It’s like a golden rule in any investment to never put all your eggs in one basket. Diversifying an investment portfolio is the key to mitigating risk and maximizing profits, especially for volatile assets such as cryptocurrencies. A balanced portfolio is a smart way to manage your investment and one of the most efficient techniques in maintaining a healthy account.
But what does a balanced portfolio look like when it comes to cryptos? Does it mean just spreading your fund equally across all available coins? This article will share four tips on creating a well-diversified and balanced crypto portfolio.
Tip 1: Balance Your Portfolio By Sector
Cryptocurrency investing became popular because of the quick and high returns it brought to some investors who were able to get into some coins before they boomed. Only a few investors are after the long-term value of a project behind a cryptocurrency. Yes, each cryptocurrency has a unique roadmap, vision, and purpose. They can be classified into different sectors: payments, security, privacy, cloud storage, and many more. You may want to visit cryptochronicle.io for in-depth information and insights.
With all the hundreds of cryptocurrencies available today, the sector-based approach is an excellent way to start building a balanced portfolio. You may simply divide your funds into equal parts and invest in cryptocurrencies that fall under different categories.
For example, put 10% of your portfolio in stable payment coins. Another 10% may be invested in storage coins. You may then equally distribute the rest among other sectors such as healthcare, gaming, and social media. Diversifying your crypto portfolio by industry is a practical way of minimizing the risk of losing money when one industry fails.
Tip 2: Balance Your Portfolio By Geography
Although cryptocurrencies are borderless and global projects, dividing your crypto portfolio by geographical location would be more practical. For example, you may put 40% of your fund into cryptocurrencies in countries friendly to cryptos. You may distribute 10% of your fund to cryptos established in countries that are more hostile to cryptocurrencies. The remaining 50% may be placed in neutral countries.
Doing this will reduce the risk of losing money when a particular country takes harsh measures against cryptocurrencies. Geographical diversification can help you avoid huge losses in case of a global crypto crackdown.
Tip 3: Balance Your Portfolio By Age
The age of cryptocurrencies can also have an impact on their future value. Cryptocurrencies just a few weeks or months old may be more volatile and have a higher potential to fall deeply or grow exponentially. Cryptos a few years old can be more stable and may have lesser chances of sudden spikes or drops in value.
However, not all new coins are risky, and not all old coins are stable. There are old Ponzi cryptos that might still be on the market after a long period. This type of crypto doesn’t have an actual project behind it and is just pumping money from new investors to pay older ones. As such, investing in Ponzi cryptos would be unwise, no matter how old it is.
Investing in a balanced portfolio of crypto of different ages can help you diversify your chances but take time to do research on their history and development.
Tip 4: Balance Your Portfolio Through Time Diversification
Every investor will agree that it’s impossible to avoid risk when investing in any asset entirely. Cryptocurrency is no different. However, you can minimize your risk by investing in a balanced portfolio across different time frames.
Timing the market may be one of the most challenging things to do as an investor. You may end up buying when the prices are high and sell when they’re low because of FOMO (fear of missing out). But if you spread your investment across different time frames, you can avoid selling during a panic and buying during a bubble. So, how do you do it?
Time diversification means timing the market by investing in different cryptos at the right time, not all simultaneously. It requires an investor to set aside a certain amount of money or asset to invest or sell at a regular or non-regular interval, depending on your preferred criteria of entry and exits.
Investing in a balanced portfolio of cryptos is the best way to minimize risk and an excellent method to maximize returns. Even though the crypto market is highly volatile, you can limit losses and ensure that you’re always in the game with the right approach. Investing in different sectors, geographical location, and cryptocurrency age enable you to spread risks. On the other hand, timing the market allows you to make the most of your investment by buying at a low and selling at a high.
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