Over the past few weeks, cryptocurrency has been on a tear (especially Bitcoin) and everyone wants to grab their piece of the pie.
Many new investors seem to be flooding in daily. Some of these people come from traditional investing and understand simple principles that are often implemented to reduce risk regardless of the size of the portfolio. This principle, of course, is diversification. Although many understand the meaning of the word, you may not necessarily understand how to implement diversification across your cryptocurrency portfolio.
While there are many legitimate Bitcoin alternatives, there are also many fly-by-night cryptocurrency scams designed to defraud investors of their hard-earned money. Are you about to lose money through a Bernie Madoff-style Ponzi scheme?
Is Cryptocurrency a Fad or Here to Stay?
Many are under the impression the cryptocurrency craze is just a fad, a mere bubble that is about to burst. Cryptocurrencies are held by encrypted addresses thus allowing for truly anonymous transactions. With the price of Bitcoin well over $3000, it is undeniable that money is being made by many of these anonymous address owners.
Unfortunately, a bad rap is given as cryptocurrencies may be used as an avenue to traffic various illicit activities due to the anonymous nature of transactions and it being unregulated by the government.
How to Diversify Your Cryptocurrency Portfolio
To protect yourself against market volatility and minimize losses should you fall prey to a scam, it is important to diversify your cryptocurrency portfolio.
There are several different ways to diversify your cryptocurrency portfolio. It is very easy to put all your money in new coins with the hope that some may rise to the price of the beloved first-mover Bitcoin. Often, this is not the best choice as investors can be easily misled or run through an excessive amount of volatility.
It would never be advised to put all your investable assets in cryptocurrency. Here is a possible portfolio diversification ratio you may want to consider:
50% Core – Low Risk: In the current marketplace, there are only two cryptocurrencies this core category: Bitcoin and Ethereum. Both of these coins find themselves in the low-risk category – at least relatively – as they’ve already brought investors high-returns, have a strong community, and possess a significant backing.
25% Satellites – Moderate Risk: This sleeve of the portfolio could be comprised of coins that possess lower risks but are more lightly-traded. Ripple, the new Bitcoin Cash, and Litecoin are some of the largest cryptocurrencies by market capitalization that would fit this category (outside of our Core group).
25% Satellites – High Risk: High-risk options can include Initial Coin Offerings (ICO’s) and issued cryptocurrency under low market capitalization coin alternatives. Be very careful with this option – 25% of your portfolio might even be too high for the conservative investor. In-depth research is necessary as this category may be equal parts “diamonds in the rough” and completely illegitimate scams.
Diversifying Your Cryptocurrency on an Exchange
To diversify your portfolio, you will inevitably use a cryptocurrency exchange to buy and sell different coins. There are many different types of exchanges. Here are a few tips to keep in mind while looking for an exchange to conduct your transactions.
The reputation of the exchange is one of the most important factors to consider. Read reviews about transactions as well as reviews on the exchange itself. Reddit is often a great place to start your search.
Understanding the fees associated with an exchange is also very important. Many exchanges have fees varying on different transactions, deposits, and withdrawals. These fees can generally be found on the exchange’s website and should be researched thoroughly.
Exchanges offering limited payment method options may be a turnoff to you. Many people want the ability to use their credit card, debit card, PayPal, other cryptocurrencies, etc. You want a wide variety of currencies and conversion options ideally.
The exchange websites vary on verification requirements. Most that allow United States citizens access require identification upon withdrawals. Some will allow the user to stay completely anonymous.
Often the exchange rate varies drastically depending on which site is being used. These rates can vary upwards of ten percent! Be sure to evaluate this as you can lose an incredible amount just off the purchase.
Consider a Buy and Hold Trading Strategy
A very popular strategy for cryptocurrency investors is to time market purchases on currency lows and selling for profits at higher price points. Obviously, this “buy low, sell high” is the ideal scenario for any strategy.
However, in my opinion, it is better to take a long-term hold approach with cryptocurrencies. As the world starts to adapt to the concept of a non-regulated currency, we will find that the value of certain coins will continue to rise. The best concept is to dollar cost average in different currency lowering your average cost per coin. Ideally, buy more when they drop.
Remember! Investing in cryptocurrency has various degrees of risk. Do not put all your eggs in cryptocurrency as it may be very volatile. If you put a small percent into a crypto portfolio, proper due diligence and diversification can allow for healthy returns uncorrelated to stock market events.