"Don't put all your eggs in one basket" - an old proverb that gains double importance in the volatile crypto world. Did you know that 60% of the cryptocurrencies that were in the top 10 list in 2017 are no longer on that list today?
Sami, a successful engineer, invested all his savings in a single cryptocurrency that was considered the "Bitcoin killer" in 2018. "I was convinced it would dominate the market. Today, its value has dropped by 95% from its peak, while other cryptocurrencies I ignored have risen." Sami's story reminds us that predicting a single winner in the technology race is nearly impossible.
Diversification in your crypto portfolio is not just about risk distribution; it is a smart strategy to increase your chances of benefiting from the growth of the sector as a whole. Here’s how to diversify your portfolio intelligently..
Diversify by currency type, diversify based on the project status of the coin, geographic diversification, and time diversification.
Diversification by asset class: split your portfolio among different categories of cryptocurrencies:
- Major coins (Bitcoin, Ethereum): represent the relatively safe foundation of your portfolio.
- Layer 1 coins: independent blockchains like Solana, Cardano, Polkadot.
- Layer 2 coins: scaling solutions like Polygon, Optimism.
- Stablecoins: to hedge against volatility and wait for buying opportunities.
- DeFi tokens: to benefit from the growth of decentralized finance.
- NFT coins: for exposure to the art and digital ownership market.
Crypto experts say: "The best diversification plan is to allocate 40% of your portfolio to major coins Bitcoin and Ethereum, 30% to promising layer one coins, 20% to established DeFi projects, and 10% to small high-risk/high-reward projects."
Diversification by project status: you should balance between mature projects and emerging projects:
- Established projects: Safer, but slower growth .. lower returns and also lower risks.
- Mid-tier projects: have a functioning product and a strong team, but are still in the growth phase ..
- Emerging projects: high risk, but potential for huge returns if successful.
Geographic diversification: projects from different regions are affected differently by regulatory and economic changes in each area.
Karim, an investment analyst, says: "I follow regulatory developments in Asia, Europe, and America, and I distribute my investments so that my portfolio is not significantly affected by decisions from one region."
Time diversification: don't invest all your money at once. Spread your purchases over time to reduce the impact of market timing.
Ray Dalio, founder of the world's largest hedge fund, says: "Diversification is the only free lunch in investing." In crypto, always keep this wisdom in mind.
But beware of over-diversification. Owning dozens of cryptocurrencies in small amounts makes it hard to track them and reduces the impact of successful investments on your overall portfolio.
Samir, a professional investor, shares his advice: "I prefer to own 10-15 cryptocurrencies that I understand well and monitor continuously, rather than owning 50 cryptocurrencies that I only know by name."
Review and rebalance your portfolio regularly. As some investments grow and others decline, your portfolio may become less diversified than you planned. Review the distribution every 3-6 months and readjust if necessary; smart diversification is not an option but your shield against this unknown world.
In the next post, we will discuss how to track the performance of your investments - the crucial step to improving your future decisions. Are you ready to turn your data into gold?