Considered one of the best performing assets of the decade, Bitocoin has come to beat even traditional financial instruments like gold, stocks and bonds. In just over ten years, Bitcoin has brought massive returns to investors. Many institutional investors have started to include a percentage of their investment portfolio, made up of bonds, indices and stocks, in major digital assets Bitcoin and Ethereum.
It is a recognized fact that major cryptocurrency tokens like Bitcoin and Ethereum have generated massive returns for investors in the past. However, the cryptocurrency markets have grown far beyond the top ten digital asset list. Cryptocurrency markets now include a multitude of utility tokens, security tokens, DeFi tokens, privacy tokens, investment tokens, and more.
Moreover, it is not enough to build a cryptocurrency wallet only with Bitcoin and Ethereum. To make the most of this booming industry while reducing the risk factor, it is necessary to diversify a portfolio containing several cryptos. In this guide, we explore the need to diversify a portfolio beyond bitcoin, as well as one of the diversification strategies for a more favorable outlook.
What is the diversification of a crypto portfolio?
Crypto portfolio diversification is the process of disbursing investment funds into different crypto projects in order to reduce the risk factor if one or more projects fail. The aim is to create diversification with investments in different areas / niches in order to reduce the overall risks of investments. For example, investors who invested in Bitcoin in 2017 had first hand experience of the sharp drop in the price of Bitcoin in 2018.
The basic idea is to decrease the factor of negative events. This can be done by investing in multiple tokens so that you don’t lose the overall value of your investments. To this end, a savvy investor recognizes that it is safe to not put all of their eggs in one basket, namely that of Bitcoin.
It is important to manage your business operations on a reliable and secure cryptocurrency exchange. This allows the investor to improve his overall experience of diversifying his portfolio.
How to get started with portfolio diversification
Multiple strategies exist to diversify a cryptocurrency portfolio. This can include building 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 meets the different properties of tokens, including market capitalization, liquidity, stability and functionality.
While a wallet is not to be made up entirely of Bitcoin, the first crypto currency must hold a considerable percentage of your investments. One of the factors is the growing trend of Bitcoin investments from hedge funds, corporations, institutions and investors. In addition, the major financial companies have also started offering different services related to Bitcoin.
Bitcoin Asset is also attracting the attention of retail investors, which promotes its adoption by the general public. It continues to outperform conventional investment options like gold in 2020. Allocating a percentage of your cryptocurrency portfolio to Bitcoin mitigates risk by acting as a safe asset.
Ethereum and ERC-20 tokens
Ethereum continues to occupy the second place in the cryptocurrency markets. Moreover, the real value of Ethereum lies in its ability to facilitate the creation of smart contracts and decentralized applications. Its inherent usefulness then makes it easier to lay a solid foundation for the valuation of its original token, ETH. While there are many other blockchain networks out there, Ethereum continues to dominate the industry.
ERC-20 protocols are the utility tokens launched on Ethereum’s blockchain network. These tokens act as a utility function in a landscape encompassing a real case of industrial use. Many of these altcoins have found success in their crypto endeavors. For example, OmiseGo (OMG) is an ERC-20 token that grossed five times as much in 2020. In other words, an investment of $ 1 in January 2020 is valued at nearly $ 5 in November 2020.
Investing in altcoins allows a trader to take advantage of exponential growth in a relatively short period of time. At the same time, it poses a threat of scams, project failure and hacking. But these risks are offset by safe assets like Bitcoin.
Passive income rates
Just like dividends, some cryptocurrencies offer interest to token holders. Staking is a phenomenon that makes it easier to reward cryptocurrency in exchange for holding crypto in a wallet. In addition to diversification, staking also allows passive income to be earned from holding crypto tokens.
Cosmos (ATOM) is a cryptocurrency token that earns 8-10% interest in exchange for investment transactions. Dash (DASH) is another cryptocurrency token that earns an annual reward of 5-6%.
Cryptocurrencies are well known for their volatile nature. While volatility can add benefits if trades are executed correctly, it is also a risk factor. Stablecoins are cryptocurrencies that are used to mitigate the risks that arise from other tokens. These coins are pegged to the value of an asset such as fiat currency such as the US dollar.
Tether (USDT) is one of the most popular stable cryptocurrencies which is pegged to the value of the USD. It is advisable to guarantee a percentage of the portfolio to stable cryptos. This helps eliminate the risk factor to some extent.
Diversification is a strategy that sophisticated investors have access to to mitigate their risks in traditional markets. The benefits of diversification also apply to the cryptocurrency industry. Moreover, diversification can play a strategic role in cryptocurrency investments when the industry is at an infancy stage. While it doesn’t eliminate threats or double the value of your portfolio, it is an important tool when the markets are suddenly down.