Diversifying a cryptocurrency portfolio based on the use-cases of different digital assets.

Today, the cryptocurrency market encompasses more than 11,000 digital assets. These cryptocurrencies have different use-cases, functionality, operations, etc. While thousands of digital currencies exist today, the top 20 cryptocurrencies dominate 90% of the market share.

Investing in this highly volatile market comes with risks. Many investors make the mistake of holding on to only one crypto asset, and continually keep investing in it. However, this strategy has become outdated and may lead to significant losses.

When it comes to cryptocurrency, one of the strategies to deploy is to diversify your portfolio. Diversification is the base principle of sound investments, and it can easily reduce your overall risk while investing.

What is a Crypto Portfolio and Why is it Important to Diversify?

A crypto portfolio is a collection of different cryptocurrencies, which contain a variety of digital currency assets. Essentially, you can diversify your portfolio across coins, tokens, and products that present different goals and use cases.

Diversifying your crypto portfolio is a common strategy used by expert investors. By spreading your capital in different assets, you reduce overall risk and volatility. Your portfolio has more scope to gain profits, and your losses can be balanced out by the gains.

In order to diversify your portfolio, it’s important to have a basic understanding of the different types of cryptocurrencies and digital available for investment:

Stablecoins

The crypto market is highly unpredictable and volatile. Hence it’s important to have a few assets that remain stable and keep their value intact. Stablecoins are digital assets that are designed to reflect the value of fiat currencies such as the dollar or euro. For instance, BUSD pegs the U.S. dollar with a 1:1 ratio. PAX Gold uses a similar system, where it ties the value of the coin to the value of one troy ounce of gold held in reserves. Hence, stablecoins act as a safeguard asset in your portfolio. They might not give you big returns, but they ensure stability and your losses do not go over a certain limit.

Payment coins

These primarily deal in payments. Some of the most popular payment coins are Bitcoin, Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH). These are highly desirable and popular currencies but have a high-risk factor when it comes to price fluctuations and volatility.

Utility tokens

Utility tokens give the right of a service or product to a trader. They are essentially used as payment for transaction fees while interacting with decentralized applications. Typically, a company develops a digital product or service and sells utility tokens during its Initial Coin Offering. BNB and ETH are both utility tokens, and the token’s value should have a direct link to the utility’s value.

Security tokens

In essence, security tokens are financial instruments that hold value and can be traded. It could mean a bond issued by a project, equity in a company, or a stake in some external enterprise. These can be issued by businesses or governments, and they have been digitized and put on the blockchain. They mostly fall under the same regulations and one has to go through a legal process before issuance. This asset can be a logical progression for the financial industry and can be included in your crypto portfolio.

Your crypto portfolio can have a number of these digital currencies that can help you diversify your portfolio. There are several strategies you can implement to do the same.

Tips to plan a diversified crypto portfolio

To put together a well-balanced portfolio, it’s important to research past trends in the market and analyze the current situation. Here are some tips to get started.

Divide your assets

A portfolio containing only high-risk investments means that you’re at the risk of facing consistent losses. A well-balanced portfolio has a mix of high, medium, and low-risk investments. Split your assets wisely, and give each one of them appropriate weightage. This balances out your profit-loss index.

Invest in stablecoins

You can add liquidity to your portfolio by investing in stablecoins. Stablecoins are a means to ensure that you can quickly and easily lock in gains, and the risk factor is quite low.

Avoid overweight

If you have witnessed success in one area of your portfolio, it might be tempting to add more funds to it. However, don’t let greed interfere here. The market is extremely volatile, and overweighting one area of your portfolio can cause an imbalance, thus increasing the risk factor.

Be thorough with your research

It’s important to stay updated with current news and events about the market. In such a volatile market, staying updated helps in making more informed decisions. You can even reallocate your funds depending on the current situation.

There are hundreds of cryptocurrencies in the market that you can choose from to build your portfolio. A deep understanding of each type and its pros and cons would make it easier for you to put together a portfolio that suits your needs. You can even consider crypto portfolio trackers that help you to trace the movements of your holdings. A well-balanced portfolio will help you invest your assets more strategically.