A Framework for Cryptocurrency Portfolio Diversification

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When it comes to cryptocurrency investment, there is not much discussion about managing risk and yet many of the principles that are used in classical asset allocation can equally be used to manage the risk for cryptocurrencies. But what's the best way to do this? A bigger chance to reduce market risks is by having a well-balanced portfolio with careful asset allocation.

One of the fundamental and underlying principles of investing that helps reduce portfolio risk is Diversification.

What is Diversification?

“Diversification is protection against ignorance.” That is the famous statement made by the Billionaire investor, Warren Buffet. This is a common piece of advice which means that you should not concentrate all efforts and prospects on one thing or area as you could lose everything. And there’s a good reason for the advice.
If it is your goal to keep up with the innovation of the crypto industry, it may not be enough to rely on a single cryptocurrency investment. Many crypto experts would suggest sharing out a variety of digital assets to help you profit from growth in the overall crypto market.

Top investors find a window of great opportunity when investing in a diverse set of high-performing coins. There are thousands of cryptocurrency so you have the power to choose from tokens and other crypto projects that have different foundations and technologies. At the same time, this will give you an option of choosing those that correspond to your investment objective.

Why Diversify?

Investing money in several different areas has a lot of benefits, as long as the investments appear as they will actually perform differently at the same time. That is, an investor should seek out investments that will not all be affected in the same way by market and economic moves. If one investment performs poorly, the other investments may not be unaffected. In financial planning terms, diversifying a portfolio lowers one’s risk, the probability of the value of a portfolio falling by a large amount. While some investors may feel like they can take time to watch the investments grow over a long period of time, and are not worried about market movements, that is rarely how investors act.

Many benefits will be received if your money will be invested in various areas, as long as the investments seem as if they will actually perform differently at the same time. That is why an investor should try to find an investment that will not all be affected comparatively by market and economic moves. Why? Because If one investment performs badly, other investments may not be unaffected. In a simple statement, diversifying a portfolio lowers one’s risk, generally for a low price.

Conclusion

Unfortunately, we cannot predict which cryptocurrency is going to really rally in the next month or the next year. And so we might have to consider spreading our investments across multiple currencies. In that way, it will help you ride through the market volatility and earn better returns.

This is not a financial recommendation or advice but let us not forget that varied crypto investments can counterbalance some of the losses that occur with a single crypto crash, so it is very important to consider diversifying your crypto portfolio.