Any professional trader will tell you that diversification is the golden rule of crypto investing. When you put all your investments in one digital asset, your investment portfolio will likely crash. Besides, crypto diversification generates more than average profits, and you can maintain a balance between your risk and target.
This article digs deep into what is an investment portfolio diversification, and why you should diversify your crypto investment today.
What is an Investment Portfolio Diversification?
The ultimate objective of any investor is to reduce risk and increase profits. Investment portfolio diversification is a method of minimizing risk by putting your money in multiple digital assets and wealth generation options.
This will help you to maximize your returns while managing risk. Nevertheless, it does not guarantee that you will never make losses. The aim is to get long-term returns by managing the current risk via diversification. Now that we have known what an investment portfolio diversification is, let us briefly look at the various types of investment risks before diving into the importance of diversifying your crypto portfolio.
Types of Investment Risks
As mentioned earlier, diversification cannot wholly eradicate risk, but it can help to control risk. There are two types of investment risks:
You can also call it the market risk. Since a systematic risk cannot be minimized or eliminated because of exchange rates, uncertainties like wars, natural calamities, inflation rate, etc. It is important to note that a systematic/market risk exists in almost every industry.
Unsystematic risk comprises business risk and financial risk, which you can quickly diversify. It differs from one industry to another; hence, you can analyze it.
The Importance of Diversifying Your Crypto Portfolio
You Cannot Rely on Bitcoin Alone
While Bitcoin is the first and most significant digital currency by market capitalization, it is not the only cryptocurrency. There are more than 2500 cryptocurrencies in the market. Besides, BTC is no longer a reliable investment on its own as it tends to experience short and sudden boom cycles followed by bears and stagnation. Depending on BTC alone implies that your investment is left to the vulnerabilities of its highly volatile nature. Diversifying your crypto portfolio will enable you to offset some of these considerable risks.
Industry Leaders are Diversifying
Suppose you are at a crossroads on which investment decisions to make, analyze what the crypto sharks are doing. Famous crypto millionaires, like Barry Silbert, Dan Morehead, and the Winklevoss brothers study the crypto market and spread their investment risk across the best-performing coins. Most likely, they started just with single investments but started diversifying their investments as they got to know the industry well.
It is a Volatile Industry
Lastly, the crypto world is volatile. Even the coin with the largest market cap can experience significant price declines in hours. We have experienced some significant market declines in the past, and we are likely to experience them sooner or later.
Crypto diversification is a method of hedging your investment portfolio and ensuring that you have adequate backups and safety nets against risks. Additionally, a diversified portfolio increases your chances of making maximum use of every crypto opportunity.
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