Is There a Magic Diversification Ratio for Crypto Investing?
By definition, diversification is an investment strategy that lowers a portfolio’s risk and helps an investor achieve stable returns by building a portfolio that contains exposure to a variety of assets or asset classes.
While there isn’t a set rulebook around what types of financial assets an investor should or shouldn’t diversify their portfolio with, the aim of the game is generally to invest in assets that vary in their ratio of risk versus reward. The main reason for this is to counter or minimise any potential losses that occur in one asset, segment or market.
For those new to investing, or new to investing in crypto, here are a few things you should consider when building a diversified portfolio.
Building a crypto-only portfolio
Although crypto has been notably one of the best-performing asset classes over the last decade, the market has experienced periods of high volatility.
Often when the dominant crypto assets such as Bitcoin and Ethereum lose value, other altcoins will outperform the market.
Investors may want to consider what elements or factors lead to this varying performance and invest in a number of different crypto assets, including altcoins such as XRP (XRP) and Ethereum (ETH), to help protect their overall crypto investments.
To further break it down, an investor can also diversify their crypto portfolios through some of the following ways:
Mix different industries, applications, and categories
Some crypto investors decide to diversify their crypto portfolios with crypto assets and projects from different industries, applications and categories. This way the investor is sorting their crypto-based on how they are intended to be used.
This could include anything from:
- Payment crypto assets – Dogecoin (DGE), Litecoin (LTE), Stellar (XLM), Tether (USDT)
- Infrastructure crypto assets – Cardano (ADA), Cosmos (ATOM), Ethereum Classic (ETC)
- Financial crypto assets – Augur (REP), Curve (CRV), Melon (MLN), Compound (COMP)
- Service crypto assets – Chainlink (LINK), Filecoin (FIL), Orchid (OXT)
- Media & entertainment crypto assets – Theta (THETA), Basic Attention Token (BAT)
For those new to building portfolios and may not quite know where to start, some platforms offer pre-packaged solutions. CoinSpot for example, offers investors access to diversified bundles, which include a range of different themed crypto assets and projects including; a DeFi bundle, an NFT bundle or a Green bundle for projects focused on sustainability measures.
Look to differentiators
Another way to diversify a crypto portfolio is through considering crypto assets defined by various market statistics or fundamental differentiating factors.
In terms of market statistics or profiles, an investor can compare crypto assets’ varying in market capitalisation or trading volumes in order to balance their crypto portfolios with assets that boast divergent popularity and trading activity.
When it comes to fundamental differentiators, investors may want to research whether the coin organisation has; a successful team, partnerships and successful real-world applications of technology to find suitable assets for their crypto portfolio.
Using crypto to gain exposure to asset classes
For those looking to gain exposure to precious metals, for example, investors can pick up gold-backed tokens such as the Gold Standard (AUS), or silver-backed tokens like the Silver Standard (AGS).
Uniquely, the Gold and Silver Standard tokens are 100 per cent backed by real physical gold and silver bullion already vaulted, insured, and verified in the high regulatory and geopolitically safe environment of Australia.
Gold and Silver Standard was created by Ainslie Bullion, one of Australia’s largest and oldest bullion dealers.
Each AUS and AGS token equals one gram of each metal with their price pegged to the spot price of each metal.
Building a multi-asset portfolio
Many investors would consider it best practice to diversify an investment portfolio with a mix of different asset classes beyond just crypto such as stocks, bonds, private equity, property, and commodities.
As different assets rise and fall at different times, holding a variety of non-correlated assets can minimise risks that are specific to a company or industry, while helping to reduce losses in a bear market and preserving capital for investment in bull markets.
Beyond just making sure your portfolio is diversified across different asset classes, it can also be a good idea to research unrelated industries or sectors such as tech or fashion, as well as global markets beyond your own such as the US market, Asia or Europe. Investors may also like to consider thematic portfolios, investment funds or ETFs that provide exposure to different industries and themes.
Is there a magic diversification ratio for crypto investing?
Diversification is unique and personal to an individual’s risk profile, so there is no one-size-fits-all diversification template or ratio that investors can follow.
For those new to this strategy, start slowly and build up the variety in your portfolio over time, or research different investment options such as bundled asset purchases. Investors may also consider researching investment funds when looking to diversify in stocks or equity markets.
Investors should test and trial what types of diversification work best for them, while still ensuring they do their research on each asset, adopt a long-term investment strategy and only invest within their limits of affordability.