The significance of diversification in the crypto realm.

The significance of diversification in the crypto realm.

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“Diversification is a risk mitigation strategy that should be part of everyone’s investment approach.” — Wei Ly

Cryptocurrency has turned out to be another focal way of diversification even for experienced investors, ever since it gained more media-coverage investors have been wondering about the power of diversifying their traditional portfolios by adding cryptocurrency to their bulk of investments.

There are all kinds of investors in the crypto realm, but the cryptocurrency´s essence fit well with a younger group of people, millennials and so forth, who may be investing for the first time in their lives; the problem with this is that they usually create devotion for a particular project, which is a common mistake rookie investors make.

Diversification is a strategy of spreading capital investments in a way that reduces the exposure to one single asset by investing in a variety of assets.

The idea is that if one project fails you still have all others, or while one side may be dropping in price the other may be increasing. Although there are no guarantees, this strategy is an important component of any portfolio in the long run; note: diversifying goes well with hodling.

“I’m a big fan of diversification in general, whether it’s the traditional markets or the crypto markets. Frankly [it] is more important when you have less clarity on what the outcome or market direction is going to be, because when you have more clarity, it’s easier to put all your chips on red.” — Ed Handschuh, co-founder and CEO of the blockchain investment firm 1Konto

The idea is that if one project fails you still have all others, or while one side may be dropping in price the other may be increasing. Although there are no guarantees, this strategy is an important component of any portfolio in the long run; note: diversifying goes well with hodling.

Let´s say you have all your investments in Bitcoin, and it is made public that a major exchange has been hacked; the prices would drop dramatically, and guess what? Your portfolio would suffer a lot from the drop because all your eggs were put into one basket. However, if you had it spread out your portfolio would not have suffered as much.

There are two types of risks:

1. Undiversifiable Risk: This is a systematic risk, any investor who chooses to invest in anything opens themselves to this, and it cannot be controlled by the investor like inflation rates, extensive changes in government policies, wars, natural disasters and so on.

2. Diversifiable Risk: This, however, is an unsystematic risk, which is related to industries, economies, countries, markets and it can be reduced by diversifying.

Numerous people have lost so much money with this past Bitcoin plunge simply because they do not have enough information about diversifying, or as mentioned above they create this loyalty mindset to a particular project and some, as it would be typical of a millennial, may even blame it on the difficulty of diversification.

In the world of stocks experienced investors spread the risks between, low, moderate, and high-risk stocks. The spreading is done according to the investor´s risk profile (conservative, moderate or aggressive), which will designate their tolerance for risks. So please do not proceed with the process of diversification without acquiring your profile first.

In cryptocurrency the same should follow, however, due to the volatility, it is important to invest most of your capital into the safest investments even if you are a more aggressive investor, which means you have a high tolerance for risks. After all, even the “safest coins” like Bitcoin and Ethereum are not a promise.

I cannot stress this enough, that as of now, cryptocurrency is beyond monetary gainings, yes we all want profits but the main investment is in the technology itself. Keep that in mind. Every time you invest in any crypto you are expanding the technology, you are supporting and strengthening the ecosystem.

In stocks, investors are encouraged to only invest in projects they honestly believe and see fit, and in the crypto market, it shouldn’t be any different.

It is important to scrutinize the project, the team, the purpose of the coin, the community and somehow make your choices intuitively; your gut may lead you to what is best for you, which may not be what is good for somebody else. This is not a plea for you to become emotional about your choices, as a matter of fact, be rational even when it comes to your gut feeling, be truthful and pragmatic to how you feel about a project.

“The top coins are usually trusted by investors because of their reputable development and real-world use cases and applications. “

A blend of cryptos (or even with other assets, stocks, and bonds) can lessen your portfolio´s sensitivity to the market´s fluctuations.

Here is an example of how to diversify your crypto portfolio:

  • Lower Risk — in the current market Bitcoin, Ethereum and Litecoin has been around from the beginning and shown investors great return. You might want to invest 50–60% of your investments here.
  • Moderate Risk — Aside from the main coins above the two largest coins by market capitalization at the moment is ripple and EOS; in this category, you may also consider the smaller altcoins with tremendous potential as WTC, WCO, VTC, and VEN. You might want to consider investing 15% to 25% here.
  • High Risk — In this category, you may consider the low market cap coins and the ICOs (Initial coin Offerings) which unfortunately many of these happen to be scams, you must study. You might want to invest less than 15% of your investments here.

Ps: of course this is just one example of how you could divide your investments, but do seek strategies that may be best suitable to you.

You are probably wondering how many crypto coins you should own. Well, this technology is still at an early phase, so there are no studies claiming to know for a fact how many cryptos happens to be a safe bet, so you should limit yourself to whatever number makes you feel comfortable. But keep in mind that no matter how you diversify risks cannot ever be eliminated completely.

There are projects like Faa.st.com to assist investors in diversifying with ease. Youtube also offers a great sum of videos of cryptocurrency users explaining the strategies they have chosen to your to diversify their portfolio.

Final Thought:

Even in this high-risk market, diversification can help diminish risks and maximize safer profits.

Now that you understand the concept and purpose of diversification in the crypto world, you can start searching for different diversification approaches until you find a method or a strategy that suits you.

Do not allow anyone or any “amazing article” to tell you where to anchor, do your own research and do not rely on experts opinions alone.

Diversifying enables you to navigate the cryptosystem, learn more about the industry and other great projects.

The Winco Team


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Disclaimer: Our team works hard to bring you the best content in the cryptocurrency market, but it is only our point of view and not legal advice, and may be divergent from other opinions, so please do not make any decisions without concluding studies of your own to understand the profit possibilities and uncertainties involved at your own risk.

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