How to Diversify Your Crypto Portfolio

by CoinGecko

eToro is a publishing partner of CoinGecko

Having a crypto portfolio is necessary when starting to invest in cryptocurrency. It allows you to plan where and how you would invest your money. But do you invest in only one type of coin? Or do you diversify your portfolio?

“Just like with stocks and bonds, it’s important to balance your crypto portfolio based on your investment objectives,” says Guy Hirsch, US MD of eToro. “Is your goal to try to earn a fast return and turn a profit quickly, or build savings overtime? These are important questions to ask yourself as you’re getting started.” 

Generally, it’s advisable to not put your eggs in one basket. If the basket falls, all your eggs may crack and you’d lose everything. That is why diversification of portfolio is so important.

Diversifying your crypto portfolio helps you to:

  • Manage risks by mixing a variety of investment strategies; and
  • Withstand the negative events of a single crypto, such as a drop in market cap, without losing too much value in your overall portfolio

6 Crypto Diversification Portfolio Strategies

Now that you know why you need to diversify your crypto portfolio, let’s look at the various ways you can invest and make the best of your portfolio.

Type of crypto and use cases

One of the common strategies is to choose different types of cryptocurrency. You would generally choose the coins that have great potential or are well-performing. The way you determine this is by looking at the trends of the market prices. In addition, you can consider the different use cases of crypto coins. For example, generally speaking, Bitcoin is designed as a virtual currency while Etheruem powers DeFi protocols. This would be a matter of personal interest or what you think would be beneficial in the future.

Type of solution

As new blockchain platforms, protocols, and services are being created, the new projects would rely on investors to help develop the technology for better use. By investing based on the different types of blockchain solutions, you may be spreading your risks between different segments of the market. Projects would either fail or succeed. If one fails and the rest succeed, the successful ones would hopefully be able to cover the losses.

Geographical location

This investment strategy is basically looking at different projects from different parts of the world. Recently, there is a shift towards investing in Asian blockchain projects. Those projects have a big loyal following and so they seem to be a good investment. To some extent, the more popular a project is, the greater the chances of its success.

Time diversification

This strategy is one that is not often highlighted but it’s one of the oldest investment strategies. We know that timing the market is hard; it’s tough to determine the right buy-in moment. But with the intentional execution of this strategy, you could gain profits in the long term. One approach is to use dollar cost averaging—that is, buy a small percentage of the intended portfolio each month, say 10%. After about 10 months, you would have assembled a complete crypto portfolio. If you’re in it for the long run, this strategy may be useful for you. Just remember to set price alerts on the crypto coins or projects you’re interested in so that you’re updated with the shifts in the market.

Analytical approach

If you’re a serious investor, adopting an analytical approach may serve you well. The idea is to diversify your crypto portfolio based on your available funds, risk tolerance, and crypto market swings. The basic idea is to allocate certain percentages into both relatively stable cryptocurrencies and riskier ones. Generally, the higher the market cap of a cryptocurrency, the lower the risk.

4 Categories of Coins for a Well-Balanced Crypto Portfolio

So which cryptocurrencies can you start investing in? While this is not a be-all-end-all, you may elect to start with these 4 coin categories.

The Founding Father: Bitcoin

Let’s be real, without bitcoin, crypto wouldn’t have existed. Besides, it’s currently the largest market cap crypto and makes up over 50% of the entire crypto world. So a relatively large percentage of your investment could go to bitcoin.

The Most Popular: Ethereum

Ethereum is the most actively developed blockchain in the industry and it’s second in line to bitcoin in terms of market cap. The price of and demand for ETH coins would increase as more projects are built. With 85% of available tokens having been built on the Ethereum blockchain, it may be wise to put some of your money into it.

The Market Hedger: Stablecoins

The volatility of the cryptocurrency market has pushed for the creation of stablecoins i.e. cryptos that are tied to fiat currencies. Stablecoins such as USDC and Tether are shielded from price swings in the crypto market.

The Market Trader

If you’re feeling bold, you can trade current popular coins like DOGE, ADA, XRP and UNI. Trading cryptocurrencies do come with significant risks as they are subjected to volatile market price swings. So be sure to monitor the market diligently and trade cautiously.

Manage Risk and DYOR

Regardless of what strategy you choose, always have a plan to manage risk and do your own research. Do not blindly invest and certainly do not invest with money you can’t afford to lose!

eToro is a publishing partner of CoinGecko

eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.

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CoinGecko's editorial team comprises writers, editors, research analysts and cryptocurrency industry experts. We produce and update our articles regularly to provide the most complete, accurate and helpful information on all things cryptocurrencies. Follow the author on Twitter @coingecko

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