All investors should realize the importance of their investment portfolio diversification regardless of their area of interest. Cryptocurrency is not an exception, even though this sector might seem too volatile to look for any diversification opportunities. These opportunities actually exist, you just need to understand how you can enrich your crypto portfolio and increase your exposure to a wider market. Here are our key findings on that matter.
How can you diversify your crypto portfolio?
Diversification isn’t just about adding different asset classes to your portfolio. It’s possible to find diversification options even within the same asset class. Here is how it might work in the case of crypto investments:
Different types of units
With more than 20 thousand cryptos existing, it’s obvious that all of them cannot be the same. This means that it’s possible to explore different types of coins and add them to your portfolio for the sake of diversification. Here is the basic classification:
- Payment means: These coins execute the initial function of digital money — execution of fast online transactions in the decentralized environment. The two biggest cryptos — BTC and ETH — are payment tokens.
- Security tokens: From the name of this category, you can guess that such instruments are based on real underlying securities. Very often, these are tokens that represent the virtual form of ownership over real estate securities.
- Utility cryptos: Coins are gaining popularity right now because they are necessary for the functioning of specific networks, which are widely used to develop dApps or other purposes. BNB, which is a utility unit of the most widely-used crypto exchange Binance, is currently the biggest participant in this category.
- Governance coins: Some blockchain networks enable their users to vote for strategic decisions. To do this, users need to hold governance coins. The case for investing in Cardano, Uniswap, or other similar coins is a good investment for individuals who would like to gain voting rights in blockchain networks.
- Gaming cryptocurrencies: The concept of crypto helped game developers create real value for their in-game assets. Decentraland and its native token MANA is a good example of how gaming money can be traded on specialized exchanges equally to instruments that were created as financial assets.
- NFTs: Even though NFTs are not exactly cryptocurrencies, these are virtual tokens with real values as well, so they can serve as good diversification instruments for your crypto portfolio. NFTs refer to pieces of digital art that can be traded on virtual auctions or specialized marketplaces. Often, NFTs are provided as rewards for being active within a specific crypto community.
Different application areas
The above-mentioned way to diversify your crypto portfolio is quite simple to do because it’s based on the exact functional differences of tokens. Diversifying by application areas might be a bit more complicated because many users don’t even know that certain crypto projects were launched to be used in specific industries.
For instance, crypto projects like MediBloc and Dentacoin, which take the 291st and 1491st positions by market cap respectively, were developed to boost the efficiency of the healthcare sector, while DOGE, ApeCoin, Shiba Inu serve no other purposes than pure fun and entertainment. Some coins may power blockchain networks that enhance logistics operations while others encourage investments that make contributions to the implementation of eco-friendly and renewable-energy initiatives.
Such a diversity of cryptocurrencies dedicated to different industries make virtual coins quite similar to stocks since the overall growth of a particular industry and its wider acceptance of blockchain-based solutions can stimulate the increase in prices of respectful cryptos. Thus, it makes sense to explore which instruments can grow in value as a result of the overall growth of a particular industry.
Different asset classes
To numerous beginners, it seems that when you want to put your funds in a blockchain, there’s no other way than investing in its volatile coin powering the entire network. However, this is a common misconception. It’s possible to make such an investment and at the same time diversify your portfolio with various types of assets.
For instance, you can invest in public shares of businesses that are tightly related to the cryptocurrency sector. As a rule, these are enterprises that manufacture crypto-mining hardware. Their revenue will grow with the growing demand for mined cryptocurrencies and this will boost your potential returns from investments in their stocks.
Opportunities exist for investors to acquire blockchain-powered bonds that are digitally issued or to possess bonds that invest in cryptocurrencies such as Bitcoin. Distinguished financial institutions like the World Bank, the European Investment Bank, the Singapore Exchange, and even El Salvador have all ventured into the issuance of blockchain-based or crypto bonds.
These innovative instruments leverage the potential of blockchain technology to revolutionize traditional bond markets and introduce novel investment avenues. By embracing blockchain, these institutions enable investors to participate in the evolving landscape of digital assets, offering the potential for enhanced liquidity, transparency, and efficiency.
Pros of diversification practices
- Mitigate crypto price volatility: Cryptocurrencies are extremely volatile instruments and if you want to avoid or at least mitigate the impact of this volatility, there’s a point in diversifying your crypto portfolio.
- Rebalance your crypto holdings: If one of your cryptocurrency investments performs exceptionally well, it may lead to an imbalance in your portfolio, focusing heavily on a specific asset class or sector. To maintain a diversified portfolio, investors can adjust and rebalance their crypto holdings accordingly. By rebalancing, investors can reallocate their investments across different cryptocurrencies, ensuring more even distribution and reducing the risk of overexposure to a single asset.
- Gain wider exposure to the blockchain industry: Diversifying your crypto portfolio is a good way to benefit from the overall growth of the market. Even if a certain set of cryptocurrencies fail to meet the pace of this growth, your portfolio won’t suffer from big losses.
To sum it up, it’s necessary to highlight that diversification isn’t the only investment practice you need to learn more about. No matter which asset classes you work with, make sure to conduct thorough analyses and make deep research on any potential investment.