Benefits of Diversifying Crypto Portfolio

The main reason you should spread out your virtual coins investment is to mitigate risk. Cryptocurrencies are highly volatile; they can go from zero to a hundred within no time and back. Unlike traditional finance, you may not have the luxury of investing in widely differential asset classes that react differently, such as stocks, derivatives futures, and commodities like gold and oil. However, you may still reduce your risk exposure by spreading your assets to virtual currencies in a way that limits the volatility risk exposure of the entire portfolio. This can be achieved by diversifying between high market cap coins such as Bitcoin and newer tokens and stablecoins. That way, you can also earn returns from different crypto streams.

Ultimately, diversification plays a significant role in reducing the risk of permanent loss. Even if one coin crashes, you still have to hold on, and they may even gain value, helping you recover your losses. Traders fully invested in Terra’s UST and LUNA coin lost all their money overnight in 2022. However, if this were only a tiny portion of your portfolio, you would have banked on the distributed amount for recovery. While the crypto market generally appears to move cohesively, the degree of volatility differs from one coin to another.

The other reason you should widely allocate your portfolio is to learn about different crypto projects. There is no better way to be an expert at something than to participate. Most investors are only aware of the already mainstream BTC and ETH, but did you know there are many new crypto projects with different use cases? If you’re a real virtual coin enthusiast, you want to learn about new developments in the industry and how they can help you. Besides, your money will still be growing in value. You may want to try out tokens like TRON (TRX), which promises to decentralize the entertainment industry or learn other forms of investing, such as coin staking. Eventually, these projects may significantly contribute to your total portfolio profits.

Lastly, diversify your virtual coin investment book for overall better performance. As already mentioned, cryptocurrencies have different volatility levels. In 2021, the total market cap for the industry grew by over 180%. If you only invested in BTC, you closed the year with about 57% gains. However, if you spread your funds among different currencies, you took home huge returns that year. In fact, BTC was probably one of the few coins that didn’t perform exceptionally that year. Solana, for example, raked in 11, 117%. Assuming you had $1000, and equally $250 in BTC, ETH, DOGE, and SOL, you would have cashed in $147 from BTC (59%), $997 from ETH (399%), $8,865 from DOGE (3,546%), and $27,750 from SOL (11, 117%). Your return would be about $37,759, a whopping 3,775% return. Of course, such numbers can only be seen in crypto.

To get the most out of your Bitcoin investment, you need a well-balanced portfolio. But what happens when all the assets in the portfolio crash? A diverse portfolio has a higher probability of surviving than one that is not, even though that is an uncommon occurrence. Nevertheless, certain coins exhibit greater resistance than others, even during the toughest crypto winters. So, diversification should be your initial risk management approach if you plan to take your virtual currency investment program seriously.