Home > News > How and Why to Diversify Your Crypto Portfolio?

How and Why to Diversify Your Crypto Portfolio?

Risk management and diversification of an investment portfolio are fundamental to the success of your financial operations. Even though the crypto market is still relatively young, diversifying your portfolio can be a crucial aspect in winning the battle and being part of the small percentage of investors who make real profits. What are the necessary steps to diversifying your investment portfolio and what impact can including cryptocurrency make?

Diversification: An Essential Tool for Balancing the Risk of Investment

Experts agree that diversification is absolutely essential for investors who want to maximise gains from their trades and holdings; from those with a long-term perspective to those who engage in “day-trading” (trading financial assets in a single daily session). 

Fidelity, one of the most important and recognized financial institutions in the world, confirms this premise. In an article on the official website, they define the concept of diversification as the “practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.”

Diversifying a portfolio of crypt coins

The introduction of cryptocurrencies has allowed many people outside this space to show interest and even decide to invest. In the strict sense of the concept, diversification refers precisely to the addition of different types of assets in an investment portfolio. However, many digital currency investors have only considered the leading Bitcoin and one or two other popular altcoins. Certain crypto exchanges have opened the door to investment with minimal capital, in some cases below $10. Where the capital is very low, diversification loses its focus and so it is more viable to limit your portfolio to the least number of financial instruments.

Now, what is the best way to diversify with cryptocurrencies? There’s no one right answer. A portfolio could be composed solely of cryptocurrencies. If this is the case, the investor has an implicitly high-risk profile. In other words, they are willing to lose more capital in the hope of making more profit. This is due to the volatile nature of the vast majority of cryptocurrencies. However, diversification does not lose its validity in this area. In fact, some currencies are more stable than others and it is still possible to diversify within the same typical parameters.

Evaluate the volatility of your favourite crypto assets

If your decision is to keep only crypto assets in your portfolio, you must have an unintuitive idea of how stable they are in price. Although the price of Bitcoin moves violently, Nakamoto’s is in fact one of the most stable assets in the industry. Other smaller altcoins register even faster and larger changes. For example, Cardano reports 5 times more volatility than BTC in the last 3 months according to the analysis website “Crypto Volatile”, which calculates the volatility index according to price evolution.

Crypto coins volatility
According to CryptoVolatility data, cryptosystems such as AION and Cardano have exceeded a volatility rate of +10% in the last 83 days. Others like BTC, Ripple and Huobi Token remain below 4%. Other indicators such as BitMEX’s Bitcoin Volatility Index are even more accurate.

In addition to consulting this website, it is important to take into account factors such as market capitalization (CoinMarketCap). In general terms, this metric is inversely proportional to volatility; a very small capitalization makes the asset more susceptible to volatile movements in price. Technical analysis will also help define the level of volatility and provide information on trends and target levels.

Determine your risk profile

The decision on how to distribute the investment capital will essentially depend on the risk profile of the investor. In general, conservative investors fill more than 80% of their portfolio with more stable assets, thus reducing their possibility of losses, but also of gains. Conversely, aggressive investors allocate more than 85% of their portfolio to volatile assets with potential price changes. Either way, we suggest limiting the number of assets in your portfolio, ensuring that you will be able to track and monitor every open position. Each trade must have, among other things, a correct risk management.

Cryptocurrencies as part of an investment portfolio

However, in order to achieve real diversification, the addition of other types of financial instruments will need to be assessed. According to the quoted Fidelity article, this is essential to “balance risk and reward in your investment portfolio“. They also recommend distributing investment assets into different classes or categories.

For this type of trading, the recommendation is to use a regulated broker or platform. In addition to providing regulation, they usually offer a wider range of instruments to invest in. eToro is a good example of a platform that combines traditional assets with cryptocurrencies, but there are also other well-known brokers.

