Investing requires exposing oneself to financial risk in exchange for the possible benefit of predicted financial returns. The goal of diversification is to mitigate some of the risk factor that comes with an investment.
Diversifying your portfolio is a smart investment strategy since it helps in reducing the risk aligned with the cryptocurrency market. As per experts investing in altcoins is an excellent way to diversify your crypto portfolio.
What is Diversification?
Investing in coins is risky as the price keeps fluctuating, and it’s challenging to predicate which coin will rise or fail. Thus, investing all your savings into a single crypto asset can be risky. Because if the asset price changes, you can face tremendous losses that can impact your overall portfolio.
Diversification is a strategy of investing in which one invests in a wide range of different investments rather than just one or two.
Diversifying is investing your money among several coins, tokens, or projects. It will help reduce the chance of enormous loss, as even if one asset fails, there are chances that your other asset may perform differently. Some can retain their value, and some may rise, thus improving your overall portfolio.
#Diversification is an important part of portfolio management as it teaches you how to minimize loss and optimize gains— Sumit Gupta (CoinDCX) (@smtgpt) September 22, 2021
As there are various types of altcoins available in the market, each with its own function and varied value that may give different financial performances over time. Thus, investing in different types of coins can be a good investment strategy. Diversifying in altcoins also helps you learn about new coins and projects.
Why Should You Diversify Your Portfolio With Altcoins?
Many options available:
There are many types and sectors of coins circulating in the crypto market. So, the investor has the option to choose based on return, acceptability, risk level, and other advantages that give a competitive edge.
Investing a small amount in altcoins can help you understand different coins’ features and applications in the market without putting your entire crypto portfolio at risk.
Strategies to Diversify Your Portfolio Through Altcoins
You’ll need an excellent investing strategy to diversify your portfolio via altcoins. Don’t worry our team of crypto experts are here to help. In this article, we have outlined some of the strategies that can help you diversify your crypto portfolio:
- Purchase altcoins with different use cases:
The crypto market is flooded with hundred and thousands types of altcoins, each with different use cases and varying values as well as financial performance.
Investing in different coins based on their use cases or function can help you diversify your portfolio.
For example, Ethereum, the second-largest crypto network, allows the creation of decentralized applications on its network using the smart contract.
Another option is a stablecoin whose value is pegged to a reference asset like fiat currency or trade exchanges commodity. Stablecoin like Tether (USDT) and USD Coin (USDC) value remain stable, which reduce the volatility of the crypto market.
- Invest in different altcoins blockchains:
Cryptocurrencies runs on a network or technology known as the blockchain. There are a number of blockchains available in market for users to invest in.
Ethereum blockchain network, allows users to develop dApps on its platform as well as execute the smart contract, which is an agreement that does not require the involvement of a third party.
EOS blockchain provides online services like cloud storage, dApps, as well as smart contracts. EOS blockchain network allows processing millions of transactions per second and dApp upgradation and updation.
Cardano is a competitive blockchain that provides improved network security, scalability, and efficiency. And like Ethereum, the Cardano blockchain also allows the creation of decentralized applications on its platform.
Solana blockchain processes transactions faster while charging low transaction fees compared to other blockchains.
These are example of just a few of the blockchains available in the market. Do more research before investing.
- Adopt different altcoins sectors:
There are various types of altcoins available in the crypto market.
Basic Attention Token (BAT), Golem Token (GLM), and Filecoin (FIL) are an example of utility tokens. It is an asset sector allowing users to access specific platforms’ products.
Non-fungible tokens, or NFTs, are another coins sector that allows artists to display or sell their art on their platform.
Platform tokens, DeFi coins, stablecoin, meme coins, security tokens, governance tokens, and play-to-earn are other altcoins sectors.
Invest and branch out to different coins sectors but do thorough research and sort out sectors that fulfill your requirement list.
- Diversify based on risk level:
Invest and diversify your portfolio based on the level of risk you can handle. The best option is to start investing in coins that are stable and prone to less risk.
Stablecoin is one such option, as its price does not fluctuate. Later try to add altcoins that are less risky. Investing in known projects like Ethereum that have lasted through several bear markets is perhaps a good place to start.
- Diversify based on Market Capitalization:
There are many types and sectors of altcoins available, each with a varying market cap that you can consider investing.
An altcoins with a larger market cap is said to have strong fundaments and is considerable more stable. Ethereum, Tether and BNB are e.g. of some coins with highest market cap. Whereas, altcoins with a smaller cap has stronger growth potential with a much higher degree of risk. Example of some of the coins with lowest market cap as per coinmarketcap are XENO Governance, CantOHM and Matrix.
- Diversifying by different industries:
DeFi has utilized cryptocurrencies the most; thus, many people only associate them with the finance sector. But crypto does have various abilities that other sectors can use. Some altcoins are used in industries like video games, music, supply chain, and other industries.
Altcoins can be the best option for the investor who has just entered the crypto market. It will help you diversify your portfolio while reducing the risk involved in investing in the crypto market.
As the market is huddled with various altcoins, it’s challenging to differentiate between them, make sound decisions, and choose profitable altcoins to invest. Therefore, it’s vital to do thorough research as well as conduct due diligence before investing in any altcoins.