How to diversify your crypto portfolio
Introduction
When it comes to cryptocurrency investing, diversification is an important strategy that helps to reduce a portfolio’s risk.
Balancing a cryptocurrency portfolio is a lot like balancing a traditional portfolio. The key is to invest in multiple digital assets instead of a single cryptocurrency such as Bitcoin (BTC), and to regularly rebalance your asset allocation.
Although diversification is beneficial, the extent to which you diversify will depend upon your personal level of risk tolerance and portfolio goals.
Key Takeaways
- Cryptocurrency diversification is used to track the overall market and reduce a portfolio's risk.
- A cryptocurrency portfolio can be diversified by investing in a wide range of digital assets with multiple uses.
What are asset allocation and diversification?
Asset allocation and diversification are two strategies used by investors to reduce their portfolio risk. Diversification refers to investing in multiple asset classes, whereas asset allocation refers to the distribution of your investment funds across different sectors. An example would be investing in precious metals, healthcare and technology instead of investing all your funds in one industry.
How to diversify your crypto portfolio?
Although cryptocurrencies are a single asset class, it’s possible to diversify across products, coins, and tokens based on their different goals and utilities. For example, allocating 35% of your portfolio to Bitcoin, 25% stablecoins, 20% altcoins, and 20% NFTs would allow your portfolio to track the overall market. A cryptocurrency portfolio can be diversified by including a wide range of digital assets with multiples uses.
5 different types of cryptocurrencies
Bitcoin is the most well-known cryptocurrency and has the largest market cap, but a balanced portfolio needs to include a wide range of cryptocurrencies. Below is a list of the different types of cryptocurrencies that can be used to diversify your crypto portfolio.
Stablecoins
Stablecoins are a class of cryptocurrency that’s backed by “stable” reserve assets such as gold or the U.S. dollar. They attempt to track the underlying assets and hold value in an often-volatile market. Although stablecoins are not likely to provide investors with large gains, they do offer stability, a useful trait if looking to achieve a balanced portfolio.
Utility tokens
A utility token serves a specific use case within a crypto ecosystem, giving investors access to a product or service or enabling an action on a certain network. ETH and BNB are both utility tokens, some of their utilities include being able to pay for transaction fees when interacting with DApps. Utility tokens are a popular way for projects to raise funds in a coin offering.
Governance tokens
Governance tokens are an important utility token of DeFi protocols and can often be found on decentralized finance platforms such as Uniswap and Sushiswap. Key benefits of governance tokens are that they provide investors with voting power on a project as well as a share of revenue. They are the first cryptocurrencies to use voting on the blockchain, shifting platform decisions from a centralized structure to a community. Similar to utility tokens, a governance token’s value is directly related to the overall success of the underlying project.
Payment coins
Although cryptocurrencies have evolved over the years and most new coins don’t deal primarily in payments, cryptocurrencies like Bitcoin and Litcoin (LTC) were originally created as a system to transfer value. Popular payment coins like Bitcoin are accepted by certain merchants as an alternative to fiat currency.
Security tokens
Due to security tokens representing fractional ownership of assets that already exist in the traditional market, security tokens offer investors a bridge between traditional finance and blockchain. Even Nasdaq has embraced the idea of digitalizing the listing of public companies by incorporating blockchain. Like traditional securities, a security token can represent multiple things, such as equity in a company or bonds. Security tokens are essentially fractional liquid contracts of valuable assets such as corporate stock or real estate.
Diversify your crypto portfolio with indexes
Like traditional indexes, cryptocurrency indexes like the DeFi Pulse Index allow investors to easily diversify their portfolio by investing in multiple assets at once instead of having to manually trade assets. A key benefit of crypto indices is they allow investors to reduce their risk and protect their portfolio from being overly exposed to a single token. Crypto indexes consist of various cryptocurrencies, grouped together, and weighted by market capitalization.
If you would like to diversify your cryptocurrency portfolio with leading indexes such as the DeFi Pulse Index, log into your WonderFi account to start investing today.
