What is crypto portfolio diversification? Portfolio diversification means investing in a range of different crypto assets to protect your wealth and reduce the overall risk of your investments. In other words, “Don’t put all your eggs in one basket.”
“Diversification is the only free lunch in investing” is a popular saying on Wall Street dating back to the 1950s. And there is a reason why people are still saying it today.
In this guide, you will learn what portfolio diversification is, and how you can diversify your crypto portfolio beyond bitcoin.
What is Portfolio Diversification?
Portfolio diversification means investing in a range of different assets to reduce the overall risk of your portfolio. In other words, portfolio diversification is a fancy way of saying do not put all your eggs in one basket.
If you were to invest only in Tesla stock, for example, the value of your investment portfolio would fluctuate greatly and could go to zero if Tesla goes bankrupt. However, if you were to invest in Amazon, Apple, Google, Microsoft, and Tesla, you could benefit from the potentially strong performance of the Tesla stock while reducing your risk by diversifying into more established tech companies.
If you were to buy a fund that invested in the entire stock market, you would diversify still further, in case the tech industry were to suddenly collapse. (Unlikely, but possible.)
That is the main principle of diversification. You reduce your overall risk, while still keeping upside potential.
We can take this idea further, and invest in things other than stocks. For example, owning government bonds can provide advantages in that bonds can be sold easily for cash. In addition, some legal protections come with owning bonds, and they are not as volatile as other assets.
However, volatile assets should not be discounted as they can lead to profit. Bitcoin is a highly volatile cryptocurrency that has risen by more than 300% in the past four years. Crypto is a growing asset space that has expanded its market cap to nearly $3 trillion as bitcoin, Ethereum, and other altcoins continue to hit all-time highs.
That said, the rule of not investing in a single asset should also apply to digital currencies. Having all your crypto holdings in BTC, for example, may be risky given that if bitcoin falls, you risk losing your whole portfolio. So diversification is just as crucial for crypto portfolios.
Asset classes do not always move in tandem. There have been times, for example, when crypto and stocks have moved in opposite directions. Owning both types of investments can diversify your portfolio and keep growing your wealth, even if one type of investment experiences a dip.
If you want to build a long-term crypto investment portfolio because you believe in the future value of this new asset class, it would be prudent to buy not just bitcoin, but also other digital currencies and tokens with a long-term view.
How to Build a Diversified Crypto Portfolio
There are several approaches to building a diversified crypto portfolio.
The most straightforward diversified digital asset portfolio you can build is an equally weighted portfolio with holdings in bitcoin (BTC) and ether (ETH). This is because Bitcoin and Ethereum’s ether are the two largest digital assets by market capitalization and are also among the most liquid.
To build this portfolio, you could use a platform such as Coinbase to buy both BTC and ETH, then store your holdings in a secure hardware wallet. This portfolio would provide you with exposure to the two largest cryptos by market cap.
If you would like to diversify your portfolio further, you could add more of the top-performing digital assets to the mix. However, if you want to remain conservative, you will probably still hold most of your portfolio in bitcoin.
For example, you could build a portfolio composed of bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Solana (SOL), where BTC remains at 40%, and the remaining three assets split the other 50%.
To build this portfolio, you could sign up on a digital asset exchange such as Coinbase, Binance, or Kraken and purchase each of these assets before transferring them off the exchange into a personal wallet that only you control. (See our guide to Top Crypto Exchanges.)
If you would like to go beyond the top ten assets, you could look at future winners in each sector. (See our guide to The Power of Sectors for Investors.) For example, you could create a portfolio that holds 50% in bitcoin (BTC) and the rest in tokens issued by smart contract platforms if you would like to “go long” in the smart contract sector:
For new blockchain investors, a simple split between the top assets is the easiest choice. However, for more experienced investors, there are opportunities to build portfolios composed of different sectors such as digital currencies, utility tokens, security tokens, and different sector exposure, such as enterprise chain tokens, privacy coins, and exchange tokens.
Diversified Portfolios for Different Crypto Investors
What kind of crypto investor you are could make a difference in what kind of portfolio is right for you. For example:
- Newbies: If you’re new to crypto investing, your portfolio may consist of only a small amount of bitcoin — no more than 2.5% of your overall portfolio — with a broad mix of stocks and bonds making up the rest. (See our Baby Blockchain Believers portfolio.)
- Conservative: If you’re primarily concerned about retaining wealth with minimal risk, invest in a broad mix of stocks and bonds, leaning more toward bonds and other reliable investments. (Consider our Baby Blockchain Believers portfolio with 2% or less of bitcoin.)
- Yield-earning: Another approach is to put more of your crypto assets into yield-earning investments, like earning interest on traditional bank accounts (see our list of Top DeFi Interest rates). Instead of holding bitcoin or other crypto assets, you can put them to work for you. (Consider our Big Blockchain Believers portfolio, with a portion allocated toward Staking or Yield Farming.)
- High-net worth: If you have $1 million or more in liquid assets, you may be able to take more risks with your investments. Consider expanding your crypto holdings, using our Future Winners Portfolio as a starting point, and potential adding winners in each of the Top Blockchain Sectors.
- Aggressive: Our philosophy is a long-term approach: don’t look to “get rich quick,” but “get rich and make it stick.” However, you can use our Big Blockchain Believers portfolio, increasing the percentage of stocks vs. bonds, and investing 10% of your holdings in our Future Winners Portfolio.
The Bottom Line
In three words: Diversify, diversify, diversify.
Portfolio diversification is one of the most important things you can do as an investor. For traditional investors, crypto can be a valuable way of diversifying your portfolio of stocks and bonds. For crypto investors, be sure to heavily diversify beyond crypto.
Diversification–when done right–allows you to reduce your portfolio’s risk while keeping your expected returns high. Simply put, don’t put all your eggs in one basket. That holds true for everyone, no matter what type of investor you are..
- The Blockchain Believers Portfolio
- The Future Winners Portfolio
- Dollar-Cost Averaging: The Smart Way to Invest in Bitcoin
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