When a crypto investor invests in just a single crypto, their exposure to the usually unpredictable performance of another crypto asset is limited. This is why crypto asset diversification is an essential factor of smart cryptocurrency investment just like it is in other investors like stocks and bonds. And there’s even how to recover a blockchain wallet.
A lot of cryptocurrency investors usually invest in just a single crypto asset like Bitcoin or Ethereum. Nevertheless, this is a wrong investment strategy for those who intend to turn their investment into a profitable venture. When you invest in just a single asset, the gains and losses connected to the asset are yours to bear, however, not all the gains from cryptocurrency assets are the same.
The primary goal of all cryptocurrency investors is to make profits and cut down on risks as much as they can. This is the reason they have investment goals and use several tactics to make money from the market trends. As a result, they invest their money in different types of cryptocurrency assets.
The aim is to invest a different amount of your cash in different cryptos so that price drops do not significantly reduce your earnings. This technique covers portfolio diversification at its most basic level and how to recover blockchain wallet.
To put it another way, portfolio diversification is the process of channelling a variable percentage of your funds to various assets in order to maximize profit while minimizing risk. When diversifying, the likelihood of two or more assets’ prices correlating is given more weight. A well-diversified portfolio is made up of assets that have distinct performance characteristics.
Why Is Diversification of Cryptocurrency Portfolios Important?
Compared to other traditional assets, the cryptocurrency market is highly volatile, and the prices might suddenly change in any direction multiple times a day, which could either profit or harm an investor. As a result, while volatility tends to improve profitability, it also increases the risk of losing money. It is not uncommon for the price of Bitcoin to plummet by 50% in a few days. Investors that are significantly invested in the Bitcoin market will see their portfolio value plummet in such circumstances.
Spreading one’s wealth across a variety of digital assets is recommended to avoid such levels of risk exposure. This investment technique helps to mitigate the size of losses sustained during market downturns. Because you just put a portion of your money in Bitcoin and spread the rest across a range of coins, a 50% Bitcoin meltdown is unlikely to be as disastrous. This is due to the fact that the performance of the constituent crypto-assets in a diversified portfolio would compensate for the losses.
While Bitcoin may be down 50%, Ethereum may be down only 25%. Adding a stablecoin to the mix lowers the risk even more. And, fortunately, DeFi tokens may be on the rise. Individual investment losses may be mitigated in the long run by the collective performance of digital assets in a well-diversified portfolio.
It’s worth noting that the risk associated with a Bitcoin-focused strategy is equally present in an investment strategy centred on Ethereum or any other digital asset. The idea is to make sure you’re not overly invested in a single cryptocurrency, such as Bitcoin, Ethereum, Binance Coin, or any of the other 5,700 digital assets available.
Advantages Of Crypto Portfolio Diversification
Diversification has generally provided two advantages: It diversifies your portfolio with “non-correlated” assets so that when some investments fall in value, others remain stable or even rise, and it (hopefully) shields you from a catastrophic loss if one of your investments implodes.
With crypto, the first benefit is just tangentially relevant. Bonds tend to rise in value when stocks decrease in value, allowing investors to ride out bad markets with a typical investment portfolio. Cryptocurrencies, on the other hand, tend to rise and fall in lockstep. Here’s how to recover a blockchain wallet.
The fundamental benefit of cryptocurrency diversification is that it limits extreme outcomes. If one cryptocurrency fails and your investment falls to zero, other crypto investments may still do well. Ideally, one currency will not wipe out your entire crypto holdings.
Investing in smaller cryptocurrencies with functionality that is fundamental to the decentralized finance market and ecosystem in general is another method to profit from cryptocurrency’s future. You can learn how to recover a blockchain wallet if you lose access to it.
If you’re a new investor, it’s a smart idea to start with coins and cryptocurrencies that have been around for a while and have demonstrated that they’re not scams. Bitcoin and Ethereum should make up at least half of a cryptocurrency investor’s portfolio, with the rest made up of other potential coins and tokens. Beyond that, especially if you aren’t aware of the crypto industry, it’s advisable to stick with cryptocurrencies that are absolutely authentic and learn how to recover blockchain wallet.
Elora is PR and Outreach Manager at Crunchoid Inc. Outside of work, Elora enjoys Flywheel, tacos, the tennis, and adventuring around the globe.