Trading cryptocurrency is as much about discovering opportunities as it is about managing risk. This skill is even more important in the volatile world of cryptocurrencies where token prices move 50% in a few days of trading. Crypto can even be part of a broader investment strategy that includes mainstream assets.
When trading on platforms like Binance, multiple tokens are on offer, with dozens of promising tokens at any given time. Whether you are buying or selling Bitcoin, Ethereum, Toncoin, or even Dogecoin, there are certain tools that can make your trading more manageable.
Discovering The Diverse World Of Cryptocurrencies
Former MicroStrategy CEO Michael Saylor was the first Wall Street executive to bet big on Bitcoin in 2020 with a $250 million investment. This bet went platinum a year later when Bitcoin doubled its previous record highs. Today, it is commonplace for finance titans like BlackRock to have crypto investments. If anything, BlackRock is now one of the issuers of spot Bitcoin and Ethereum ETFs.
Similarly, regular people are investing in crypto more than ever and not just staples like Bitcoin and Ethereum. Many investors are starting to diversify their portfolios using altcoins like Solana and Toncoin.
By diversifying across many different digital currencies, investors can hedge against any one coin seeing a massive decrease in value. Toncoin for instance has seen a massive increase in price going from around $2.22 in January 2023 to its current price of $5.79 in September 2024, according to Binance.
Why Diversification Is Useful
The old saying about putting all your eggs in one basket is the perfect allegory for the need for diversification. Your basket can drop and all your eggs are gone in one fell swoop. Diversification of investments is necessary to use the cushioning effect some assets can provide when others fall.
Cryptocurrency unfortunately has plenty of hype men cheering you to max out on one asset. Sometimes, it works. Oftentimes you will burn yourself through FOMO investments and fall for pump-and-dump schemes.
Diversification is a way to gain exposure to multiple assets at once. Compare it to an investment in a mutual fund for stocks. When one stock goes down, some hold the fort and ensure the ship remains afloat.
Accordingly, investors like Saylor have adopted crypto as a diversification tool. Microstrategy was the first public company to use Bitcoin as its primary asset reserve. Their buy-and-hold long-term strategy is fruitful since it does not follow the momentary rise and fall of Bitcoin prices.
Cryptocurrencies like XRP took a beating from regulatory crackdowns. Having multiple tokens ensures that when risk attaches, the ones that take a direct hit will not be the only ones in your basket.
Accordingly, there is reason to explore the unique price movements of multiple cryptocurrencies. Investors like MicroStrategy show the possibilities of holding crypto like Bitcoin while carrying on their primary business, which is software development.
A little Crypto Can Go a Long Way
When creating a total investment portfolio, investors will consider both total returns and risk over time. The more time an investor has the more risk they are typically willing to take on given the longer time-horizon to recoup any losses. Allocating approximately 5% of a crypto asset such as Bitcoin has been shown to increase total portfolio returns compared to a traditional 60/40 stocks and bonds portfolio.
Diversify Cryptos
No matter what percentage of your overall investment portfolio you choose to invest in cryptocurrencies it’s important to diversify the coins you invest in as well. You don’t want to put all your capital allocation into one coin only to see a 50% drawdown. While these types of drawdowns are more frequent in the crypto space, you still want to invest in a number of different digital currencies to balance any losses with profitable investments in order to reduce overall risk in the short term.
Choosing which cryptos to invest in can be challenging but here are a few things to consider before making your decisions:
- Invest in coins with different use cases: Look for cryptocurrency coins that have use cases that you would look to use in your everyday life. For example, Ripple makes transferring money easier and cheaper that traditional financial institutions.
- Invest in different blockchains’’ cryptos: Different blockchains have their own individual pros and cons. The Ethereum blockchain enables execution of contracts without needing a third party along with enabling development of dApps. A competing blockchain that many consider is Cardano which offers efficiency, scalability and security.
The Big Picture
Cryptocurrency use cases continue to emerge with time. The market keeps picking winners and losers and even the best traders can only be right most of the time. Diversification is a crucial tool in the arsenal of any investor, whether purely in crypto or in combination with traditional assets and equities. The possibility of multiple assets improving the risk/reward profile of a portfolio is the essence of diversification.
