Diversifying crypto portfolio can be understood as buying more than one coin or token at a particular point in time.
It can also be understood as having other investments apart from crypto investments.
To better understand how to diversify your crypto portfolio, you must understand how the financial market works.
The financial market is the overall market that deals with the movement of money between different sectors.
How does the financial market work?
In a real sense, everything that happens in the financial market is well-planned activities and not based on chances.
The financial market deals with the movement of money otherwise known as the money supply.
Money can exist in Savings, demand deposits, and time deposits.
There is usually a noticeable movement in a particular sector when large amounts of money are being moved to that sector.
For instance, money can be moved from the stock market and forex market into the crypto market.
At that point, there will be a significant move in the crypto market.
The movement of money is not limited to financial institutions alone. As individuals, we also contribute to the movements.
During the accumulation stage, individuals are moving their savings to cryptocurrency in anticipation of more gain.
So, the financial market is an interaction between individuals in different sectors.
How to diversify a crypto portfolio
The Crypto market is said to be a highly volatile market whereas it is not as high as other markets, especially the stock market.
To understand the diversification of crypto portfolio, the following should be acknowledged.
Don’t diversify your portfolio when the market is bullish ~ Karla
The best time to diversify your crypto portfolio is during the bearish market.
One of the mistakes made by newbies in cryptocurrency is that they think the market will continue to go up once it starts going up.
In contrast to that, experts take profits when the market is bullish.
At that point, when the market is bullish, what you should be thinking about is “when should I take profit”.
As it stands today, bitcoin is the only cryptocurrency that is completely decentralized. It has no board of directors, no advisory board, no marketer, and no marketing plan. It is purely community-based.
Aside from bitcoin, all other cryptocurrencies have founders and teams that are behind them.
In diversifying your portfolio, you must do research.
What should I research?
Decentralized or not?
Truth be told, the cryptocurrencies that we have in the market today are not fully decentralized.
So in terms of decentralization, only bitcoin is fully decentralized.
Nevertheless, some cryptocurrencies are community-based with founders and teams that ensure that the protocol is safe and updated from time to time.
The use case
A partially decentralized project can be further weighed based on the use case.
Ethereum did not satisfy the concept of decentralization like bitcoin but its use case paved the way for it to become the second-largest cryptocurrency in terms of market cap.
What can this coin or token be used for? Should be a point of research before diversifying your crypto portfolio.
In 2016, what we had in the Crypto space was ICO. It was Defi in 2020 and NFT in 2021.
In 2022, what is trending is move2earn just like Everest, the first mobility-as-a-service that is built on the Algorand blockchain.
Another trend in Crypto is the Metaverse.
Before diversifying your portfolio, what is the current trend?
3. Risk Reward
Even if you are a newbie, you would have heard this countless times.
Risk-Reward is a terminology used to explain the proportion of your portfolio that you are bound to lose with respect to the amount you are targeting as profit.
You will have to consider the category of risk-reward in which the coins or tokens you’re buying fall into.
Types of risk-reward.
There are four basic types of risk-reward otherwise known as the risk-reward quadrant.
High risk-High reward
This is used to explain a type of investment that has high risk but also has high reward as well.
Trends in Cryptocurrency fall under this category because no one can say precisely when the hype will be over.
You can enjoy profits while the hype lasts.
Low risk-Low Reward
These are cryptocurrencies that are bound to increase in price though it might take a lot of time.
Bitcoin and Ethereum fall under this category.
Ask any trader and they will say with confidence that bitcoin will increase in price but they cannot predict when.
Even though it will increase in price does not mean it will give 50X or 10X but there is an assurance of profit in the long run.
This kind of investment is the best because you are sure of having your money back with profit but within that time, you must have a means of survival.
High risk-Low reward
These are the categories of investment where you are most likely to lose all your money with an expectation of little gain.
This should be avoided at all costs whether as an individual or as an institution.
Low risk-High reward
Meme coins and new projects fall under this category.
Their risk is considerably low compared to their potential reward.
These are coins that can easily give 10X within days if not hours. 100X, 1000X are possible with these kinds of coins or tokens but the best time to buy them is when they are yet to be fully known by the public.
Remember, timing is the first.
4. Personal finance
This is as important as your life. Being able to manage and diversify your crypto portfolio starts with managing your personal finance.
The poor man wants to have money while the rich man wants to control money.
Research has established that rich people invest to keep the value of money.
For easy understanding, have a regular source of income so that you won’t spend your capital before it yields profit.
5. Investment in physical businesses
This is most overlooked by Crypto traders.
All your investments should not be digital.
What if the bearish market takes longer than expected like the bearish run of 2018?
If you have a friend that you think is doing well in business but needs funds, you can both agree and you will be earning a certain amount monthly or yearly based on your agreement.
If you want to diversify your portfolio but don’t want to undergo all these procedures either as an individual or as a business, you can contact Crypto Smart to manage your assets for you.
You can also join the Crypto Smart Telegram group for free crypto classes.
This is an excerpt of our Let’s talk session with Karla, Founder of Crypto Smart.