“Crypto behaves like an extreme risk asset, not a safe haven. As such, small allocations can improve portfolio return/risk ratios but these might diminish in coming years if crypto becomes more mainstream and correlations with traditional risk assets rise further,” HSBC Bank report.
Cryptocurrencies come along with high volatility rates that at some time they can bring in very good returns but some other times they can make an investor incur enormous losses. This happens especially when the investor has all his eggs in one basket. Diversifying your portfolio as an investor is one of the best ways to survive in the cryptocurrency ecosystem.
Investing with a good plan is a wise decision, otherwise one would just be gambling. Well, we are not here to gamble but to make huge investments that can later be of benefit to us as investors. Diversifying your portfolio is a way of mitigating the risks that come with the volatile nature of cryptocurrencies and ensuring that you achieve your financial goals without necessarily putting your funds in danger.
When you have your portfolio diversified, one increases their chances of reaping higher returns should one of the crypto assets you have invested in takes off.
Sometimes the projects, investors choose to invest in might not deliver the expected returns, or in worst scenarios, they could turn out to be scams. Sometimes the projects are faced with regulatory hurdles and are forced to close. This is where portfolio diversification comes in handy.
Portfolio diversification is just the act of investing in more than one asset or investing in assets of different classes so at to reduce the risks if any should occur in case an investment fails to deliver.
How to diversify your cryptocurrency portfolio:
There are three major factors an investor should consider when diversifying their portfolio;
1. Their geography.
Different regions have different cryptocurrency regulations. This means that investing in cryptocurrency projects from the same region will limit the returns desired. Do in-depth research on crypto projects from different regions and make wise decisions before investing. Doing so will help protect your investments from regulatory risks and enable you to balance off your diverse portfolio despite the uncertainty of the markets.
2. Timing.
Always be careful about when and where to invest. Investing based on timing is an interval-based investment plan also known as dollar-cost averaging. One simply invests in the selected tokens on settled times by saving some good amounts of money that will cater for the investment at that specified time.
3. Industry.
Investing in coins that offer lasting solutions to a variety of industries such as the World Causecoin can greatly help mitigate the undesired effect of industry-specific crypto-unfriendly regulations. Investing in a solid and fast-growing business should be the major goal.
Modern portfolio theory (MPT).
MPT is a framework that assumes that the volatility of a portfolio can be reduced by bringing together assets that are unrelated in terms of classes. This theory was introduced by Harry Markowitz.
Major assets classes will tend to move in different motions depending on the market conditions. If a certain asset class performs well due to the market conditions, a different asset class might be affected negatively by the same market conditions. Assets classes are grouped as additional assets which are bonds, stocks, and cash. Alternative assets such as commodities, real estate, private equity, insurance products, and as well as crypto assets.
Cryptocurrency is a risky investment, and small allocations can help improve the crypto portfolio. However, as the cryptocurrencies continue to gain traction this might change as they might cease to be volatile.
