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5 Tips on Diversifying Your Crypto Portfolio

Diversifying your portfolio is a long-standing and much-recommended investment tip, and for good reason. By distributing your wealth across multiple investments, you reduce your chances of suffering major financial losses if one of them falls through. A diverse portfolio is especially important if you invest or have plans of investing in cryptocurrency. Because these digital assets are relatively young and highly volatile investment products, most financial advisors recommend investing in multiple cryptocurrencies, different asset classes, and other strategies for diversification.

It’s true that the relative novelty of cryptocurrency makes diversification a little more difficult than it is for more traditional assets, such as stocks and bonds. This is because, at present, there are no mutual funds investors can take advantage of to explore the broader digital asset space. Still, there are strategies that resourceful investors with cryptocurrency holdings can use to manage financial risk. Try these tips to build a more diverse crypto portfolio:

Buy Different Coins and Tokens

One of the simplest diversification strategies for crypto portfolios specifically involves investing in different types of cryptocurrency. Many well-known cryptos, for example, function as payment tokens that can be used to fulfill transactions at business establishments that accept them as modes of payment. 

Besides Bitcoin and Ethereum, two of the biggest cryptocurrencies currently existing, thousands of other payment tokens exist to choose from. The privacy-focused coin Monero (XMR), for example, is becoming increasingly popular for the high levels of user security and anonymity it promises. XMR’s privacy technology facilitates completely untraceable transactions between any two parties anywhere in the world, provided that each has access to the internet and a Monero wallet to perform the transfers.

Though they’re definitely the kind of token most people will be familiar with, payment tokens are not the only type of cryptocurrency out there. Some other varieties to consider about potential investments include utility tokens, security tokens, gaming tokens, governance tokens, and more.

Invest in Industry-Specific Projects

A whole host of industries is becoming increasingly interested in exploring and utilizing blockchain technology, the foundational technology underlying cryptocurrency. Industries seeking to leverage blockchain technology are primarily interested in blockchain’s ability to drive greater transparency, digital security, and operational efficiency. Many emerging crypto projects have thus begun focusing on particular sectors, including the healthcare, real estate, transportation, and supply chain industries.

Investing in public companies mounting blockchain projects is another way crypto investors can diversify their portfolios across multiple industries. Publicly traded companies engaging in significant blockchain integration efforts are prime targets for investors seeking to go down this path. 

Invest in Other Asset Classes

Another viable way to diversify your crypto portfolio is to explore other asset classes that still have some ties to cryptocurrency. Here are some major asset classes that can help with crypto portfolio diversification:

  • Real estate – Crypto investors can now gain valuable stakes in real estate, the largest asset class in the world, by purchasing blockchain-based real estate tokens. These tokens give them access to fractionalized real estate investments. Real estate tokenization platforms, which essentially function as marketplaces for these tokens, are also becoming increasingly popular.
  • Stocks – Many companies in the crypto sector, such as cryptocurrency hardware and mining companies, are publicly traded. A substantial number of companies in other industries, meanwhile, have considerable crypto holdings on their balance sheets. Buying stocks of such companies is another feasible way crypto investors can diversify their portfolios.
  • Bonds – Digitally issued blockchain-based bonds, as well as bonds that invest in high-profile cryptocurrencies like Bitcoin, may be available for purchase by crypto investors. Institutions like the Singapore Exchange, the European Investment Bank, and even the world bank have all issued crypto or blockchain-based bonds.

Connect with a Financial Advisor with Crypto Experience

Because cryptocurrencies are typically considered high-risk investments, most financial advisors typically recommend that their clients invest conservatively in crypto. Some may even be reluctant to dispense more detailed advice about assembling a crypto portfolio. However, as their client bases grow increasingly interested in cryptocurrency, more and more advisors are willingly offering in-depth crypto-related recommendations. If you’d like to consult a financial advisor about your crypto holdings, finding one who holds their own crypto investments or expressly specializes in digital assets would be best.

Do Your Own Research

Due to the relative rarity of professionally managed funds that cater to crypto investors, most people with an interest in trading crypto largely assemble and manage their own portfolios. This practice is especially common among individuals from the millennial generation or Generation Z. These young investors are generally more tech savvy, have more access to online tools and resources for self-education, and feel more confident about independent investing than their counterparts from older generations. 

As a fairly new asset, cryptocurrency has fewer analytical tools available than stocks and other traditional assets. Even publicly available information about cryptocurrency projects is often extremely technical and, therefore, difficult for laypeople to understand. There is, however, a growing number of websites, online communities, mailing lists, and even Discord servers dedicated to crypto education. This makes it easier for newcomers to crypto and even seasoned investors to connect with other cryptocurrency enthusiasts, learn about new projects, ask questions, and receive advice.

Though diversifying your crypto portfolio can be complicated, it’s worth doing to help manage investment risk. A diverse portfolio will help ensure that minimal harm comes to your finances as a result of your crypto holdings’ price volatility, thereby protecting your peace of mind alongside your hard-earned wealth.

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