hard commodities like gold, diversifying your portfolio ensures that you limit the risk of losing your investments and gives you the opportunity to capitalize on market cycles. Rebalancing allows investors to sell overperforming assets at a high and reinvest in those that are still undervalued.
Due to the volatile nature of the cryptocurrency market and its somewhat uncertain future, investors can reduce overall volatility and maintain liquidity by hedging with stablecoins or low-volatility assets.
Ultimately, balancing provides resilience, reduces risks and, most importantly, can minimize the number of sleepless nights.
Here are eight strategies to diversify your crypto portfolio and limit risk:
— Invest in cryptocurrencies with various purposes.
— Invest in crypto companies.
— Diversify by market capitalization.
— Invest in different cryptocurrency blockchains.
— Diversify crypto investments by geographical location.
— Invest in different industries and niches.
— Use dollar-cost averaging.
— Diversify by risk level.
Invest in Cryptocurrencies With Various Purposes
You can start diversifying your crypto portfolio by investing in cryptocurrencies with various purposes, also known as use cases. While most cryptocurrencies, with the exception of “pump and dump” meme coins, can act as a medium of exchange, many offer additional functions. Bitcoin, for example, serves as a store of value, preserving and growing wealth due to its strong historical performance. Some expect Bitcoin to become an alternative to digital gold.
Ethereum, with its native cryptocurrency Ether (ETH), the second-largest crypto by market cap, is a blockchain network that supports smart contracts and decentralized applications (dApps), making it an investment in the broader blockchain ecosystem.
XRP, for instance, which has been on a steep rise during the past few months, is designed to facilitate transfers for banks and financial institutions.
Stablecoins like Tether (USDT) and USD Coin (USDC) can further diversify your portfolio. Pegged to assets like fiat currencies and commodities like gold, stablecoins provide consistent value, helping to avoid the crypto market’s volatility.
Invest in Crypto Companies
Investing in crypto companies is a great way to minimize volatility while still technically investing in the crypto market. There are several companies, for example, such as Coinbase Global Inc. (ticker: COIN) and Robinhood Markets Inc. (HOOD), that heavily correlate with the cryptocurrency market yet are companies that specialize in offering users a platform to trade cryptocurrencies.
Both companies went public a few years ago, and although the share price of both is directly impacted by the state of the cryptocurrency market, you’re investing in companies with financial histories and obligations to their investors and governing bodies.
Diversify by Market Capitalization
Bitcoin is the leading cryptocurrency with the largest market capitalization, which currently stands at about $2 trillion. It is followed by Ether, which has a market capitalization of about $477 billion.
Despite the fact that Bitcoin has been a dominant cryptocurrency for the past 10 years or so, there are numerous altcoins that are worth considering.
While a crypto with a large market cap may offer more stability and have stronger fundamentals, it’s unlikely that you’ll see 4x or 2x growth from the likes of Bitcoin or Ether anytime soon. Even though it’s possible for Bitcoin and Ethereum to grow significantly, it’s likely to take years.
On the other hand, cryptocurrencies with lower market caps might have stronger growth potential but lack the same stability.
Invest in Different Cryptocurrency Blockchains
Blockchain is the technology that allows cryptocurrencies to function. However, the capabilities of blockchain platforms go far beyond that, and they are in high demand in nearly every sector because of the solutions they offer.
You know that the Ethereum blockchain facilitates the execution of agreements without a third party and allows dApps to be built on its platform. Another example, Solana (SOL), is a blockchain platform for hosting decentralized, scalable applications. A large number of meme coins are built on the Solana blockchain.
Diversify Crypto Investments by Geographical Location
Investing in cryptocurrencies from diverse regions around the globe can provide exposure to a broader range of innovations within the cryptocurrency industry.
That said, it’s a safe strategy to avoid investing in questionable cryptocurrencies, and especially in countries where cryptos are banned or heavily regulated. It’s more likely for the cryptocurrency to go bust rather than for the country to change its approach to crypto innovation.
Instead, focus on regions that have a lot of growth potential.
It’s important to remember that more and more countries are starting to regulate crypto investments, with many introducing capital gains tax on crypto gains. Therefore, it’s important that you do your own research before investing.
Invest in Different Industries and Niches
Cryptocurrency investment opportunities can be found in different industries, from fintech to gaming.
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.
At the same time, crypto’s use in the world of gaming and the metaverse has taken off, and a growing number of users are trading virtual assets in a global virtual marketplace.
Some cryptocurrencies act as a service token, which allows users to access specific services or features on a network. Storj is a good example, which is essentially an alternative to Google Drive and Dropbox.
Use Dollar-Cost Averaging
Avoid investing a one-off lump sum. The dollar-cost averaging method is perfect for crypto investing because it makes dealing with the ups and downs of the market so much easier.
Instead of trying to time the market, you just invest a set amount on a regular schedule.
You can even decide to buy on dips, or when the market is showing a downward trend. What you don’t do with this method is invest a lump sum in one particular cryptocurrency. You may want to set aside a small amount of cash to use for market-dip opportunities.
Diversify by Risk Level
Investing is all about risk tolerance, so it’s important to let that be your guide. Having numerous sleepless nights during the year won’t help you find balance in your crypto portfolio.
In order to find peace with your crypto investments, you might start by devoting more funds to stable cryptocurrencies like Bitcoin and Ether. Although anything is possible in the crypto market, these two are unlikely to crash in the short run.
Depending on your risk tolerance, you can then decide to invest in riskier cryptos that have more growth potential, keeping your allocation to a relatively low percentage of your overall portfolio.
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8 Ways to Diversify Your Crypto Portfolio and Limit Risk originally appeared on usnews.com
Update 12/16/24: This story was previously published at an earlier date and has been updated with new information.
