Why you should diversify investing in cryptocurrencies
For any investor, the ultimate goal of every investment is to maximize returns while minimizing risk. This is why they establish investment objectives and employ various investment techniques so that they can benefit from market trends. Typically, investors allocate their capital to more than one asset as part of these strategies. In fact, the whole point of diversifying one’s holdings is to make sure that even if prices fall, your profit margin remains relatively intact because a portfolio composed of a variety of assets will produce better long-term returns on average while reducing risk. . of any investment. And this is the fundamental concept on which portfolio diversification is based.
According to its Blockchain founder Hitesh Malviya, “Diversification is a risk management strategy that mixes different types of investments within a portfolio. In general, he said, investors build their portfolio by allocating different percentages of the portfolio to different asset types. Diversify in. Traditional asset classes include stocks, bonds, commodities, ETFs (exchange-traded funds), etc.
“Recently, as cryptocurrencies have gained significant traction, they are also considered as an asset class worth investing in, with some arguing that crypto is not an asset class. Nevertheless, diversification is an investment technique. This applies to all financial markets, including the cryptocurrency market,” Malviya said.
“With crypto becoming mainstream, many investors are flocking to the markets to start trading and investing in crypto. But more often than not, many investors believe that simply adding bitcoin to their portfolio is enough,” he said. said.
Malaviya explained that investors tend to devote all their funds to a single asset, rather than implementing a solid portfolio diversification strategy out of the nearly 11,000 cryptocurrencies currently available. “This approach is problematic in itself, especially if the objective is to make a profit.”
Certainly, investing in a single asset can give you 100% of the profit or loss associated with that asset; However, it is important to remember that not all crypto-asset gains are created equal. And although the price of bitcoin has risen substantially in recent years, many other cryptocurrencies have outperformed bitcoin by gaining significant value.
This is why it is essential to start looking beyond the realm of bitcoin and diversify your investments into many other cryptocurrencies. Apart from the fact that you can hedge the risk and obviously make a substantial profit, he said.
5 reasons to diversify crypto portfolio:
1. Cheaper Transaction Fees
Unlike traditional payments, which incur high fees when transacting abroad, crypto transactions are convenient to execute locally and globally. The cost of transacting with cryptocurrencies like bitcoin is often cheaper than a bank transfer because there is no intermediary or government involved. In addition, your transfer will be faster due to the lack of authorization requirements and the long waiting period. There are also no additional fees, such as deposit fees, withdrawal fees, minimum balance fees, etc.
2. Complete control over your money
As you know, the most important feature of cryptocurrencies is that they are not issued by any central body, which makes them potentially resistant to government interference. Because governments and officials are unable to intervene, they are unable to manipulate or control it. It gives consumers the freedom to manage their money in any way they want without the hassles of a traditional banking institution.
3. Highly Attractive to New Customers
Because of the potential for high returns, cryptocurrencies continue to attract investors from all income levels, from incredibly wealthy investors like Elon Musk to any ‘layman’. Furthermore, the rise of concepts such as DeFi, NFT and crypto derivatives has increased the interest and activity in the crypto market, which means that crypto investing is not going to stop anytime soon. As a result, there is clearly a lot of room for investment growth within cryptocurrencies.
4. Unlimited Options
When it comes to investing in an industry, it’s important to have a wide range of options. Your investment prospects increase in proportion to the number of options you have. Currently, there are over 11000 cryptocurrencies in the world, so you have the option of investing in any of them. The crypto market is growing every day, and every time a new coin is created, it is added to the market.
If the availability of over 11000 cryptocurrencies overwhelms you, don’t worry; You can filter your list into the top 50-100 cryptocurrencies. Most investors generally prefer the top ten cryptocurrencies, but there are always more to consider. Sites like Coinmarketcap break down crypto by market cap and provide more information about each currency, so it can be easier for you to decide.
5. Fixed Store of Value
The need for a reliable, long-term stock of money is one of the most prevalent motives for investing in cryptocurrency. Unlike traditional currency, most cryptocurrencies have a limited supply. This makes it impossible for any political or government body to reduce its value through inflation. The government also cannot tax or confiscate cryptocurrency without the owner’s consent due to its cryptographic nature. This asset is highly attractive to people, especially those who are worried about bank failures, hyper inflation and other calamities.
How to diversify crypto portfolio
1. Diversification by Industry
Make sure you invest in a variety of coins that can be used to deal with issues in different industries. This will help you mitigate the negative effects of crypto-unfriendly policies and events on your investments. Make sure you do thorough research and invest in both solid and fast growing businesses. You should also evaluate overall profitability and industries that are globally competitive, such as medicine and finance.
2. Diversifying Geography
Make sure none of your funds are going to crypto projects in the same region or country – do thorough research on the performance of crypto projects in different parts of the world. Doing so will protect your investments from regulatory uncertainty and provide you with an additional means of balancing your diversified portfolio even in uncertain market conditions.
3. Diversify over time
While it is impossible to completely eliminate market risk when investing, you can increase the value of your portfolio by knowing when and where you invest. Diversifying your investments over time, also known as dollar-cost averaging, is an interval-based investing strategy. All you have to do is to set aside a predetermined amount to invest in your chosen token at a predetermined time.
That way, it’s a good moment to invest in a new cryptocurrency when prices are falling significantly, and you’re in a great position to sell and profit when things are going well and prices are rising.
The extreme volatility of the crypto market necessitates the use of effective risk management approaches. This is why a dynamic approach to budget allocation is essential so that you do not lose out on all your hard earned money. When done properly, portfolio diversification is certainly an effective risk-mitigation strategy for crypto investing. However, it is important to remember that while diversification reduces risk, it also lowers your return on investment.
Therefore, it is entirely up to you whether you want to diversify your crypto portfolio or not. Whatever your decision, just make sure you do your homework and consider your budget.
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