Every day new people join the cryptocurrency revolution. Some people are coming with prior investing experience and already understand the idea of diversification. My goal is to explain to anyone new to investing what it means to diversify your investment portfolio regardless of size. Diversification is one of the oldest and most important concepts every investor needs to learn to protect their investments and reduce risk. I'm sure everyone reading this has heard the saying: "don't put all your eggs in one basket." Just like "buy low, sell high" this is timeless advice.
My recommendation is to break it up into groups. The larger the portfolio, the more members in each group. The types of categories you should have will depend on your overall long term investment strategy. If you still haven't figured out where you are realistically are trying to get to, you may want to figure out an investment plan before buying more coins. Your portfolio should have at least three groups: safe and strong low risk group, medium to low risk group, and high risk short term coins.
Simple right? Sure, as long as you find a good balance between them. There is no magic number or proportion that will be perfect because every portfolio is different and we all have different goals. My personal portfolio is set up for a long term focus with short term trading potential.
Here is how I break up my coins using a 2 BTC budget:
- Low Risk - Long Term HODL: 50% with only 1-2 types of coins. These are my safest and strongest investments. The coins that I believe will continue to grow and have a strong future ahead. I have very low risk tolerance in this group.
- Medium - Low Risk: 25% this group consists of projects with major developments coming in the next several months with massive potential for further growth after. Typically I have only 1-2 coin types in this group. This group may include ICO's.
- High Risk - Short term: 25% of my portfolio is reserved for active trading. These coins I watch closely and trade often. I have as many as 4-5 coins I actively trade.
The cryptocurrency world can be extremely volatile at times and the market behaves irrationally. Scam coins can blow up over night and the best coins can crash just as fast. If you diversify your portfolio, you do not have to worry about a flash crash wiping out your entire portfolio or setting you back weeks or even months while it recovers. These proportions may have to be adjusted periodically as your portfolio grows in size. The larger it grows, the more you should be focusing on your 'low risk - long term' coins and cutting back your budget for 'high risk' coins.
For an additional layer of protection, I recommend spreading your medium and low risk coins between multiple wallets and always using 2FA that many wallets offer. Keeping these coins off of major exchanges is a great way to reduce your risk of becoming a victim to a hack or other exchange related failure. I recommend using an offline wallet like a Ledger Nano S or paper wallets. I use both.
Always do your research before investing into ANY coin! Google it, talk to the developers on their Slack channel, read what other investors are saying (but beware the pump and dump groups), and read their white paper. Never go in blind! Especially not in a 'high risk - short term' play. Don't get caught with your pants around your ankles if the market takes a strong dip and all your money is in high risk coins that plummet!
Thank you for reading and please upvote, follow, and resteem if your enjoyed my article.
Or at least upvote 😉
Bitcoin Image: Pixabay.com
Crypt0.Critic Images: CleverCat
This blog is written for informational and entertainment purposes only. As the author, I can honestly say that I am in no way associated with any blockchain based company. My opinions are my own and are offered freely. My opinions and suggestions and are NOT INVESTMENT ADVICE! Please do your own research before considering any high risk investments.