All over the world, crypto investors are building and expanding their portfolios in the hopes of making a substantial profit from cryptocurrency. If you head online, you’ll find a range of various crypto trading strategies that claim to help you dominate the market. However, as useful as many of these crypto investing strategies are, none can compete with the power of a diversified portfolio.
In this article, we’ll discuss the benefits of diversifying your portfolio and show you the most effective ways to create a crypto portfolio that can withstand the pressure of the crypto market!
The Main Benefits of Building a Diverse Crypto Portfolio
Not sure whether it’s worth the time and effort to diversify your crypto portfolio? Check out these main benefits of portfolio diversification!
- Mitigated risk – For beginner traders especially, mitigating risk when trading crypto is vital. Crypto assets are notoriously unstable and unpredictable, meaning that at any point, their prices can plummet. If you choose to invest in a handful of different coins, even if a few of them suddenly drop in price, the rest of your portfolio will compensate for the losses.
- Potential for high returns – By investing in different types of coins, you give yourself a higher chance of landing on a crypto that experiences significant and rapid gains. If this happens, your portfolio will shoot up in value, and you can enjoy the substantial growth of the coin.
- Reduced volatility – Investing in multiple assets, each with different prices, market caps, and use cases, will help to stabilise your portfolio’s value. This can help ease your mind during periods of market turbulence, as your portfolio will be more likely to withstand drastic price fluctuations.
- Chance to gain knowledge – Choosing to invest in multiple cryptocurrencies and diversifying your portfolio takes time and research. By doing this, you’re broadening your knowledge regarding the crypto industry and opening up new investment opportunities for yourself.
Ways To Diversify Your Portfolio
Overall, diversifying and balancing your portfolio is one of the best crypto investing strategies for mitigating risk, reducing volatility, and providing opportunities for high returns. The good news is there are several ways to diversify your portfolio when trading cryptocurrency. Below, we have listed the most effective ways, so you have plenty of options when building the most suitable crypto portfolio for your trading strategy! Let’s take a look!
- Coin Type
The most obvious way to diversify your portfolio is by coin type. There are a variety of different crypto tokens, each with its own attributes and function. Here are a few different types of cryptocurrencies, with an example for each:
Utility tokens – Tokens that help to provide a service, allowing users to perform actions on a blockchain network or decentralised app (dApp).
Example – Chainlink (LINK)
Security tokens – Tokens are financial instruments that represent rights of ownership of a specific asset.
Example – Battle Infinity (IBAT)
Stablecoins – Coins that have a value which is pegged to another asset’s price, such as fiat currency (e.g. dollars, euros, and pounds).
Example – Tether (USDT)
Meme Coins – Coins that have gained popularity through memes and social media but have no specific use cases.
Example – Dogecoin (DOGE)
Altcoins – Generally, altcoins are referred to as any coin that is not Bitcoin. Most altcoins have a purpose that extends beyond simply serving as a digital currency in the way that Bitcoin does.
Example – Solana (SOL)
We recommend researching various coins and investing in several different types. For instance, you can invest in one coin from each category we’ve listed.
Another way to balance your portfolio is by investing in crypto projects that focus on different industries. You may already know that blockchain technology is dominating (or disrupting) many sectors worldwide. If you want to profit from your trades and reduce risk, we suggest ensuring to invest in coins from different industries. Here are some examples of popular industries that cryptocurrency already has an effect on:
- Real estate
- Market Cap
Last but not least, you can diversify your crypto portfolio by market capitalisation. By checking crypto marketplaces, you can review the market cap of various coins. We recommend dividing up your portfolio by investing in coins with large, medium, and small market caps. See below for a further explanation regarding portfolio balancing through coin market cap!
Examples of Diversified Crypto Portfolios
We understand that it can be overwhelming to consider all these different strategies for diversifying your portfolio. So, to make it easier, we’ve listed the top two most common and effective rules for building a diversified portfolio!
The 80/20 Rule
Many crypto traders abide by the 80/20 rule when planning out and diversifying their portfolios. This rule ensures that your portfolio remains stable with a mix of crypto assets but still leaves the potential for high rewards.
According to this rule, 80% of your portfolio should be made up of the most established and stable cryptocurrencies, such as Bitcoin and Ethereum. You can also allocate this portion of your portfolio to other large currencies (the top 10 in market cap size). You can find out which coins have large and small market caps through a crypto marketplace such as CoinMarketCap.
The other 20% of your portfolio should be dedicated to coins with mid-to-low market caps. These coins are a much riskier investment, which is why we recommend dedicating a smaller portion of your portfolio to them. However, you should not neglect these coins altogether as they have the potential for skyrocketing in price, resulting in high returns.
If you’re unsure how to abide by this rule when building your portfolio, check out our example below!
