What Is Cryptocurrency Diversification and Why Is It Important?

Cryptocurrency diversification is the process of investing money into multiple crypto assets so that it eliminates the risk of losing all the investment if only one asset faces a decrease in value. In hindsight, if some of the assets fail to yield big gains, the investor can depend on the other assets to maintain a steady and balanced increase. This gives them a chance to conduct more sustainable trades with minimized levels of risks. People are becoming more inclined towards this trading strategy, as it provides a more financially secure trading mechanism.

Numerous surging cases have been put forth due to crypto volatility, mainly in Bitcoin, whose value can go up or down instantly. Hence, it proves to be a major threat to those traders who tend to invest all their money in one particular asset. However, the volatile nature of cryptocurrency is one reason for it, diversifying crypto allows the investor to save themselves from any potential losses due to extreme price jumps. Another way diversification helps is that it increases the possibilities of yielding profitable gains through one's investment by the maximization of different coins.

The importance of cryptocurrency diversification

Just like any other type of asset, dealing with cryptocurrency also has a few risks involved. One minor mistake or wrong decision can end up ruining everything. All the investments will go to waste and it may pose devastating financial damage. Hence diversification of cryptocurrency is a strategy that is applied to every kind of investor. From newbies to experts, it is advised that they keep multiple cryptocurrencies to reduce the chances of losing money. The importance of crypto diversification can be assessed from the fact that traders from all over the world are adopting this strategy, and have fetched promising results from it.

Crypto diversification is protecting against risk

Every investor and trader is aware of the volatile nature of cryptocurrency. It rises and falls at a very sharp pace. These enormous ups and downs force the prompted market participants to look for such methods and strategies that will protect them from the risk of losing all their investments. Hence, crypto diversification has been made a preferred strategy so that it will minimize the potential drawbacks by developing a portfolio that inculcates both high diversity and low diversity cryptocurrencies. Hence, minimizing the risks by a considerable ratio.

Top crypto diversification strategies

  1. Diversifying the type of cryptocurrency

    Diversification in cryptocurrencies is imperative. It has many advantages, the biggest one being that it eliminates the possibility of a potential loss. Although it is a fact that dodging the chances of a loss is near to impossible, the impact of the losses will lessen keeping the investment stable and with minor changes.

    Looking at the big picture, it is noticed that this strategy completely eradicates the chances of experiencing losses. This is because if one asset sets to crash, the other asset's performance will make up for it. Some can put the value on hold while the other can increase, either way, there is no loss.

    Another reason why diversification is important in crypto is that it helps to broaden the knowledge regarding the performance of different crypto assets. Although the two mainstream digitized coins are Bitcoin and Ethereum, what investors tend to look over is that there are thousands more available. Each of these serves different purposes, objectives, and values as a few years pass by. The last advantage that it provides is that it helps in making the investor perform better and more knowledgeable.

  2. Diversifying by industry

    According to this strategy, the investor should aim to invest in those crypto assets that are present in numerous industries. This way, if one of the industries was to lack in value, the remaining half of the investor's portion can make up for the losses without having major impacts on one's returns. The numerous countries that have stepped into the crypto world can also become a beneficial factor to start investing and diversifying crypto. For example, many stocks are available for investing in. Some of the industries with crypto projects include:

    • Finance
    • Decentralized finance
    • Data and analytics
    • Medicine
    • Identity
    • Supply chain
    • Artificial intelligence
    • Energy

    These industries have proven to be a profitable ground for investment, as they promise a good return profit. Therefore, if the money is invested in those industries which hold a reputable history, then the returns from the investments will be beneficial in both the long and the short term.

  3. Time diversification

    Under this strategy, the investor splits their portfolio investments into set time gaps to get rid of the chances of losing all the money which was invested in one go With the help of this strategy, the investor should firstly time the market and purchase the digitized asset when it will yield the most returns. This will result in good profits for the traders. This strategy also goes by the name of "dollar-cost averaging.

    Let us take a look at an example to understand it in a better manner. Suppose that if an investor is willing to invest $50,000 then according to the diversification strategy, this money will be invested over time. The investor will put $1000 to $2000 every month. This way, the chances of losing all the money at once are lowered.

    Attempting to time the market through mere observations of an investor entails enormous risks. However, if the investor tends to make small payments throughout can save them from the impacts of crypto's volatile behavior. In a case where the asset that they had invested in underperforms, the losses from this situation will not affect the investor tremendously. The investor can simply brush off such a small loss and swiftly move on to the next coin, again in intervals. This also means that the amount spent on an asset over time will be low, hence the average profit per coin will increase as the value keeps incrementing.

Conclusion

Putting all of one's money into a single asset out of the thousands that are available in the financial world is a risky move and consequently, carries a risk of great losses in the future. A good investor is the one who spends their money investing into multiple assets. It helps when different objectives are first observed and considered.

Moreover, an investor can always look for numerous industries and observe their overall performance and put money in multiple different sectors. Each crypto asset is different from the other, hence looking at their financial objectives can become a major help while selecting which one to invest in. The best approach is to save money and reduce losses by diversifying the investments for a perfect solution.