Diversifying Your Investment Coin Cap: Strategies For Success

Diversification is a risk management strategy that creates a mix of various investments within a portfolio. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency. It can also be achieved by purchasing investments in different countries, industries, sizes of companies, or term lengths for income-generating investments.

Cryptocurrency is a volatile market, and it is not uncommon for an asset to see huge gains and losses in a short amount of time. If all your money is in 1 or 2 coins, it is possible that one day you will be up and the next day you will be all the way back down. If you’ve diversified well, outside of a huge crash, it’s unlikely that all your crypto investments will crash at the exact same time. Having your investments spread out over a number of coins is recommended.

A well-diversified portfolio usually contains a blend of small, mid, and large-cap coins that span a range of cryptocurrency types. The 80/20 rule is a good starting point if you’re new to crypto. According to this rule, 80 percent of your portfolio should be in the largest, most established cryptocurrencies like Bitcoin and Ethereum, and the other 20 percent can be spread out among other mid and low-cap cryptos, which are riskier but provide the potential for much higher returns.

Diversify across cryptocurrencies

Diversifying your cryptocurrency portfolio is a great way to reduce risk and volatility. Here are some strategies to diversify across cryptocurrencies:

Diversify by Coin Size

Add large-cap or small-cap cryptocurrencies to your portfolio. If you own mostly Bitcoin, consider investing in some emerging cryptocurrencies. If you own only small-cap coins, perhaps add a large-cap token like Bitcoin to your portfolio.

Diversify by Coin Type

There are several types of tokens that serve different purposes. Here are some examples:

• Stablecoins: These are cryptocurrencies designed to minimize volatility and are often backed by real-world assets or fiat currencies. Examples include Tether, USD Coin, and Paxos.
• Utility Tokens: These tokens have a specific use case within a blockchain or crypto ecosystem. Filecoin, for instance, facilitates decentralized data storage.
• Governance Tokens: These tokens enable users to participate in the governance of a blockchain. Examples include Uniswap and Compound.
• Basic Attention Tokens: These tokens are used to pay users for their attention, such as viewing digital advertisements. The best-known basic attention token is affiliated with the Brave browser network.
• Gaming Tokens: These coins have in-game value and are also traded on third-party exchanges. Decentraland’s MANA is a prominent example.

Diversify by Industry

Blockchain technology is being applied to a wide range of industries, and you can invest in cryptocurrencies that focus on these sectors:

• Healthcare: Blockchain can improve efficiency and security in the healthcare sector. Examples of healthcare-focused cryptocurrencies include MediBloc and Dentacoin.
• Supply Chain: Blockchain technology can make supply chains more transparent. VeChain is a cryptocurrency designed for this purpose.
• Transportation: Blockchain can be used to innovate and improve many aspects of the transportation sector. Transportation-focused coins include Mass Vehicle Ledger and ParkinGo.
• Entertainment: Blockchain platforms can support a range of entertainment options, and entertainment companies can integrate blockchain technology. Some entertainment coins include ApeCoin and Reef.
• Climate Change: Blockchain technology can facilitate transparent investments into sustainability projects. Climatecoin is an example of a currency that supports climate change initiatives.

Diversify by Geography

You can also expand your crypto portfolio to include tokens that are primarily used within specific geographic regions.

Invest in Different Blockchain Protocols

Invest in cryptocurrencies that use different consensus mechanisms such as proof-of-work and proof-of-stake.

Invest in different asset classes

Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio to reduce portfolio risk. One of the most common ways to diversify is to invest in different asset classes. An asset class is a group of similar investment vehicles. Different classes of assets include:

• Stocks or equities: Equities are shares of ownership issued by publicly traded companies. They are traded on stock exchanges such as the NYSE or NASDAQ. You can potentially profit from equities through a rise in the share price or by receiving dividends.
• Bonds or other fixed-income investments: Fixed-income investments are investments in debt securities that pay a rate of return in the form of interest. Such investments are generally considered less risky than investing in equities or other asset classes.
• Cash or cash equivalents, such as money market funds: The primary advantage of cash or cash equivalent investments is their liquidity. Money held in the form of cash or cash equivalents can be easily accessed at any time.
• Real estate or other tangible assets: Real estate and other physical assets are considered an asset class that offers protection against inflation. The tangible nature of such assets also leads to them being considered more "real" than assets that exist only in the form of financial instruments, such as derivatives.
• Forex, futures, and other derivatives: This category includes futures contracts, spot and forward foreign exchange, options, and an expanding array of financial derivatives. Derivatives are financial instruments that are based on, or derived from, an underlying asset. For example, stock options are a derivative of stocks.
• Cryptocurrencies: Cryptocurrencies such as Bitcoin are sometimes classified as "alternative investments" due to their more illiquid and risky nature.

By investing in different asset classes, you can reduce your overall risk by spreading your investments across different types of assets. This is especially important if you are investing in volatile assets such as cryptocurrencies.

Diversify by market cap

Diversifying your investments by market cap is a way to manage risk and smooth out unsystematic events in your portfolio. Market capitalisation, or market cap, is the total value the market places on a company and its assets. It is calculated by multiplying the total number of outstanding shares by the stock price.

There are four major size categories of market cap: large cap, mid cap, small cap, and micro cap. Large-cap stocks are generally considered safer investments as they represent large, well-established companies. However, they usually offer less potential for high growth. On the other hand, small-cap stocks have more room to grow but are more susceptible to market fluctuations.

