When investing, whether in cryptocurrency or otherwise, there are many different strategies and methods that you can use in order to increase profits. One of the most popular ones is diversification. This is a strategy in which you invest in a number of different assets, some of which carry a high amount of risk and others that carry low risk. This gives you a nice balance between risking and protecting your money. Such a strategy still allows you to enjoy the potential of decent returns without the risk of losing your entire investment. Plus, it allows you to mix up your investments, try out something different, and broaden your horizons.
While it is a great strategy for some, it is far from being perfect, as no investment strategy is free from problems. Being aware of both the good and the bad of a potential investment strategy is vital. If not, you may be unaware of some of the risks or other problems in the strategy you take. With that in mind, this guide is going to go over the pros and cons of diversifying your cryptocurrency portfolio. So, let’s see why you shouldn’t limit yourself with a decision to buy bitcoin only.
Pros of Diversifying Your Crypto Portfolio
One of the major benefits of diversifying your portfolio is that this way you reduce the overall risk and volatility of your investments. If you invest in one cryptocurrency only, and it isn’t doing so well, your overall portfolio will be a representation of that. You are tied to that one asset and how it ends up performing over time. However, if you have several crypto investments, the losses in one will often be offset by the gains in another. This helps to keep your portfolio more stable and less prone to huge drops. Of course, there is no saying that all of your assets won’t fall at the same time, but that is just more unlikely.
Another pro of diversification is that it gives you more opportunities. If you invest everything in one specific cryptocurrency or asset, you don’t see returns unless that crypto asset rises in price. However, if you invest in a number of them, you have a better chance of one of your investments hitting it big and showing great returns. There are few things worse than seeing an asset you just about invested in start to see a lot of growth. Spreading your investment out can help make sure you don’t miss out on these potential opportunities for growth.
Cons of Diversifying Your Crypto Portfolio
Of course, some drawbacks go along with diversifying your crypto portfolio. One in particular is that diversification can reduce the overall returns of your portfolio. The reason why you may see average returns is that all of your high-performing assets and the growth you get from them will be weighed down by the assets that see a drop in value. This limits the potential for profits of your overall portfolio.
Another potential drawback of diversification is that it can be more difficult and expensive to manage. If you simply have one asset that you invest in from time to time, it is very simple. But if you invest in a dozen different cryptocurrencies, it can be a lot to manage. This is especially true if some of your assets aren’t available on your main trading platform. You may need to use multiple exchanges in order to successfully diversify in the way you want to, which can be quite annoying. Not only that, but you need to keep an eye on the movement of several different cryptocurrencies, instead of just one.
Also, while diversifying helps stabilize your overall investments, it also increases your exposure. If you invest in several different cryptocurrencies, there is a good chance that at least part of your portfolio will be seeing a decline. For some people, this can be very stressful or worrisome. While there is a chance that all of your investments will be winners, this isn’t very common to see.
Also, if you invest in several different cryptocurrencies, there is a good chance you might not know about those assets as well as you should. If you invest in things you don’t know, it could have bad consequences. Always be sure to do your due diligence on any investment that you consider making.
Should You Diversify Your Crypto Portfolio?
So after reading the various pros and cons, should you diversify your crypto portfolio? Well, that answer is up to you. It is your investment and you need to choose a strategy that works well for you. In general, it is often recommended to diversify investments as it protects investors in some way. Since most people aren’t day traders or professional investors, they simply want to make a little money without the risk of losing everything. Diversification can help with that.
However, if you are a seasoned investor, who is okay with the risk, and have the sole goal of quickly and rapidly getting the highest returns possible, you might not want to diversify. Whether you use it or not, diversification is a powerful tool, which is one of the reasons why it’s such a popular investment strategy and method. Also, it is possible to vary your level of diversification. Your diversification could be simply investing in two cryptocurrencies, while others will invest in a dozen.
In conclusion, we hope that this blog post has been able to help you learn both the pros and the cons of diversifying the crypto portfolio. Whether you ultimately decide to diversify your crypto portfolio is up to you and will depend on your goals and preferences. Whatever type of crypto investing you decide to do, be sure to do your research and consult your budget before ever purchasing an asset.
Credit: Mary Ann Callahanof cex.io