80/20 Rule Example
Bitcoin (BTC) – 40%
Ethereum (ETH) – 30%
Solana (SOL) – 5%
Cardano (ADA) – 5%
Avalanche (AVAX) – 5%
DeeLance (DLANCE) – 3%
EcoTerra (ECOTERRA) – 3%
Tamadoge (TAMA) – 2.5%
ApeCoin (APE) – 2.5%
Love Hate Inu (LHINU) – 2%
RobotEra (TARO) – 1%
ZCash (ZEC) – 1%
The 40/30/30 Rule
Another popular crypto strategy for portfolio diversification is the 40/30/30 rule. With this rule, investors are urged to invest 40% of their portfolio into the top two cryptocurrencies (Bitcoin and Ethereum), whilst 30% is dedicated to coins with a market cap of at least $10 billion. You should allocate the remaining 30% to coins that have a mid-range market cap of between $1-10 billion.
This rule has a much higher risk-to-reward ratio, as you are dedicating a significant portion to mid-cap currencies. If you have a high-risk tolerance or are a more experienced trader, then check out our example of the 40/30/30 to see how to set up your portfolio!
40/30/30 Rule Example
Bitcoin (BTC) – 20%
Ethereum (ETH) – 20%
Cardano (ADA) – 10%
XRP (XRP) – 10%
Tether (USDT) – 5%
BNB (BNB) – 5%
Litecoin (LTC) – 5%
Tron (TRX) – 5%
Solana (SOL) – 5%
Bitcoin Cash (BCH) – 5%
Chainlink (LINK) – 3%
Polygon (MATIC) – 2.5%
Polkadot (DOT) – 2.5%
Avalanche (AVAX) – 2%
Top Tips for Crypto Portfolio Diversification
Now, you’re all set to build a balanced and stable portfolio by investing in a diverse set of assets. Before you head off to start your research and find exciting coins to trade, take a look at our top tips for crypto portfolio diversification!
Use a Crypto Broker
If you’re feeling overwhelmed by the idea of finding various coins to invest in, establishing a cryptocurrency trading strategy, and adequately balancing your portfolio, then you wouldn’t be the first! Crypto trading is notoriously complex, and more often than not, traders are daunted by the prospect of trading alone through a crypto exchange.
That’s why we recommend using a crypto broker to help support you as you trade. A crypto broker is a firm or individual whose role is to assist traders who seek their guidance. Crypto brokers often are equipped with various tools and resources that you can use to your advantage. This can help you build confidence whilst establishing your portfolio and ensuring that it’s balanced.
These brokers are suitable for traders of any experience level and can help you in lots of different areas as you navigate the crypto sector. If the idea of using a broker interests you, then we suggest signing up for a brokerage-matching platform such as https://immediate-connect.app to help get you started.
These platforms typically use AI technology to pair traders with brokers that are best suited to them. The process is fast and straightforward, so you’ll have plenty of time left to refine your crypto investment strategy and build the crypto portfolio of your dreams!
Regularly Rebalance Your Portfolio
Regardless of how you choose to diversify your portfolio, it’s crucial that you regularly review it and rebalance it when necessary. The crypto market is constantly changing, with coin prices often fluctuating in price. Therefore, ignoring your portfolio after building it can lead to your taking on more risk than you’re prepared for.
Rebalancing your portfolio is a crypto investing strategy that you should not overlook. Ideally, you’d want to review your portfolio every day or so. However, we understand that not all traders have the time to constantly check their crypto investments. So, if every day is unmanageable, then we recommend reviewing your portfolio at least once a week.
You can also use this time to consider your goals and the process you’ve made towards them. Perhaps the crypto market conditions remain stable, but you notice you’re not close to reaching your goal. Or, maybe you feel like you’re making a profit too slowly and are willing to take on more risk as an investor.
If this is the case when reviewing your portfolio, then maybe it’s time to rebalance it and take on some riskier investments. You may choose to dedicate a larger portion of it to mid-to-low cap currencies, altering your risk-to-reward ratio. Whatever the case, it’s important to never underestimate the power of periodically reviewing your portfolio.
Set a Budget Beforehand
Another important tip that many traders overlook when creating a portfolio is setting a clear budget beforehand. Every trader has a different budget, and this depends on multiple factors, such as their financial situation and future goals. You should carefully consider your own budget before making any investment decisions, as you don’t want to land yourself in financial trouble due to investing more than you can afford to lose.
Additionally, budgets can help you avoid falling for FOMO (Fear of Missing Out), a widespread experience that affects almost all traders. You may experience FOMO if you notice other traders profiting from a specific investment. FOMO can spur feelings of jealousy, greed, and anxiety, as you might feel like you’re missing out on making a big profit too. This can lead to you making an irrational investment decision that could severely cost you in the long run.
However, if you have already established a budget, it can help you to ignore feelings of FOMO and focus on your own goals. Overall, this can improve your overall emotional state and reduce feelings of stress as you trade cryptocurrency.
Conclusion – TLDR
To conclude, diversifying your portfolio is crucial for mitigating risk, reducing volatility, and setting yourself up for success as a trader! Additionally, diversifying your portfolio is easier than it may seem, and if you need help, you can follow the 80/20 or 40/30/30 rule. Just remember to do your research, establish your budget, and periodically rebalance your portfolio. Good luck!