Bitcoin is considered one of the highest-yielding assets of the decade, outperforming even traditional financial instruments like gold, stocks, and bonds. Bitcoin has produced huge returns to investors in just over a decade. Many institutional investors have started to include a percentage of their investment portfolios; consisting of bonds, indices, stocks; to the main digital assets Bitcoin and Ethereum.
It is an accepted reality that prominent cryptocurrencies like Bitcoin and Ethereum have yielded massive returns to investors in the past. However, the cryptocurrency markets have expanded far beyond the top ten digital assets list. Cryptocurrency markets now incorporate a multitude of utility tokens, security tokens, Defi tokens, privacy tokens, gambling tokens, and more.
Also, building a cryptocurrency portfolio with only Bitcoin and Ethereum is not enough. To take full advantage of the gains from this rising industry while reducing the risk factor, it is necessary to diversify a portfolio containing multiple cryptos from scratch. In this guide, we explore the need to diversify a portfolio beyond Bitcoin and also one of the diversification strategies for a brighter outlook.
What is cryptocurrency portfolio diversification?
Crypto portfolio diversification is the process of disbursing investment funds into different crypto projects to reduce the risk factor if one or more projects fail. The objective is to create diversification with investments in different areas/niches to reduce the overall risks of investments. For example, investors investing in Bitcoin in 2017 had the first-hand experience when the price of Bitcoin fell sharply in 2018.
The basic idea is to reduce the factor of the negative event. This can be done by investing in multiple tokens and coins so as not to lose the overall value of your investments. To this end, a smart investor recognizes that it is safe not to put all your eggs in one basket, that is, in Bitcoin.
It is important to manage your business operations on a reliable and trusted cryptocurrency exchange platform. This makes it easier for an investor to increase their overall portfolio diversification experience.
How to get started with portfolio diversification
There are different strategies to diversify a cryptocurrency portfolio. This can include creating a portfolio taking into account different factors depending on the investor. We have discussed one of the strategies that a trader can employ to build a portfolio that caters to the different properties of tokens, including market capitalization, liquidity, stability, and functionality.
Bitcoin
While a portfolio shouldn’t be made up entirely of Bitcoin, the leading cryptocurrency should contain a considerable percentage of your investments. One of the factors is the growing trend of investment in Bitcoin by hedge funds, corporations, institutions, and investors. Major financial companies have also started offering different services related to Bitcoin.
The Bitcoin asset is also gaining the attention of retail investors, thus driving its mainstream adoption. It continues to exceed conventional investment alternate like gold in 2020. Allocating a percentage of your crypto portfolio to Bitcoin mitigates risks by acting as a safe asset.
Ethereum and ERC-20 Tokens
Ethereum continues to rank second in the cryptocurrency markets. Furthermore, the real value of Ethereum lies in its ability to facilitate the creation of smart contracts and decentralized applications.
Its inherent usefulness subsequently provides a solid foundation for the valuation of your native ETH token. Although there are many other blockchain networks, Ethereum continues to dominate the industry.
The ERC-20 protocols are the utility symbols released on the Ethereum Blockchain network. These tokens act as a utility function for a landscape spanning a real industrial use case. Many of these altcoins have found success in their crypto projects. For example, OmiseGo (OMG) is an ERC-20 token that yielded five times more in 2020. In other words, a $ 1 investment in January 2020 is worth nearly $ 5 in November 2020.
Investing in altcoins makes it easy for the trader to leverage exponential growth in a relatively short period. At the same time, it poses threats of scams, project failures, and fraud. But this kind of risk is offset by safe assets like Bitcoin. For more information on the price of Bitcoin and how to buy Bitcoin, click here.
Passive income tokens
Like dividends, some cryptocurrencies give interest to token holders. Staking is a phenomenon that facilitates the rewards of cryptocurrencies in exchange for keeping crypto in a portfolio. In addition to diversification, staking also serves to allow a passive income from having cryptocurrencies.
Cosmos (ATOM) is a token that yields an interest of 8-10% in exchange for staking operations. Dash (DASH) is another token that produces an annual reward of between 5-6%.
Stable cryptocurrencies
Cryptocurrencies are well known for their volatile nature. While volatility can add advantages if trades are executed correctly, it also poses a risk factor. The established ones are cryptocurrencies that are used to mitigate the risks that arise from other tokens. These currencies are tied to the value of an asset such as fiat currency such as USD.
The Tether (USDT) is one of the most popular stable coins that is pegged to the value of the USD. It is advisable to secure a percentage of the portfolio to stable coins or stable cryptocurrencies. This eliminates the risk factor to some extent.
Final comments
Diversification is a strategy used by smart investors to mitigate their risks in traditional markets. The advantages of diversification are equally relevant to the cryptocurrency industry as well. Also, diversification can play a strategic role in cryptocurrency investments when the industry is in a nascent stage. Although it will not eliminate threats or double the value of your portfolio, it is an important tool when markets suddenly turn down.