Crypto Essentials: Diversification and Asset Allocation

Thanks to our real-life experiences that helped us learn about the importance of investing, even though it is not aligned with the context of knowing everything about the stock market. We may have already known about its basics and essentials.

No? How about looking at this example. You might have observed that most cafés you have visited would know when a hot cup of coffee and freezing Frappuccino are best served and sold, depending on the weather type.

If it is sunny, Frappuccino will sell harder than hot coffee. If it is rainy, then it is the opposite. This means that the shop has minimised the risk of losing profit, may it be a sunny or rainy day, since they have varied products to sell.

In the given scenario, we can juice out the concepts of diversification and asset allocation. So, this article will discuss the two essential strategies that you may find helpful in your crypto investing journey.

Let us begin by diving into crypto diversification.

What is crypto diversification?

Diversification of your crypto portfolio is the act of investing in a variety of crypto assets to reduce risk if one or more projects underperform. Using this strategy also helps you to withstand the negative events of single crypto, like a drop in market capitalisation, without losing much value in your crypto portfolio.

Examples of crypto diversification approaches

  • Geographical Location – this investing approach entails looking at a variety of projects around the globe. To some extent, the more well-known a project is, the more likely it is to succeed. For example, if you own European cryptos, diversifying your portfolio with Asian or American ventures might help you avoid regulatory difficulties in each nation.
  • Time Diversification – although not commonly mentioned, this is one of the oldest crypto portfolio diversification methods. It is difficult to predict the market, let alone one as volatile as cryptocurrencies. Investors can swing trade some of their portfolio goods while keeping others for a long-term investment using thorough execution.
  • Types of Cryptocurrencies and Use Cases – this is one of the most common strategies. Looking at market price patterns is one approach to figure out which coins have a lot of potential or that have a good track record.
  • Industry Diversification – its goal is to ensure that you have a comprehensive crypto portfolio that includes various industries such as supply chain, medical, and finance. As a result, if one section of your portfolio experiences a significant loss, the rest of your portfolio can mitigate the impact on your results.
  • Analytical Approach – this slightly complicated strategy might be beneficial if you are a serious investor. This approach aims to diversify your crypto portfolio based on your available finances, risk tolerance, and cryptocurrency market fluctuations. The fundamental concept is investing a specific amount of one’s assets in both relatively safe and risky cryptocurrencies. In general, the larger a cryptocurrency’s market valuation is, the less risky it is.

Let us now look at how asset allocation works in crypto investing.

What is crypto asset allocation?

Asset allocation is a money management technique that specifies how capital should be allocated among asset types in an investment portfolio. Both asset allocation and diversification boil down to not sticking to only one asset.

The most effective method to construct a balanced portfolio is to mix asset classes and assets that are not connected. Crypto assets belong to the “alternative assets” category, along with insurance products, private equity, derivatives, commodities, and real estate. The other category is known as traditional assets, which include stocks, bonds, and cash.

Examples of crypto-asset allocation approaches

  • Tactical Asset Allocation – for more aggressive investment approaches, Tactical Asset Allocation is a better fit. It enables investors to focus their portfolios on assets that beat the market. It assumes that if a sector outperforms the market, it will do so for a long time.
  • Strategic Asset Allocation – is a conventional strategy that is better suited to a passive investing method. This strategy’s portfolios will be rebalanced only if the targeted allocations vary due to a change in the investor’s time horizon or risk profile.

Here is an example of a crypto portfolio using a diversification strategy. Note: This is just a sample guide. We do not strictly imply that this would be the best format for you.

  • 50% allocated on Bitcoin (BTC)
  • 20% Ethereum (ETH)
  • 15% EOS (EOS)
  • 15% Cardano (ADA)

If you are new to Bitcoin trading, bear in mind that the market is volatile. Trading Bitcoin and other cryptocurrencies are not risk-free, which is why you should do comprehensive research on your selected asset(s).

Diversifying your crypto portfolio can also be made more convenient when you are partnered with a Bitcoin Compass trading platform wherein you can invest in some well-known cryptocurrencies like Bitcoin, Ethereum, Cardano, Binance Coin, Tezos, Neo, and EOS.