How to diversify your crypto portfolio
Diversifying means buying and trading more than one coin. Diversification is one of the main strategies in crypto trading because it helps you to mitigate the negative consequences of volatility and other risks.
Additionally, when you put all eggs in one basket, you lose earning opportunities that may be open with other coins.
Here is how you can diversify your crypto trading portfolio to make it work for you more efficiently.
Invest in projects with different use cases
There are tens of thousands of cryptocurrencies, and their number is constantly growing. While there are those that don’t have any use cases (they are good for getting a short-term profit), there are plenty of projects that are working on solving complex real-world problems, and the tokens behind these projects can have many use cases.
So, you can pick a coin that has some use cases, and then another coin with different use cases, and so on.
Pick crypto by industry
Combine diversifying by use cases with diversifying by industry. Transportation and supply chains, education, healthcare, environment are among the most promising directions. Choose coins that are in these industries or pick those that are after innovation, e.g., artificial intelligence, virtual reality, etc.
Invest in crypto projects located in various countries
Regulation is a tricky thing, and if a country bans crypto, projects located there may discontinue. That’s why by picking projects from various countries, you mitigate the risk of project discontinuation.
This approach also allows you to be exposed to a wider range of innovations within the industry.
Some countries, such as El Salvador and Portugal, have created very favorable conditions for crypto development. Investing in projects located there may deliver additional benefits such as tax reliefs and a higher income. While other countries ban crypto or put limitations on its use. Investing in crypto projects located in such countries may be risky and even dangerous.
Diversify by risk levels
It is recommended to start by adding Bitcoin and Ethereum as the assets with the lowest risk level. Then, you can consider riskier small-scale coins with some growth potential.
Rebalance your portfolio constantly
Some projects grow while others demise. That’s why it is crucial to be rebalancing your portfolio regularly to adjust the asset weightings within it. It entails buying coins and selling others to achieve the wished level of risk or asset allocation. You may rebalance your trading portfolio once a week, once a month, or even once a year but do it regularly and always have a clear understanding of what you want to achieve with it.
Bottom Line
Portfolio diversification is one of the most important and frequently used ways to manage crypto trading risks and increase profits from trading. It means that you take a proactive approach to risk mitigation and limit the potential damage that can be caused by unfavorable market conditions or a project collapse.
Other Articles
No articles