Many crypto fans who only own one asset are likely to have considered diversifying their portfolio at some point in time. However, they may put off doing so because they worry about how complicated it can be.
Portfolio diversification often feels like a daunting task, but in reality, there are a handful of straightforward principles that can help you along the way. Let’s take a look at what those are, and see how Ledn can help you in your situation.
What is Crypto Portfolio Diversification?
Portfolio diversification is the act of investing in various digital assets. For instance, rather than simply holding BTC, some people choose to hold other cryptocurrencies such as Ethereum, USDC, or smaller altcoins.
Why is a Diversified Crypto Portfolio So Important?
A well-diversified crypto portfolio helps mitigate the risk of one asset plummeting and dragging your finances down, by spreading your options across a range of options. This is often perceived as a healthy strategy that avoids relying on one asset wholeheartedly. It is essentially the opposite of putting all your eggs in one basket.
Three Key Ways to Diversify Your Cryptocurrency Investments
Let’s take a look at three top methods of diversifying your crypto portfolio.
Diversify by coins and tokens:
The easiest method of diversification is to simply hold different crypto assets. In its most basic form, that could be holding just two assets, such as Bitcoin and Ethereum, and in its most complex form that could involve having 10+ coins and tokens in your possession.
The amount you hold is up to you, but it is worth noting that having more assets does not automatically equate to a smarter strategy. For the best results, it is good to research every coin and token you plan on holding, and seeing if they align with your goals and ideas.
Diversify by asset class:
This industry is primarily made up of cryptocurrencies, however, there are a select few other asset classes that make up this space. For instance, NFTs are actually a separate class that run on cryptographic technology, but which function in a different way. You could choose to buy and hold a few specific NFTs to add some variety to your portfolio, alongside your typical assets like Bitcoin and Ethereum.
You could also consider stablecoins to be a different asset class as well, although this will depend on whether you consider them to be cryptocurrencies in their own right, or rather an emulation or representation of their pegged asset. For example, if you viewed USDC as a mere placeholder for the US dollar, then any investment in it would count as diversifying your crypto portfolio by adding fiat (or forex if you are not in a country where USD is legal tender).
Diversify by investment vehicle:
While most people tend to invest in crypto assets by simply buying and holding them, there are other methods available. In fact, as of recently, you can now invest via ETFs (or exchange-traded funds). These are investment vehicles that track the performance of a particular index, sector, commodity, or other assets, but can be bought and sold on stock exchanges just like individual stocks. Bitcoin ETFs have been hotly anticipated for years, with them only being given the green-light by the SEC in January 2024.
Related Content: Bitcoin ETFs vs. Bitcoin: Which is Better?
Advantages & Disadvantages of a Diversified Crypto Portfolio
Crypto diversification is a great option for many people, but it is definitely not for everybody. Let’s break down some of the pros and cons to give you a full picture.
Advantages
Reduces risk: If you spread your assets around, then you reduce the chances of having your holdings wholly drop. This is because your cryptocurrencies will be dispersed across a range of places, meaning that even if one asset plummets, it may not affect the others.
Improves odds of picking a top investment: Technically, the more assets you invest in, the higher your chances are of picking one that will skyrocket. The reality is nowhere near as simple as this, but it is reasonable to argue that having a handful of well-picked crypto assets puts you in a better position than holding just one and putting your eggs in one basket.
Can reduce overall portfolio volatility: You can set up your portfolio in a way that is designed to offset potential volatility. For instance, if you are a big fan of altcoins, you can add Bitcoin to your portfolio to soften the blow, should your smaller coins and tokens drop in value. While the crypto sector tends to move synchronously, altcoins are known to be more volatile than the giants in the space (like Bitcoin and Ethereum), so you can use them to your advantage.
Disadvantages:
Requires more knowledge: The amount of knowledge you need to balance and diversify a portfolio is relatively large. While you do not need a degree in Economics to do so, it is a good idea to get acquainted with some financial terms and principles, as well as work hard to research what assets might suit your needs.
Time-consuming: Portfolio diversification is not something that you can do in just a couple of hours. It should ideally take several days worth of research, and a relatively sizeable amount of time taken to make purchases. This is especially the case if you are going for very small and little-known altcoins.
