If you’re not new to investing, then you probably know the importance of diversification. The same concept applies to cryptocurrency investments.
These blockchain-powered digital assets have proven to be profitable, but the wild price swings have also caused investors to lose money especially those who haven’t diversified their cryptocurrency portfolio. Keep reading to learn what diversification is and how to do it correctly.
The importance of diversification of your cryptocurrency portfolio
Younger people make up a huge chunk of the total cryptocurrency investors. They’re one of the most active traders in cryptocurrency trading robots. But Bitcoin might be the first asset class they’ve ever invested in. They also tend to fall for FUD, hype, and a cultish devotion to coin projects.
Diversifying refers to the allocation of funds in different places to spread out the risk. When investing in stocks, for instance, it’s wise to put your money in different stocks so that when one stock’s price goes down, you won’t see all your money disappear. As the adage goes, never put all your eggs in one basket.
The same principle should be applied to cryptocurrency trading. But due to a lack of knowledge, people tend to ignore the importance of diversification. You wouldn’t want to make the same mistake. The first step is to understand the different categories of cryptocurrencies:
Traditional – This is the most common category of cryptocurrencies because they are used as digital currencies that enable businesses to transact with customers using an immutable public ledger call the blockchain. Bitcoin, Bitcoin Cash, and Litecoin are three of the most popular traditional cryptos.
Privacy coins also fall under this category. These coins provide more anonymity for users. Examples include Dash, Monero, and ZCash.
Platforms – While Bitcoin poses a serious threat to banks, this second category of cryptocurrencies holds the potential to change both the economy and society. These coins aren’t used to pay for products or services. Rather, they create a blockchain infrastructure involving smart contracts and apps.
Ethereum is the most popular blockchain platform to date, with countless digital coins built using its ER20 protocol. Cardano, Neo, and EOS are also successful platforms.
Utility tokens – These cryptocurrency projects are created on top of a platform protocol and address a specific need in a given industry. There are utility tokens for market analysis, renting out computing power, and managing the supply chain.
By understanding the different categories of cryptocurrencies, you can formulate educated decisions on what coins to invest in. Of course, you wouldn’t want to put all your money in traditional cryptocurrencies. Look at platforms and utility tokens as well to spread out the risks.
It also helps to look at the market capitalization of the coins you plan on buying. The higher the market cap, the more stable the coin is. Many crypto investors diversify their portfolio by investing in low, medium, and high market cap coins. Through this, they may benefit from the wild value swings in low market cap coins while those with a high market cap enjoy a steady growth.