Top Crypto Portfolio Diversification Strategies

Everyone knows that Bitcoin is one of the best cryptocurrency investments; however, it isn’t the only one, and it isn’t a sure thing. No matter how much you love Bitcoin, it’s important to carry a diverse portfolio—even in cryptocurrency.

There are many strategies for diversifying your cryptocurrency portfolio. Keep reading to learn more about the top strategies and the ones we recommend you try.

1. Hold a Stablecoin

This is one of the most common cryptocurrency diversification strategies, and honestly, it’s not our favorite. This strategy recommends minimizing risk by holding a stablecoin alongside other tokens like Bitcoin, Dogecoin, and Ethereum.

In our opinion, holding a stablecoin is basically pointless, as most stablecoins will never increase in value and have no purpose in your investment portfolio. But if you want to combat trading psychology by logging in to see a steady number every day, fine, buy a stablecoin. Just don’t expect to be commended for your diversification tactics.

2. Balance Stores of Value With Baas Platforms

Balancing stores of value like Bitcoin and Litecoin alongside blockchains that provide a service like Ethereum and Solana is our preferred diversification strategy. This strategy works because it protects from a black swan event (like Bitcoin crashing to zero) while still exposing you to both sides of the cryptocurrency industry.

On one hand, you have your stores of value (Bitcoin, Litecoin), which tend to perform better long-term, balanced with assets like Solana and Ethereum, which can provide some short-term gains as well as returns for actions like staking.

3. Add NFTs to Your Portfolio

Another tactic for portfolio diversification is to add NFTs as one would add expensive art to a portfolio in the real world. While we think there is some benefit to a tactic like this, we think there is a larger problem—picking an NFT that is worth adding to our portfolio.

Most individuals who invest in NFTs are taking a random chance on something they think might be big, which (in our opinion) is just as risky as choosing a random token to add to your portfolio. Of course, if you know a certain NFT is worth money (as in, it is well known or famous) then it might be worth using it to balance your portfolio, otherwise, skip this strategy if you’re just going to choose blindly.

4. Add Cryptocurrency ETFs

Our second favorite tactic, which is becoming increasingly popular, is to balance your cryptocurrency portfolio with cryptocurrency ETFs. ETFs are a collection of products, combined and balanced by a computer to create a single investible product. One Bitcoin ETF, for example, may include over 100 Bitcoin-related products.

We like ETFs because they automatically help balance risk, and while they aren’t quite as stable as fiat (as they still rely on Bitcoin to do well), they can help diversify your holdings and hedge against the possible crash of a single Bitcoin-related platform.

We do recommend choosing something a bit different from what is already in your portfolio. For example, if you already hold Bitcoin, we recommend buying an Ethereum ETF. If you already hold a lot of staked Ethereum, then the Bitcoin ETF is probably a good choice.

5. Use Dollar Cost Averaging to Acquire Assets

Having a cryptocurrency portfolio will always be risky; however, one of the best ways to manage risk long-term is to employ dollar cost averaging in your acquisition of assets.

For example, while you may definitely want to have Bitcoin in your portfolio, you may also want to have Dogecoin. We recommend setting up automatic investments when you get paid each month, to buy a little bit of each. This way, your portfolio continues to grow while also allowing you to balance your costs long term.

Of course, dollar cost averaging is a long-term strategy, but it is recommended for beginners who are new to the market. So if this is your first cryptocurrency portfolio, definitely start with dollar cost averaging any of the assets you want to add.  

6. Balance Platform Tokens With Layer Two Solutions

One of the diversification tactics that is becoming more popular is to invest in a few platform tokens, like Binance Coin, Ethereum, and Solana, alongside a few layer two solutions. What this does is allow you to invest in an asset that the layer two solution supports (like the lightning network supports Bitcoin) while also allowing you a degree of separation from the asset itself.

For example, as Bitcoin continues to become more popular, more and more people will likely utilize the Lightning Network for transactions even if the price of Bitcoin remains the same. This would allow an investor to make returns from their Lightning Network investment, instead of having to hodl Bitcoin and hope for the best.

While you can invest in a layer two solution of a platform token you already own, we recommend choosing layer two solutions for platforms you don’t have a vested interest in, as this provides more diversification and helps balance risk.

7. Choose Assets In Different Sectors

This is a very common diversification tactic, and it involves choosing cryptocurrencies based on their sector in the blockchain industry. Below are some examples of the categories and the cryptocurrencies in each:

·      Payment: Bitcoin, Litecoin, Monero

·      DeFi: Uniswap, Sushiswap, Aave, Ondo

·      AI: Near Protocol, Bittensor, StoryIP, Virtuals Protocol

·      Infrastructure: ICP, Chainlink, Filecoin, Stacks

So, for this strategy, an investor would likely choose one asset from each category to invest heavily in, such as Bitcoin, Uniswap, Near Protocol, and ICP. Choosing one asset from each category would naturally balance the risk involved with investing in cryptocurrency. Of course, there is still a chance that cryptocurrency isn’t a thing one day (so there is still some risk), but this is a great way to hedge against the crashing of one token or one aspect of the industry.

Overall, diversification is important, and everyone does it differently. While these are some of the most common tactics, you don’t have to use any of them to be a successful cryptocurrency investor. Just remember that all types of investing carry risk, and never invest money you wouldn’t survive without.