Portfolio Diversification

29 September 2021

We have more than 11,000 different assets in the cryptocurrency market right now. Any way you look at it, that’s quite a lot. Out of this large number, just less than 20 of the largest currencies make up 90% of the value of the entire market. This illustrates just how erratic and volatile this market is. Many novice investors make a serious mistake. Following the thinking that if something is more expensive or bigger, it will surely be better, they throw all their investments into one big currency. This investment strategy creates a big risk, because if this one currency goes down a lot, we have no way to limit or compensate for the losses. A very good investment strategy that can prepare us for possible losses is to diversify our cryptocurrency portfolio.

How to properly diversify your cryptocurrency portfolio

Let’s perhaps start with what all this diversification is about. It may sound like something complicated, but really, it’s nothing difficult to figure out and apply. Diversifying your cryptocurrency portfolio is all about spreading your capital (not just currencies, but also tokens or other digital products) across different assets.

Such a distribution of investments will make it so that if some of our assets fall in value, we can shift part of them to more stable funds, or compensate for these losses in other assets that grow. Thanks to such actions, the risk of investment decreases significantly.

What digital assets do we have?

To effectively diversify your currency portfolio, it is important to know and understand the different types of cryptocurrencies and other digital assets between which you will spread your investments.

Stablecoins

Although the cryptocurrency market can hardly be called stable in any way, there are some elements that provide some stability. Stablecoins are digital assets that find their value reflected in FIAT currencies such as the dollar or the euro. An example of stablecoin is BUSD, the value of one BUSD coin is exactly $1. Stablecoins will not generate large returns, but they provide near certainty that losses from investments will not exceed a certain threshold.

Paymant coins

As the name suggests, these are coins with a payment function. The most popular of them are Bitcoin, XRP or Litecoin. These are the most profitable currencies, but investing in them involves high risk. Their price fluctuations are large and frequent.

Utility tokens

With the acquisition of a utility token, we gain the right to a product or service of a company. The value of the token should be derived from the utility value of that product/service.

Security tokens

These are financial instruments that have value and can be traded and have been digitized and placed on a blockchain. Seemingly complicated this definition sounds, but if you read it slowly three times, it starts to sound simple and logical. If you have already read it a few times, let me give you an example: utility tokens can be, for example, shares or bonds of a company that have been digitized and placed on a blockchain.

How best to diversify these assets?

There will not be one good answer to this question. Depending on what investment strategy we want to adopt, the distribution of our assets may be different. However, it is important to maintain some degree of diversification. Although there is no one specific answer to the question asked, there are certainly some general guidelines that should be followed:

Don’t limit yourself to only high-risk assets. It is best to divide the funds in your portfolio so that you have high, medium and low risk currencies.
To limit possible losses to a certain fixed level, it is worth investing in stablecoins. The investment risk factor of these currencies is low and they allow you to block funds quickly if necessary.
It is better to be careful about creating large differences in the distribution of different types of assets in your portfolio. That is – even if the value of one of the assets you own suddenly rises sharply, it may be tempting to swap most of the other components of your portfolio for it. However, this can have disastrous consequences. I don’t know if it’s necessary to remind you again, but I will. The cryptocurrency market is very volatile and just as quickly as the value of a currency has risen, it can fall.
When undertaking both this and any other strategy, it is very important to know the market. You need to watch for new trends. It is also a good idea to use cryptocurrency portfolio trackers, especially if the amount of different funds in our portfolio is large. Cryptocurrency portfolio trackers, are programs or services that allow us to track the movements of available assets in our portfolio. They can relieve us from a lot of data analysis.

Popular cryptocurrency wallet portfolio trackers

A very popular program for tracking cryptocurrency prices. It has also developed its own portfolio feature, which is available for free. However, there is no option to connect to an exchange, so we have to enter our assets into the system manually.

delta Another mobile app that connects to 20 exchanges, including Binance. Allows you to use the paid version and the free version. The paid version additionally allows you to trade currencies.

kryptobot CryptoBot users don’t have to look far, however. The app has its own tracker under the ‘Investment Monitor’ tab, so there is no need to use external apps. The tracker continuously monitors the status of your cryptocurrency investments on multiple exchanges, not just those where KryptoBot makes purchases.

Below is a short presentation of the CryptoBot tracker:

In the side menu of cryptobot there is a tab ‘Investment Monitor’. After clicking on it, a list of functions will unfold, allowing us to add new and track current investments and configure the tracker according to our preferences.

KryptoBot menu

The ‘Add’ tab allows us to make a new investment, and to schedule notifications when a currency reaches a specific rise or fall in value.

Adding the new investment

The ‘Preview’ tab shows us the fluctuations in the value of our individual investments.

Investment monitor

And a profit and loss history that summarizes all of our investments.

Profit history

The ‘Live’ tab has very similar functionality to the ‘Preview’ tab with the difference that the data is updated in real time (data is refreshed every 1 minute).

Live preview without login

In the last tab ‘Settings’ we can adjust the form in which our data will be presented and complete the information about the history of our investments in cryptocurrencies.

Wallet setting

It is an undeniable fact that a large portion of the entire cryptocurrency market depends on Bitcoin. However, this is not a reason to abandon investments in other, less profitable currencies. A good balance of assets in your portfolio will allow you to control sudden drops in more profitable currencies and possibly cover later losses. A certain (at least minimal) degree of diversification in your cryptocurrency portfolio is very important for conscious investing.

Author: Adam Gałęcki

Graphic sources: