7 Ways to Diversify Your Crypto Portfolio

Diversification is critical when looking to expand your cryptocurrency portfolio. You’ll have multiple crypto choices to explore today, with many coins varying based on industry, asset class, and other factors. You’ll need to know what to find in today’s crypto market when planning a diversified crypto portfolio.

Why Is Diversification Important?

Crypto portfolio diversification refers to putting in various investments in different crypto assets. Instead of sticking with a single crypto token or a few different ones, you’re working with coins and other items from various fields.

Asset diversification is a common strategy in various economic fields, and crypto investors can benefit from this point. The risk of one or a few assets dropping in value can be substantial, so having enough backup items in your portfolio will be necessary. While some assets might rise and others might fall, you reduce your overall risk by choosing not to stick with too much of one thing.

Diversification also gives you a chance to see how the market works. You may discover certain investments might be more appealing to you than others, or there might be a better chance for you to grow something well.

8 Ways to Diversify a Crypto Portfolio

Diversify by Coins and Tokens

Your first option for attaining a cryptocurrency diversified portfolio involves investing in multiple types of tokens. You can add tokens like these into your portfolio to keep it diverse:

• Payment tokens – Tokens used for buying and selling items
• Security tokens – Tokens whose value comes from an outside asset that can be traded as a security through a regulated environment
• Utility tokens – Tokens that provide access to a product or service run by whoever issues these tokens
• Governance tokens – Necessary for supporting the management of decentralized applications
• Basic attention tokens – These tokens help support digital advertising efforts
• Gaming tokens – Tokens that work on gaming networks; people use these coins to obtain different items for use in games within those networks
• Non-fungible tokens – NFTs are certificates stating that a person owns a distinct digital asset listed on a blockchain

Check whatever tokens you want to invest in to see how they work before acquiring them. Look at what they are backed by and what purposes they hold, and avoid favoring one field too much.

Diversify by Industry Focus

There are also multiple industries that cryptocurrencies can serve. Your diversified crypto portfolio can include tokens that support various fields:

• Healthcare tokens may help record patient data while making it easier for hospitals and healthcare practitioners to share content with others.
• Other tokens can support supply chain operations by keeping digital records listing how well different transactions are moving.
• Entertainment tokens can support the ownership and operation of various entertainment-related activities.
• Real estate tokens can help people pay rent and mortgage costs for properties.
• Private equity tokens allow investors to acquire different equity assets represented by tokens. These assets can include shares in a business.
• Some coins also help review climate change activities by tracking and recording carbon production and control efforts. New tokens can appear when carbon reduction efforts are recorded and verified. Other investments can also support investments in sustainability programs.

Diversify by Crypto Sectors

Your next option for diversifying your portfolio is to look at different crypto sectors. The crypto industry initially started as a system where tokens were stores of value representing certain amounts of money. But today’s crypto field has expanded to include various investment opportunities. Some of these sectors you can work with alongside stores of value include:

• Stablecoins – Coins pegged to a fiat currency that are easy to transfer like cash; these coins are useful among people in populations where banking services aren’t readily available
• Smart Contract Platforms – Platforms like Binance Coin and Ethereum support the execution of smart contracts that execute when certain agreement terms are met
• DeFi – Decentralized finance or DeFi platforms provide financial services without requiring a bank or brokerage
• Oracles – An oracle supports smart contracts that use real-world information, allowing parties to link the blockchain to physical activities
• NFT Games – NFT games entail people using digital currencies to acquire and trade various NFTs
• Metaverses – Places where virtual avatars can interact with various virtual experiences and other people online are metaverses; these spaces can use crypto assets to manage operations

All tokens have different means for how they operate and what they entail, so look around to see what your tokens of value will work for before starting something.

Diversify by Asset Class

One way to diversify your portfolio is by incorporating various asset classes in your setup. In addition to coins and tokens, you can include various traditional assets like stocks, bonds, and exchange traded funds or ETFs in your setup. Real estate investments can also work, as properties can change in value over time. You can reduce your risk of losing money because you’re working with different asset classes that can perform in various ways. This point is particularly valid for bonds, as they are often tied to specific assets or groups.

It may take longer for you to see the returns on some asset classes, but that’s because these assets might be pegged to support long-term growth. These choices may still be more stable and useful.

Diversify by Investment Vehicle

There are multiple investment options you can explore when entering the crypto world. Here are a few investment vehicles you can use when obtaining a currency:

• Digital Wallet – An online wallet that allows people to send and receive tokens and other related assets
• Taxable Brokerage Account – An account with a brokerage that you can use to obtain various tokens
• Cryptocurrency IRA – A cold storage solution where you can add crypto investments into a retirement account
• DeFi – Decentralized financial products where you’ll obtain items from an online platform with no brokerage or agent groups involved; savings accounts and staking platforms are popular options here

Each investment vehicle operates differently and has unique things to explore. Be sure to look for investment options that fit your needs. Don’t forget to watch for the tax rules on some of these, as you might be subject to taxes on any profits you receive. All investments have different rules to follow.