1
Min. Deposit
$50
Exclusive promotion
User Score
10
Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Start Trading
Description:
eToro offers a wide range of cryptos, such as Bitcoin, XRP and others, alongside crypto/fiat and crypto/crypto pairs. eToro users can connect with, learn from, and copy or get copied by other users.
Payment Methods
Bank Transfer, Wire Transfer
Full regulations list:
CySEC, FCA
2
Min. Deposit
$1
Exclusive promotion
User Score
9.3
The world's largest cryptocurrency exchange with over 2bn daily users
Innovative trading platform offering enormous range of crypto coins
Supports over 60 methods of payment including PayPal
Start Trading
Description:
Binance has grown exponentially since it was founded in 2017 and is now one of, if not the biggest cryptocurrency exchanges on the market.
Payment Methods
1Pay, 2C2P, 3d Secure Credit Card, ACH, ANELIK, Abaqoos, AdvCash, AlertPay, Alfa-Click
Algocharge, AliPay, American Express, Apple Pay, AstroPay, BPAY, Bank Link, Bank Transfer, Bank Wire, Baofoo, BitGold, BitPay, Bitcoin, Boleto, Bonds, Borneo Exchanger, Bradesco, CEX.io Mobile App, CFDs, CSS System, CUPS, CartaSi, Carte Bleu, Carte Bleue, Cash, CashU, Cashier Order, Check, Check (UK only), China UinonPay, China Union Pay, China UnionPay, ClickandBuy, Commodities, Contact, Contact Z, Credit Card, Cryptocurrencies, Currencies, DCPay, DIXIPAY, Dankort, Debit Card, Dengi Online, DineroMail, DirectPay, Dotpay, E-dinar, ELV, ENets, EPS, ETFs, EXCARD, Easy2Pay, EcoPayz, Ecommpay, Ecurrencyzone, EgoPay, Emerchant Pay, Eprotections, EstroPay, Ethereum, Euro Bank Account, Euteller, Express Dotpay, Express Polish Post Office 24/7, Express Zabka Market, Ezeebill, Ezybonds, FasaPay, Fastapay, Fastbank, Faster Payments, FilsPay, Forex, GTBank, Gate2Shop, Giropay, GlobalCollect, GlobalPAY, GlobePay, Gluepay, Halcash, I-Account, IPS, Ideal, Indices, Individual US State License(s), Indonesia Exchanger, InstaBill, Instadebit, IntellectMoney, Interswitch, Investmate, Itukar, KNET, Klarna, LaoForexBoard, LavaPay, Lion Payment, LiqPay, Litecoin, Lobanet, MOTO, MT4, MT5, Mailing Cash, Market Maker, Masari, Mastercard, MegaTransfer, Mister Cash, Mobile Trading App, Mobile Trading Platform, Moneta, Money Bookers, Money Order, MoneyBookers, MoneyGram, MoneyPolo, Multibanco, NETBANX, Nab, Namecoin, Neosurf, NetPay, OKPAY, OMT, OmahPoin, OnPay.ru, Online Naira, OrangePay, PAYSEC, POLi, POLi & BPay, PYEER, PagoEfectivo, Paxum, Pay Nova, PayCo, PayPal, PayRetailers, PayWeb, Payeer, Payoneer, Payonline, Payvision, Payza, Perfect Money, PocketMoni, Postbank, Powercash 21, Prepaid MasterCard, Prepaid MasterCard (I-Account), Prepaid MasterCard (Intercash), Prepaid MasterCard (Payoneer), Privat 24, Przelewy24, QIWI, RBK Money, Rapid Transfer, RegularPay, SEPA, Safecharge, SafetyPay, SahibExchange, Shilling, SmartPay, Sofort, SolidTrust Pay, SorexPay, Sporopay, Stock Certificate, Stocks, Swish, Teleingreso, Thailand Exchanger, Ticketsurf, Todito Cash, Trade Interceptor, Transact Europe Payment, Trazus, TrustPay, Trustly, UAE Exchange, UPayCard, USD, Ukash, Unet, UnionPay, Unistream, Uphold, Verve, Vietnam Exchanger, Visa, VixiPay, VoguePay, Vouchers, Wallet One, WeChat, Web Based Trading Platform, WebMoney, WebPay, Webtrader, Western Union, Wire Transfer, Wirecard, Yandex, Yandex Money, Yemadai, YuuPay, Z-Payment, Zenith, Array, cTrader, dinpay, eCard, eCheck, eKonto, ePay bg, ePayments Transfer, eToro Mobile Trading Platform, eToro Trading Platform, eTranzact, iPay, mPay, neteller, paysafecard, postepay, skrill, unichange.me
Full regulations list:
3
Min. Deposit
$20
Exclusive promotion
User Score
8.7
Margin Trading with full legal compliance
Cryptocurrency staking
Various Payment options
Start Trading
Description:
Cex.io offers exchange of fiat currency for Bitcoin Ethereum, Tether, and 23 other cryptocurrencies, as well as Bitcoin/Ethereum trading against the USD.
Payment Methods
Credit Card, Cryptocurrencies, Debit Card, Wire Transfer, skrill
Full regulations list:

Bonds tend to be stable and low risk, while others such as indices and stocks provide higher volatility. A number of technical and fundamental analyses can help define the layout of your portfolio. It is important to note that tools such as leverage also multiply the volatility of the asset.

Diversifying your crypto portfolio example
Example of diversification in a real investment environment. This average risk investor on the eToro platform has put 15% of his capital invested into cryptocurrencies, while the rest is distributed between stocks, commodities, indices and currencies.

Follow the evolution and update when necessary

The task does not end with the construction of the portfolio. It will, of course, require continuous maintenance and monitoring to evolve in line with the market and investor expectations. Thus, it is important to know when to close a deal in order to avoid further losses or to collect profits. This will require a combination of strategies such as trend tracking, technical analysis and monitoring of news events.

The recommendations in this article are intended to provide a guideline for diversifying a portfolio; however, not as financial advice. If you wish to obtain professional and detailed information, please consult a local financial advisor.

Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Open my Account

We use cookies to personalise content & ads, provide social media features and offer you a better experience. By continuing to browse the site or clicking "OK, Thanks" you are consenting to the use of cookies on this website.