Crypto portfolio diversification: The best cryptocurrencies and strategies to consider
Learn how smart traders diversify crypto portfolios to reduce risk and boost returns. Explore top cryptocurrencies, risk levels, and effective diversification strategies.
Smart traders must always seek the best strategies for investing in cryptocurrencies. And in most cases, portfolio diversification has proved the best way to minimize risk and have a growth-oriented portfolio. Crypto portfolio diversification means spreading your investments across multiple crypto assets rather than focusing on just one. Diversification has also been used for other investments and asset classes, as it is always better to have a balanced approach, rather than having a negative outcome because the cryptocurrency you have invested in hasn’t performed the way you envisioned. A diversified portfolio will help you protect against volatility, as you are the one who controls the exposure to risk, and you can balance investing in high-risk digital coins with those that are more stable.
Diversification will also help you achieve optimized returns and take advantage of the different directions the crypto market is headed, as you can earn returns from more digital coins. However, even though crypto portfolio diversification has proved to be a successful idea, the result of this depends on the cryptocurrencies you want to add to your portfolio. You can’t just pick cryptocurrencies at random; this process involves carefully selecting them after reviewing their risk and return profiles. Additionally, you need to ensure these digital coins align with your financial goals.
When you want to discover the cryptocurrencies that performed well lately, it is a good idea to take a look at reputable cryptocurrency exchanges. For instance, on Binance, you can access real-time data and charts to discover the best cryptocurrency for your portfolio. There, you will see the top-gaining cryptocurrencies, the top cryptocurrencies by market cap, and the new assets that have been listed on this platform. This is why you can improve your decisions by considering the data from this site.
In this article, we will explore more about the best cryptocurrencies and strategies to consider for portfolio diversification. Keep reading to learn more.
Taking a look at the risk level of different cryptocurrencies
Cryptocurrencies have different risk levels, which is why it is essential to understand this, so that you can consider the best approach for your portfolio. Here are the crypto groups considering their risk level:
Low-risk cryptocurrencies
All cryptocurrencies carry a certain risk, but some are safer than others. These are mostly represented by stablecoins, whose value is pegged to fiat currencies like the Euro or the Dollar. Because of this, they won’t go through the same price fluctuations as the others. The most popular stablecoin is Tether (USDT), which is why it is a useful tool for investors who want to minimize risk. Stablecoins have many use cases and can be used for saving, transactions, and as a store of value when the crypto market is experiencing extreme volatility.
Medium-risk crypto assets
Bitcoin
Bitcoin is the largest cryptocurrency by market cap, and also the one that has inspired the entire cryptocurrency space. Bitcoin has experienced many ups and downs over the years, yet it has remained the largest cryptocurrency. This is why Bitcoin is relatively stable, especially given its continued leadership position. Bitcoin is volatile, but in some cases it can be a powerful tool, especially for those seeking short-term gains. Another reason Bitcoin is a good investment is its limited supply, which adds scarcity and protects it from inflation.
Altcoins
Altcoins are also medium-risk crypto assets, a term referring to all digital currencies other than Bitcoin. Many altcoins, including Ethereum (ETH), Cardano (ADA), and Solana (SOL), were developed to address Bitcoin's limitations and add additional features. This is why they truly took advantage of blockchain technology and have integrated plenty of other new applications. Altcoins are great for portfolio diversification, especially since they have more use cases.
High-risk crypto assets
Among the high-risk asset classes are meme coins, which often lack technological innovation and are characterized by community support. Dogecoin (DOGE) is among the most popular meme coins at the moment, having started as a joke but evolved significantly. The increase is particularly due to the online communities these cryptocurrencies have engaged with, which have supported their evolution.
Meme coins are high-risk cryptocurrencies because they lack robust technical development and often have little practical use. This is why they are risky and volatile, and their prices fluctuate more with the market sentiment and trends. However, meme coins can still be part of a crypto diversification, as they have the potential for quick returns.
Diversification strategies
Diversifying by market cap
Large-cap cryptocurrencies: Bitcoin and Ethereum
Mid-cap cryptocurrencies: Solana, XRP
Small-cap cryptocurrencies: Celer Network (CELR), Nolus (NLS).
Diversifying by risk level
This strategy means you will select cryptocurrencies with varying levels of risk. This includes a mix of Bitcoin, altcoins, and meme coins. A good example will be:
Allocate a percentage to the largest cryptocurrency, Bitcoin
Allocate a part for altcoins with a high growth potential: Ether, SOL
Allocate a part for crypto speculation: meme coins
Keep the rest of the portfolio stabilized through stablecoins
Diversifying by use and sector
You can also try to diversify your portfolio while considering the use and sector of cryptocurrencies. In this way, your portfolio will comprise more investment strategies and industries that can grow independently. Here is a model of diversification while keeping in mind the sector and use:
Investing in smart contract application: Ether
Investing in the DeFi landscape: Uni of Uniswap
Investing in Non-fungible tokens (NFTs): AXS of Axie Infinity.
Conclusion
For all the smart traders, crypto portfolio diversification remains an important strategy to better protect crypto investments. Crypto portfolio diversification has many advantages, among the most important being that it mitigates risk and can improve long-term success. But to be able to benefit from a good portfolio diversification, you must know what the best digital coins to invest in are, as you cannot pick them by chance.
We hope this article will help you on your journey to selecting the best digital coins.
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