By investing in a mix of large-, mid-, and small-cap stocks, you can enhance diversification and reduce the overall risk of your portfolio. Large-cap stocks provide stability and dividend payouts, while small-cap stocks offer higher growth potential. Mid-cap stocks can also offer a balance between the two.

The optimal mix of market caps in your portfolio depends on your investment goals, risk tolerance, and time horizon. If you are an aggressive investor with a high-risk tolerance, you may want to allocate more of your portfolio to small-cap stocks. On the other hand, if you are a conservative investor, you may prefer a larger allocation of large-cap stocks.

It's important to note that diversification across market caps may not always be enough to fully diversify your portfolio. Combining it with other strategies, such as investing in different industries, geographical locations, or asset classes, can further enhance the level of diversification.

Diversify by industry

Diversifying your crypto portfolio by industry is a great way to reduce risk and volatility. Here are some ways to diversify by industry:

Healthcare: Blockchain technology can improve security and efficiency in the healthcare sector. Examples of healthcare-focused cryptocurrencies include MediBloc and Dentacoin.

Supply Chain: Blockchain technology can bring more transparency to supply chains. VeChain is an example of a cryptocurrency designed for this industry.

Transportation: Blockchain technology can be used to innovate and improve many aspects of the transportation sector. Transportation-focused coins include Mass Vehicle Ledger and ParkinGo.

Entertainment: Blockchain platforms can support a range of entertainment options, and entertainment companies can integrate blockchain technology. Some entertainment coins include ApeCoin and Reef.

Climate Change: Blockchain technology can support initiatives to fight climate change and facilitate transparent investments into sustainability projects. Climatecoin is an example of a digital currency in this space.

Real Estate: Blockchain technology allows for fractionalized ownership of real estate, providing investors with access to the world's largest asset class. HoneyBricks is an example of a platform that offers blockchain-based real estate tokens.

Private Equity: Some private equity funds have started tokenizing their funds, allowing for smoother buying and selling of underlying shares.

Additionally, crypto market investors can diversify across industries by investing in public companies pursuing blockchain projects. This strategy may be limited to publicly traded companies actively pursuing blockchain integration.

By investing in cryptocurrencies and blockchain projects across various industries, you can reduce the impact of sector-specific risks on your portfolio.

Diversify by geography

Diversifying your investments by geography is a crucial aspect of building a robust and well-balanced portfolio. Here are some essential insights and strategies for achieving effective geographic diversification:

Understanding Geographic Diversification

Geographic diversification involves spreading your investments across different regions, countries, or markets. By allocating your capital to various geographic areas, you can reduce the impact of region-specific economic shocks, political events, or market trends. This strategy helps protect your portfolio from being overly exposed to the risks associated with a single location.

Benefits of Geographic Diversification

• Risk Mitigation: Investing in different geographic regions can lower the overall risk of your portfolio. By allocating capital to multiple regions, you reduce the chances of your entire portfolio being affected by a downturn or negative event specific to one area.
• Enhanced Stability: Geographic diversification can provide greater stability to your portfolio. When one region experiences volatility or a market correction, investments in other regions may help offset potential losses and provide a buffer during turbulent times.
• Access to Global Opportunities: Different countries and regions offer unique investment opportunities. By diversifying geographically, you can tap into emerging markets, innovative companies, or sectors that are thriving in specific locations.
• Currency Diversification: Investing in various countries can provide exposure to different currencies. This can be advantageous during periods of currency fluctuations, as it allows you to benefit from the strength of multiple currencies instead of relying solely on one.

Strategies for Geographic Diversification

• Global Equities: Consider investing in stocks or equity funds from different countries or regions. Diversify across developed and emerging markets to capture a range of economic strengths and growth potentials.
• International Real Estate: Explore real estate investment opportunities beyond your domestic market. This can include purchasing properties directly or investing in international real estate investment trusts (REITs) or funds.
• Global Bond Markets: Diversify your bond holdings by investing in government or corporate bonds from various countries. This strategy can provide exposure to different credit risks, interest rate environments, and fixed-income opportunities worldwide.
• Focus on Specific Regions: Research and identify regions that align with your investment goals. For example, you might consider investing in Southeast Asian markets, European countries, or Latin American economies, depending on your risk appetite and target sectors.
• Country-Specific Funds: Explore mutual funds or exchange-traded funds (ETFs) that focus on specific countries or regions. These funds provide instant geographic diversification by investing in a basket of securities from a particular area.
• Global Sector Allocation: Diversify your sector allocations across geographies. For instance, if you invest in the technology sector, allocate funds to tech companies in different regions to benefit from the strengths of each market.

Best Practices for Geographic Diversification

• Research and Due Diligence: Before investing in a new region, conduct thorough research. Study the economic and political landscape, assess currency stability, and understand the regulatory environment.
• Monitor Currency Exchange Rates: Keep a close eye on currency exchange rates, as they can significantly impact your returns. Be mindful of the potential for currency fluctuations to affect your investment gains or losses.
• Consider Country Risk Ratings: Evaluate country risk ratings provided by organizations like the World Bank or international credit rating agencies. These ratings can give you insights into the economic and political stability of a country before investing.
• Regular Portfolio Reviews: Periodically review and rebalance your portfolio to ensure it aligns with your geographic diversification strategy. Markets and economies evolve, so stay informed about any changes that might impact your investments.

Frequently asked questions