These days, it seems as if you can’t turn on the financial news without hearing more about cryptocurrency and how so many types of cryptos have absolutely taken off. Indeed, many cryptos have seen major growth of late, causing more and more investors to want to purchase coins. However, while the market may be new, many basic financial principles remain the same. One such example is making sure that you diversify your cryptocurrency portfolio. Here are some of the reasons why this is so important.
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Risk Reduction
As noted by the financial experts at SoFi, “Diversification can help reduce some investment risk. It cannot guarantee profit or fully protect in a down market.” If you put all of your financial eggs in one basket, you risk destroying your net worth if that basket loses value. By contrast, building a diverse array of cryptos ensures that if one currency takes a hit, you don’t lose all of your value.
Fewer Missed Opportunities
Everyone has heard of Bitcoin, and many have invested in it. However, if the only currency you invested in was Bitcoin, you’d risk missing out on a slew of other financial opportunities. For example, as of this writing, three cryptos had shown more than 6000% growth over the past month: Bat True Share, Hey Bitcoin, and Beholder. If all you had invested in was Etherum or Bitcoin, you would have missed out on these gains. By contrast, if you had invested in a diverse array of cryptos, or any number of crypto ETFs, you may find yourself reaping some of these gains.
Avoid Sector or Coin Damage
Some bitcoins are tied closer to certain industries or companies than others, and there have been instances where entire coins have disappeared due to fraud or damage to a specific business. This, sadly, comes with the territory: Kryptos are still highly underregulated – particularly when compared to more traditional investment vehicles like the stock or bond market. As a result, it is easier for entire coins to show massive damage as a result of financial malfeasance. This means that you have to be extra careful in your investments and take extra steps in order to protect yourself. The best way to do this is via diversification.
Volatile Market
There is no question about it: The crypto market is extremely volatile. Given this obvious financial reality, you have to protect yourself from sharp gains or losses within the market. This is even more important if you have a shorter timeframe and cannot afford to just ride the market out until it bounces back. Diversification is a solid way to protect your investments from this volatility, as it can provide you with a cushion against any serious losses.
The cryptocurrency market is still relatively new, highly volatile, and likely to see major changes over the upcoming years. The best way to ensure that you are protected against those changes is by diversifying your portfolio.
