Any investment, including cryptocurrency, has inherent risk. The aim of savvy investors is to reduce risk as much as possible while maximizing returns. Cryptocurrency diversification is the best way of doing both and is a crucial part of managing a cryptocurrency portfolio.
It allows traders and investors to avoid the volatility associated with cryptocurrency investments, meaning they do not have to worry as much about having their investment portfolios wiped out when a downturn occurs. This article will focus on three diversification strategies for cryptocurrency portfolios and investors.
Diversify Using Coins and Tokens
If you have been involved in the crypto world for a while, you know there are different types of coins and tokens. These include:
- Security tokens backed by an underlying asset such as the US dollar or real estate.
- Utility tokens that have a specific use within the crypto ecosystem or a blockchain.
- Payment tokens used to complete transactions wherever cryptocurrencies are accepted.
- Governance tokens that allow users to participate in a blockchain’s governance.
- Gaming tokens that have in-game value and can be traded on exchanges.
- Basic attention tokens used to pay for users’ attention, such as in advertising.
- Non-fungible tokens.
Users who diversify using these different coins and tokens can take advantage of their growth while shielding themselves from decreases in value. The best part of diversifying like this is that you can either buy the tokens and coins you need or swap the ones you own with the ones you need.
Cryptocurrency swapping is much faster and more convenient than buying cryptocurrencies directly. It also helps you reduce the weight of a specific cryptocurrency in your portfolio to make things more balanced. Cryptocurrency swapping has a lot of utility and is something investors should know about before and when diversifying their crypto portfolios.
Diversifying By Industry Utility
Cryptocurrencies are being used in and disrupting numerous industries because there is a cryptocurrency for almost all use cases. For example, some projects aim to make the healthcare sector more secure and efficient. Some seek to streamline supply chains, transportation, and logistics, while others focus on the entertainment industry. In addition to buying cryptocurrencies directly, investors can also diversify their portfolios by investing in companies developing solutions or working on projects that cater to specific industries.
Diversifying Using Different Investment Vehicles
Investors who are overly cautious about how much risk they are exposed to can invest in alternative investment vehicles. The best place to start is using digital wallets that expose them to new cryptocurrencies and special-use tokens like NFTs.
Investors can also use taxable brokerage accounts to hold crypto investments. An alternative to these types of holdings is crypto individual retirement accounts (IRAs). The main advantage of crypto IRAs is that they reduce the administrative challenges investors have to deal with and overcome if they choose self-directed IRA investing.
Lastly, investors can opt for decentralized financial products. Options such as staking, which provides an interest income and decentralized savings account, can be the right fit for the right investor.
Portfolio diversification is a pillar of smart investing. It is crucial in cryptocurrency investing, where the risk and potential for high returns are much higher. The good news is that there are numerous options for crypto investors looking to minimize risk and increase returns through crypto portfolio diversification.