One of the famous quotes says it all “Don’t put all your eggs in one basket” which has been said for diverse portfolio allocation. Investment Diversification is one of the basic building blocks of a solid portfolio.
Diversification is an art of thinning out chances of your possible losses by spreading out your investment in a manner where your exposure to any one type of crypto is limited. This approach has multifaceted iterations, but at the bottom, it’s simply about spreading your portfolio across several asset classes like ICOs, Lending, Tokens, Staking and Mining which will eventually weed out the volatility from your crypto portfolio over the time.
Let’s say you have a portfolio where you have heavily invested only in Bitcoin. If it is publicly announced that holding and trading of Bitcoin are illegal in XYZ Country and this ban is for an indefinite period. This will infuse more volatility in prices of Bitcoin. Over here your portfolio can have a noticeable drop in value.
If, however, you have counterbalanced the Bitcoin currency with a couple of altcoins, let’s say Bitcoin Cash or Ethereum, only a part of your portfolio might have affected. In fact, there are good chances that your BCH prices would have climbed, as buyers would turn to other currencies in real time.
Therefore, to achieve better-quality diversification, you would want to diversify across the board, not only different types of currency but from also different types of industries like Oil, Real-Estate & Finance. The more uncorrelated your currencies are, the better.
The Significance of Correlation
All you need to do is examine the currencies you intend to invest in, to find the ones that doesn't tend to move up or down in correlation with other currency. By doing this, you can eventually lower the risk of your portfolio
Building Fortune
One of the keys to build a fortune in crypto-world is learning how to make the most of investment by diversifying in different currencies, which would possibly react differently to the same event.
Balancing Comfort Level
Another key is how to balance your comfort level with risk against your time horizon which will potentially reduce the number and severity of heart-churning ups and downs.
How many currencies you should have
It’s better to own 5 different currencies than owning one, but there comes a point when adding more currencies to your set, ceases to make diversity. There is a question over how many currencies are needed to reduce risk while maintaining a high return.
The most conservative view argues that an investor can achieve optimal diversification with only 15 to 20 currencies spread across various industries.
Duration
Diversification is an approach which gives an investor to reduce risk on their investment for the long term