Risk management and the diversification of an investment portfolio are fundamental to the success of your financial operations. Although the crypto market is still relatively young, diversifying your portfolio can be a crucial aspect of winning the battle and being part of the small percentage of investors who make real profits. What are the necessary steps to diversify your investment portfolio and what impact can the inclusion of cryptocurrency have?
Diversification: An Essential Tool to Balance Investment Risk
Experts agree that diversification is absolutely essential for investors who want to maximize the gains from their operations and holdings; from those with a long-term perspective to those who practice day-trading (trading financial assets in a single daily session).
Fidelity, one of the most important and recognized financial institutions in the world, confirms this premise. In an article on the official website, they define the concept of diversification as the “practice of spreading your investments so that your exposure to any type of asset is limited. This practice was designed to help reduce the volatility of your portfolio over time.”
Diversify a cryptocurrency portfolio
The introduction of cryptocurrencies has enabled many people outside this space to show interest and even to decide to invest in cryptocurrencies. In the strict sense of the concept, diversification refers precisely to the addition of different types of assets in an investment portfolio. However, many digital currency investors consider only leading Bitcoin and one or two other popular altcoins. Certain cryptocurrency exchange platforms have opened the door to investments with minimal capital, in some cases under $ 10. Where capital is very low, diversification loses focus, and, therefore, it is more possible to limit your portfolio to the fewest financial instruments.
Now, what is the best way to diversify with cryptocurrencies? There is no right answer. A portfolio can only consist of cryptocurrencies. If so, the investor has an implicitly high-risk profile. In other words, they are willing to lose more capital in the hope of making more profit. This is due to the volatile nature of the vast majority of cryptocurrencies. However, diversification does not lose its validity in this area. In fact, some currencies are more stable than others and it is still possible to diversify within the same type parameters.
Assess the volatility of your favorite crypto assets
If your decision is to keep only cryptographic assets in your portfolio, you should have a non-intuitive idea of how stable they are in price. Although the price of Bitcoin moves violently, Nakamoto is in fact one of the most stable assets in the industry. Other smaller altcoins register even faster and bigger changes. For example, Cardano has registered 5 times more volatility than BTC in the last 3 months, according to the analysis website “Crypto Volatile”, which calculates the volatility index according to the evolution of prices.
Determine your risk profile
The decision on how to distribute the investment capital will depend essentially on the investor's risk profile. In general, conservative investors fill more than 80% of their portfolio with more stable assets, thus reducing the possibility of losses, but also of gains. Conversely, aggressive investors allocate more than 85% of their portfolio to volatile assets with possible price changes. In any case, we suggest limiting the number of assets in your portfolio, ensuring that you can track and monitor all open positions. Each trade must have, among other things, correct risk management.
Cryptocurrencies as part of an investment portfolio
However, in order to achieve real diversification, it will be necessary to evaluate the addition of other types of financial instruments. According to the cited Fidelity article, this is essential to "balance risk and reward in your investment portfolio". They also recommend the distribution of investment assets in different classes or categories.
For this type of trading, the recommendation is to use our platform to exchange and spread your risk.