Over the last 10 years, crypto trading has grown tremendously in popularity. With such huge opportunities, the risks are also enormous because of its volatility. One of the best approaches to limit or spread these risks is diversification.
Diversification is a principal rule to abide by if you are trying to lower the risk of your investments, regardless of whether you are a beginner or a pro trader. We shall help you with the whole step when it comes to diversifying your portfolio if you are seeking this kind of guidance.
Why Diversification is Essential in Crypto Investing
If you have decided to venture into crypto investing with one of the credible platforms recommended by BrokerRaters, you might wonder if diversification is worth it. The truth is that you cannot overlook the importance of diversification in crypto trading.
Diversification becomes even more critical in the crypto market’s highly volatile nature. Failing to diversify your crypto portfolio is like putting your eggs in one basket- they can crack all, and you will remain with nothing! Of course, you wouldn’t want that, especially now that you have invested so much money. So, the best thing you can do when trading crypto is diversify your portfolio.
Here are two key ways in which diversification is essential in crypto investing:
- It protects you against volatility: It is no secret that the crypto market is very volatile, with digital currencies fluctuating now and then. But by diversifying your portfolio, you reduce your exposure to risks brought by fluctuations. With multiple assets, you can spread these risks, thereby reducing their impact.
- Potential for higher returns: Of course, when investing in crypto, you hope to make as much higher returns as possible. This may not be possible with a single investment. But with a diversified portfolio, you can gain returns from multiple investments because even if one crypto doesn’t do well, another may do exceptionally.
Types of Cryptocurrencies to Consider
One of the best things about crypto trading is that you can choose to invest in various cryptos. So you don’t have to get stuck with one even if it doesn’t generate your desired returns. Having said that, here are the most common types of crypto you may want to consider:
Bitcoin
Whenever digital currency is mentioned, Bitcoin comes to mind first, and that’s for a reason. With its market cap of about $1.8 trillion, Bitcoin takes the lead in terms of market capitalization, popularity, and user base. You should consider Bitcoin because of its decentralized nature, which provides protection from inflation and currency devaluation. Moreover, Bitcoin is continuously accepted by major companies and financial institutions, making it more credible globally.
Ethereum [ETH]
This is also another top crypto that you should consider. Its features that allow for contracts and decentralized apps to be built and run without control, fraud, downtime, or interference from a third party make it stand out. You can perform various functions using the system’s currency [ether]. You may also consider this crypto and enjoy its $396 billion market cap.
Tether [USDT]
Since its market value is tethered to various currencies, Tether (USDT) is among the most renowned stablecoins. This makes it widely accepted by even the most skeptical digital users. Tether has a lot going for it, including less volatility, fast transactions, and its use as a medium for trade in the crypto world.
Strategies for Diversification
Now that we have explored the importance of diversifying your crypto portfolio and the types of cryptocurrencies to consider, let’s take a closer look at how you can do so.
- Invest in various types of cryptocurrencies.
Investing in different types of cryptos is one of the best strategies for diversifying your crypto portfolio. Imagine a scenario where you invest in one crypto, and it crashes—that would be catastrophic, right? You can strike a balance between bigger ones like Bitcoin and Ethereum, which have larger market caps, making them safer, and smaller ones like Altcoins, which have higher growth potential.
- Explore different crypto sectors.
This is an additional strategy that can be used to diversify and mitigate the risks that come with crypto trading. The reality is that the blockchain ecosystem is transversally and vertically fragmented, and each sector has distinct and unique offers.
To further manage your risk and improve your potential returns, don’t forget to explore sectors like DeFi, NFTs, and Metaverse Projects.
- Rebalance your portfolio
To keep your crypto portfolio diversified, you need to rebalance it regularly. This involves adjusting your asset to match your original risk-reward profile and goals. So, by rebalancing your portfolio, you can quickly rebalance risk by buying into various assets.
Factors to Consider Before Investing
If you want to reduce your risks and maximize your returns when trading crypto, you should pay attention to several factors. They include:
- Liquidity and accessibility: One of the top factors you should consider if you want your trading to be as smooth as possible is accessibility and liquidity. You want to ensure it is easy to buy, sell, or trade on whichever platform you choose. This is one feature that can make the platform more appealing.
- Security: Security is a top priority in cryptocurrency trading. You want to ensure that your investment is as secure as possible. How do you ensure that though? – by ensuring that the platform you wish to trade on keeps its crypto on secure exchanges or wallets, uses strong passwords, or enables two-factor authentication. These measures can curb the chances of hacking and theft.
- Risk management: Risk management is a crucial factor when it comes to crypto trading. You must establish stop-loss orders to limit possible losses. And only invest money you can afford to lose. Failure to implement appropriate risk management techniques will make you more susceptible to significant loss.
Crypto trading is a profitable venture that can earn you higher returns. However, because the market is volatile, if you don’t practice caution, it can also result in losses. However, with strategies such as diversification, you can mitigate the risks associated with this trading and maximize your returns.