Can still lead to losses: Even the most balanced and meticulous portfolio can lead to losses. This is the sad reality of trading in any sector (let alone the crypto space). While diversification helps to prevent some of the dangers from negative market movements, it cannot fully mitigate the risk. Diversification works best when you pick from a range of assets or investment vehicles that are known to react differently to market sentiment and news. For instance, stablecoins are aligned with the fiat market, rather than Bitcoin and Ethereum. You could also look for assets that have a significantly different chart compared to other coins and tokens, meaning they are known to move out of sync. Monero (XMR) is a good example of this, as it tends to rally on its own, without aligning to the rest of the market.
Three Tips to Achieve a Diversified Portfolio
There are tons of methods out there to help you diversify your portfolio, and going through them all would be far beyond the scope of this piece. However, we can definitely take a look at three strategies that people often follow.
Buy the market leaders: Many people include Bitcoin and Ethereum in their portfolios as they are market leaders in this space who have a strong legacy. They are great for reducing volatility, and can offset the sharp financial moves of smaller altcoins.
Look at the market cap: If you are interested in altcoins, then it is a good idea to look at what the market cap is for the assets you’re focused on. This means evaluating the total value of all coins or tokens that have been mined or issued. The market capitalization of a cryptocurrency gives you an indication of its popularity, size, and potential for growth. Small-cap assets are often favored, especially if you are looking for an altcoin that has not had a meteoric rise just yet, hoping that it will happen during the upcoming market cycle.
Use a crypto savings account to maximize returns: For your long-term holds, it is a good idea to consider a crypto savings or Growth account, as these can provide you with interest over time. This means that while your assets are stored safely in the hands of a trusted service, you can get returns on them which contribute to your overall financial growth strategy. For example, with Ledn, you can open a Growth account for Bitcoin, Ethereum, USDC, USDT, and currently earn up to 10% APY on your cryptocurrency holdings.
An Example of Good Crypto Portfolio Allocation
There are tons of strong diversified crypto portfolios out there, all with different strategies and strengths. The model you pick will be extremely dependent on what you are looking for in a portfolio, and what types of assets are appealing to you. However, to give you just one example of what a potentially impressive portfolio allocation could look like, let’s take a look at the following example:
- 70% allocation into market leaders (Bitcoin and/or Ethereum).
- 20% allocation into small market cap coins/tokens with strong and lively communities.
- 10% allocation into stablecoins, placed in savings accounts for returns (USDC and/or USDT).
This is, of course, just one idea, and it should not be taken as gospel. Rather, consider this as a good jumping-off point and a potentially useful breakdown to inspire your own strategy.
Should You Diversify Your Crypto Assets?
Crypto diversification is a good idea to consider, regardless of your situation, but that does not mean everybody should actually go ahead and try it out. For individuals who want more exposure to the crypto market, and who are curious about more than one asset, they are likely to be the people who get the greatest benefits out of it.
However, if you are somebody who is comfortable holding just one cryptocurrency, and are not looking to expand into other aspects of the industry, then it might not be particularly interesting to you. This is also the case if you are using Bitcoin predominantly as a store of value (similar to how people hold gold investments). In the end, it comes down to personal preference.
Why Hold Your Crypto With Ledn?
If your crypto diversification plans involve Bitcoin, Ethereum, USDT, and/or USDC, then you should consider storing them in one of Ledn’s Growth Accounts. These are specialized savings accounts where you can earn interest on your holdings over a prolonged time. For stablecoins, they can currently even reach up to 10% APY.
This can actually count as its own type of diversification, as the returns you make from a Ledn Growth Account can be considered an investment vehicle in their own right, because it offers a different revenue stream. If you do not plan to access your assets for some time, then it makes sense to go for this route, as the savings add up and help to balance out market volatility (at least to a small extent).
Conclusion
As you can see, diversifying a crypto portfolio is not exactly a simple or straightforward task. However, for some people, it is by all means worth it, and can be a fantastic strategy when it comes to trading and holding in this sector. If your plans involve BTC, ETH, USDC, and USDT, be sure to consider Ledn’s Growth Accounts as a place to hold these assets, as you can currently earn up to 10% APY on them. Not only is this an impressive way to make returns on your unused assets, but it can help add diversity to your overall strategy by providing a new revenue stream, and even offset some volatility risks by bringing in reliable returns.
Sponsored by 21 Technologies Inc. and its affiliates (“Ledn”). All reviews and opinions expressed are based on my personal views. There are risks involved with buying, selling, or holding digital assets as explained in Ledn’s Risk Disclosure Statement, which can be accessed here.
