How to Build a Diversified Cryptographic Portfolio – Guide 2021
Currently, an ethereum is worth 1409.83 euros.
Considered one of the best performing assets of the decade, Bitocoin has come to beat even traditional financial instruments such as gold, stocks and bonds. In just over a decade, Bitcoin has delivered massive returns to investors. Many institutional investors began to include a percentage of their investment portfolio, consisting of bonds, indices and stocks, in the core digital assets Bitcoin and Ethereum.
It is a recognized fact that major cryptographic tokens such as Bitcoin and Ethereum have generated massive returns for investors in the past. However, the cryptomoney markets have developed far beyond the list of the top ten digital assets. Cryptomonry markets now include a multitude of utility tokens, security tokens, DeFi tokens, privacy tokens, investment tokens, etc.
Moreover, it is not enough to build a portfolio of cryptomoney products using only Bitcoin and Ethereum. To take full advantage of this booming industry while reducing the risk factor, it is necessary to diversify a portfolio containing several cryptos. In this guide, we explore the need to diversify a portfolio beyond Bitcoin, as well as one of the diversification strategies for a more favourable outlook.
What is the diversification of a portfolio of cryptos?
Diversification of crypto’s portfolio is the process of disbursing investment funds into different crypto projects in order to reduce the risk factor if one or more projects do not succeed. The aim is to create diversification with investments in different areas/niches in order to reduce the overall investment risks. For example, investors who invested in Bitcoin in 2017 had direct experience of the sharp drop in the price of Bitcoin in 2018.
The basic idea is to reduce the negative event factor. This can be done by investing in several tokens in order not to lose the overall value of your investments. To this end, a wise investor recognizes that it is safe not to put all your eggs in one basket, namely that of Bitcoin.
It is important to manage your trading operations on a reliable and secure cryptographic trading platform. This allows the investor to enhance his overall portfolio diversification experience.
How to get started with portfolio diversification
Multiple strategies exist to diversify a portfolio of cryptomoney. This can include building a portfolio by taking into account different factors depending on the investor. We have discussed one of the strategies that a trader can use to build a portfolio that meets the different properties of the tokens, including market capitalization, liquidity, stability and functionality.
If a portfolio is not to be composed entirely of Bitcoin, the first cryptographic currency must hold a significant percentage of your investments. One of the factors is the increasing trend of investments in Bitcoin by hedge funds, corporations, institutions and investors. In addition, major financial companies have also started to offer various Bitcoin related services.
Bitcoin Asset is also attracting the attention of retail investors, which promotes its adoption by the general public. It continues to outperform conventional investment options such as gold in 2020. Allocating a percentage of your cryptographic portfolio to Bitcoin mitigates risk by acting as a secure asset.
Ethereum and ERC-20 Tokens
Ethereum continues to occupy the second place in the cryptomoney markets. Moreover, the real value of Ethereum lies in its ability to facilitate the creation of intelligent contracts and decentralized applications. Its inherent usefulness subsequently facilitates the establishment of a solid foundation for the evaluation of its original token, the ETH. Although many other block chain networks exist, Ethereum continues to dominate the sector.
The ERC-20 protocols are the utility tokens launched on Ethereum’s block chain network. These tokens act as a utility function in a landscape encompassing a real case of industrial use. Many of these tokens have been successful in their crypto projects. For example, OmiseGo (OMG) is an ERC-20 token that has earned five times as much in 2020. In other words, an investment of one dollar in January 2020 is valued at nearly five dollars in November 2020.
Investing in OMGs allows an operator to take advantage of exponential growth in a relatively short period of time. At the same time, it poses a threat of fraud, project failure and piracy. But these risks are offset by secure assets like Bitcoin.
Passive income rates
Like dividends, some crypto-currencies offer interest to token holders. Staking is a phenomenon that makes it easier to reward cryptos in exchange for holding cryptos in a wallet. In addition to diversification, staking also provides passive income from holding cryptographic tokens.
Cosmos (ATOM) is a token of cryptomoney that earns an interest of 8 to 10% in exchange for investment transactions. Dash (DASH) is another cryptocurrency token that earns an annual reward of 5-6%.
Cryptomoney is well known for its volatile nature. While volatility can add benefits if transactions are executed correctly, it is also a risk factor. Stablecoins are cryptoskills that are used to mitigate the risks that arise from other tokens. These coins are linked to the value of an asset such as a fiat currency like the US dollar.
The Tether (USDT) is one of the most popular stable cryptomonies that is linked to the value of the USD. It is advisable to guarantee a percentage of the portfolio to stable cryptos. This eliminates the risk factor to some extent.
Diversification is a strategy available to sophisticated investors to mitigate risk in traditional markets. The benefits of diversification also apply to the cryptomatics sector. In addition, diversification can play a strategic role in cryptocurrency investments when the industry is in its infancy. While it does not eliminate threats or double the value of your portfolio, it is an important tool when markets are suddenly down.