Diversify by Market Capitalization

The market capitalization or market cap for a currency measures how much of a share a currency has in the crypto market. These coins appear on different levels:

1. Low-cap: Under $1 billion or not in the top 50
2. Mid-cap: From $1 to $10 billion or anything from the top 10 to 50 range
3. High-cap: Currencies within the top 10 by market cap

High-capitalization coins are less risky because they are more established, while mid-cap coins have the potential to develop. Low-cap currencies can experience potentially vast profits, but the risk of losing money is also high with these choices. The best way to diversify your portfolio here is by focusing more on high-cap coins while then adding mid-cap coins and finally including low-cap assets with whatever you have left for investment purposes.

The low-cap currencies are often ones that aren’t traded as often and could be subject to significant price shifts. While a currency might not be worth much, it only takes a few people who buy or sell it to adjust its price. The artificial shifts could add more risk than you can afford. Therefore, keep low-cap investments to a minimum while sticking with mid and high-cap choices.

Diversify Crypto Projects by Location

There are various places worldwide where crypto assets might be more accepted than others. For example, currencies are heavily accepted in El Salvador and Portugal, while American states like Texas and Wyoming have enacted crypto-friendly laws. Other countries like the Netherlands, Germany, Canada, and Singapore have also been supportive of cryptocurrencies.

Sticking with crypto investments based in countries where crypto-related laws are more positive and friendly is ideal, as the risk of a project being shut down or otherwise heavily regulated will be minimal. Cryptocurrencies are not supported in places like China, Russia, Bangladesh, and Nepal, so look to see if the country where a crypto project option is from is one that is crypto-friendly.

Diversify by Risk Level

Your last option for obtaining a cryptocurrency diversified portfolio is to watch for the risk level for each asset. Stable assets like Bitcoin and Ethereum are often safer for you to obtain, as they are more predictable and supported by more parties. You can still invest in smaller-value assets that have more use cases or aren’t as stable or fluid, but keep those to a minimum. Keeping an assortment of risk levels in hand when getting your assets ready will be critical to keeping it successful.

You can establish a plan where about half of your assets are low-risk choices. You can then use the other half on assets that have higher risks but also strong reward potentials. A balance like this will keep you from losing far too much on the market.

What Is Time Diversification/Dollar-Cost-Averaging (DCA)?

The choices you have for establishing a diverse portfolio are extensive, but it’s also vital that you know how much you’re investing in each choice. Responsible spending is critical, and one way you can keep yourself under control is by looking at what assets you take in and what you spend on each.

One option you have for crypto portfolio diversification entails time diversification and dollar-cost-averaging or DCA. Instead of investing all your money at once, you will invest your money in small increments that span time. Instead of risking all your capital at any time, you are instead using these strategies to utilize market downturns. You won’t have to guess when the right time to enter the market is, as you’ll instead invest over small periods.

For example, instead of obtaining $1,000 in Bitcoin at once, you can get $50 of Bitcoin every week, continuing this until you reach the $1,000 mark. You could also spend $50 for the first week and then add 20% of the portfolio’s value to your account each week or month, with the value of that 20% varying over how your asset price changes. It takes longer for you to build your portfolio with these measures, but doing it this way keeps you from losing too much when a market downturn occurs.

What Is Portfolio Rebalancing?

Portfolio rebalancing is a measure for diversifying your crypto portfolio that entails reviewing how you allocate your funds. You can decide how much of certain assets you will arrange in your account and then apply those measures.

For example, you might establish a portfolio where 50 percent is in Bitcoin and Ethereum, 30 percent is in mid-cap coins, and the remaining 20 percent is for low-cap coins. You might review your portfolio after a few weeks or months and notice how different coins are shifting in value.

In this case, you might notice that Bitcoin and Ethereum are dropping while many of your low-cap coins are rising. You could have a 42 percent high-cap portfolio and a 30 percent low-cap portfolio after a while. You can calculate how much in your low-cap coins you’ll have to sell or convert into high-cap coins to attain the 50-30-20 balance you’re trying to manage. This measure requires plenty of analysis to determine how much you’ll specifically have to transfer or exchange, but it will be worthwhile when planned well.

Pros and Cons of Diversification

Pros

• Diversification lets you invest in multiple crypto assets and coins.
• You can learn more about the crypto market as a whole when you have more investments from different sources.
• Your investment risk will be minimal because you’re working with different asset types that often act independently from one another.
• You can rebalance your holdings to help you improve how well you’re handling your funds.
• Price volatility will be minimal when you have enough assets. This point is particularly critical when the market experiences uncertainty.

Cons

• Diversification efforts take a while to manage. You’ll have to measure different items for investment purposes to make it work.
• You’re still at risk of experiencing poor returns if you don’t research assets. All items are at risk of experiencing losses.
• Some tax liabilities apply when investing in crypto. Check your investment to see what rules are involved here.

Don’t Forget About Rebalancing

Remember when diversifying your crypto assets that the values of everything you have will shift after a while. Some top-performing items might dominate your portfolio. There’s no telling how long those assets will maintain their momentum, so rebalancing your assets will be critical to your success. This measure helps reduce your risk of losing more if the market starts experiencing a substantial downturn.

Risks of Diversification: The Bottom Line

Diversification is an appealing solution to note when managing your crypto investments, but be sure you know where you’re going when getting a diverse portfolio ready. Every investment will have different points to explore, as there is always a chance you might lose money on anything you incorporate into your portfolio. You also have to know what is behind everything you enter into and avoid getting into assets that you don’t understand or might be questionable.          

Keep your efforts in establishing your cryptocurrency diversified portfolio strong. Your work will be worthwhile if you understand how you’re going to make your assets work for you.