How to Diversify Your Crypto Trading Portfolio Successfully?

Oct 12, 2020 03:25 PM ET
How to Diversify Your Crypto Trading Portfolio Successfully?

The investment sector has always seen market risk in some way, shape or form. The introduction of cryptocurrencies does provide people with new and profitable ways to invest, but it brings with it, its own share of risks and volatility into the market. As a result, investors employ multiple strategies in an effort to hedge their holdings against different types of risks, with diversification being a key strategy. 

Diversification is based on the principle of making a portfolio consisting of different types of investments. This is done in order to generate high returns and decreasing the amount of risk that an investor is exposed to. Thus, the objective of diversification in any market is to smooth out risk which is unsystematic in nature by neutralizing the negative performance of some of the holdings. 

Cryptocurrency Diversification

It’s true that cryptocurrencies are of the riskiest asset classes in existence today. This however does not entail that all of them possess an equal degree of risk. To spread this risk equally, the first thing you have to do spread out and incorporate a number of different coins that possess varied use cases. In other words, don’t put all of your eggs in one basket. Based on use cases, there are several cryptocurrencies to choose from. 

Use-cases

Example of Cryptocurrencies

Payment Rail

Stellar, Monero, Dash, Stellar, XRP

Cloud Storage

Storj, Siacoin

World Computer

NEO, Tron, Cardano, EOS, Ethereum

Store of Value

Digix, Bitcoin

Connected IoT

IOTA

Decentralized Finance

Maker

Decentralized Apps

Basic Attention Token, Augur, Funfair, Steem

Stable Coins

PAX, DAI, Gemini Dollar, Tether, USD Coin

Tradable Digital Assets

WAX

Exchange Utility Tokens

Qash, Kucoin Shares, Binance Coin

 

Thus, to build a balanced crypto portfolio, don’t for any single category. Instead, look to add a variety of cryptocurrencies such as Augur, Maker, IOTA, XRP along with Ethereum and Bitcoin, so that the coins are spread out over different use cases. 

Current Market Situation and Standings of Top 5 Cryptocurrencies

Below are some of the top cryptocurrencies that are expected to hold value and can be used for portfolio diversification. Keep in mind that this list excludes Bitcoin, which is one of the most common inclusions in crypto-portfolios. 

Ethereum(ETH)

Apart from being one of the first cryptocurrency projects in existence, Ethereum is also the second most liquid cryptocurrency behind Bitcoin. Other reasons why Ethereum remains as a sound instrument to add to your cryptocurrency holdings is the presence of a strong team and community behind. This offers a better chance of staying stable and an increase of value in the long term. 

As of 8/10/2020, according to coinmarket cap, Ethereum’s ETH token is valued at $336.34 and a market capitalization of $37,974,247,834, ranking second. 

Ripple(XRP)

The venture-backed startup has come a long way since its inception. Ripple’s orientation is mainly towards larger institutions as evidenced from its partnership with large banks around the world. One of the reasons why XRP is a good bet for diversifying your portfolio is its institutional support, which makes it a powerhouse in the crypto-community. 

As of 8/10/2020, according to data from coinmarketcap, Ripple’s XRP token is valued at $ $0.244615 with a market capitalization of $11,047,916,916, ranking fourth overall. 

Kyber Network(KNC)

Kyber Network is an Asian DEX startup with teams stretching across Singapore and Vietnam. In addition to being a part of Chicago DeFi Alliance (CDA)’s first batch of participants, the KNC token jumped up in price since December 2019 when it was valued at $0.18 to $0.64 by May 2020.

As of 8/10/2020, according to data from coinmarketcap, Kyber Network’s KNC token is valued at $0.889403 with a market capitalization of $175,992,012, even though it has a rank of 70.

Synthetix Network Token (SNX)

The Synthetix network token is a cryptocurrency enabling traders to trade synthetic assets on Ethereum. It allows users to bet on a number of crypto-assets, along with stocks, precious metals, currencies, and other asset classes through what they call “synths”. 

As of 8/10/2020, according to data from coinmarketcap, the SNX token from Synthetix is valued at $3.69, with a market capitalization of $460,855,045. 

Uniswap(UNI)

Uniswap is the name of Ethereum’s most popular decentralized exchange. It allows users to stake their holdings in liquidity pools and lets them vote on governance decisions. As of October 2020m, Uniswap has $2.1 billion secured in its contracts, which is 20% of all value in DeFi apps.

As of 8/10/2020, according to data from coinmarketcap, Uniswap’s UNI token is valued at $2.72 and a market capitalization of $497,191,006, ranking 36th. 

Risk of not Diversifying when investing cryptocurrencies

Many people think that Bitcoin is the safest bet when it comes to investing in cryptocurrencies, mainly because of its value and its position as the biggest cryptocurrency. However, there has been unprecedented volatility in Bitcoin’s value since 2017, making it an undeniably risky investing strategy. Some of the risks of not diversifying include the following:

The Risk of Focusing Solely on Bitcoin 

Even though at one-point Bitcoin could be regarded as a reliable investment on its own, the reality today is quite different. It might appear that Bitcoin has experienced a strong rally throughout this year, but this can be attributed solely to the global economic instability following the pandemic. History is witness to the short and sudden boom cycles that bitcoin has already experienced over the years, followed by stagnation. As an investor, if you just invest in bitcoin, it needlessly exposes your investment to the vulnerabilities of the high volatile coin. Instead, diversify your crypto-holdings so that it can offset some of this considerable risk. 

Examples of a diversified Crypto-portfolio

In 2020, many Bitcoin-based portfolios has seen steady gains or have remained in the green. This is mainly due to Bitcoin maintaining 112% in 2019 and has continued to show results in some aspects. However, when we compare this portfolio with other more diversified crypto-holdings, we can clearly see that it has underperformed.  A comparison of different crypto-portfolios has been given below. 

diversified Crypto-portfolio

As seen in the chart above, the portfolio which consists of only Bitcoin and Ethereum has underperformed in comparison to other portfolios that have both bitcoin as well as exposure to mid-cap altcoins.

Final Thoughts

Because the cryptocurrency market is highly speculative and risky, investors are advised to diversify their crypto-holding as much as they can. Even though diversification will offer little protection in the case of a broader market correction or a bearish market, it still contributes towards minimizing an investor’s exposure in case one of the cryptocurrencies go in the red.


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