Top 4 Reasons Why You Should Diversify Your Cryptocurrency Portfolio
While most MyBitcoin.com visitors might be bitcoin loyalists and even maximalists at heart, bitcoin isn't the only cryptocurrency in town and is very evident right out of the start of the new year. On January 1, 2018 the entire cryptocurrency market cap was right at $600B dollars in value. Within the first seven days by January 8th we saw it as high as $830B before slowing down and eventually dropping off as exchanges and countries were consolidated.
But during this massive right it was not bitcoin getting the attention and capturing the awareness of teh public, it was alternative coins as BTC saw as low as 32% market share which is in the all time lows in its 9 year history.
So, you’re ready to take a big step into the world of cryptocurrency investing, huh? Chances are that you have already purchased a sum of the big name in digital currencies, Bitcoin.
You may be considering if it’s best to branch out and invest in some of these newer, lesser known coins, also called AltCoins. Here are four key reasons why it’s a very good idea to diversify your cryptocurrency investment portfolio by spreading out your investments to multiple coins.
1. Unexpected Price Increases & Decreases
A coin’s value could skyrocket or plummet at any time. Take into consideration Bitcoin’s great price increase and subsequent plummet in early 2014. At that time, most investors only held onto Bitcoin and no other currency. In the 3-4 years it took for Bitcoin to regain its value, these investors were left holding onto a coin with diminished value. They also had the chance to sell at a rate much lower than they know was possible.
Investors who possessed coins other than Bitcoin weren’t so unfortunate. Because their portfolio was spread across a broader spectrum, their other investments didn’t take that severe blow. They were able to continue buying and selling (“day trading”) regularly without worrying that they’re trading at rates far below the ATH (“all time high”).
Because any coin can skyrocket and plummet at any time – for any reason – it’s best to ensure your investments are spread out. There are over 1,000 coins on the market right now, and many will double, triple, even go up 10x during their lifetime. You want to ensure that you are not going to miss the boat on any single one.
It is correct that buying multiple coins is ‘watering down’ your profit potential. However this is a safeguard to prevent against value decreases harming the entirety of your portfolio. While you could play it risky and keep all of your coins in one cryptocurrency, you’ll be chronically concerned about potential crashes if you do so.
2. “Don’t Keep All Your Coins in One Basket”
In the world of Wall Street and investing, it’s simple common knowledge that investors should not be fully invested in one stock. This is a no-brainer in the world of investing, and this rule of thumb has been around for decades. However, people getting into cryptocurrency weren’t trained in investing strategies. They know nothing about this rule of diversification.
Therefore, if a new investor commits to only one coin – such as Bitcoin – they’re liable to incredible stress and frustration if a sudden news release causes its value to tank. Spreading out your portfolio is simple. Look at a market cap website to find out what the top 50 or 100 coins are. Research a few that have had upward price swings in the recent past. Figure out if these coins have more potential. If all looks good, then consider investing a percentage of your wealth in those coins.
3. Security of Cryptocurrency Diversification
In addition to safeguarding against sudden price drops, you’ll have enhanced security by having multiple wallets. Every day around the world, hundreds of cryptocurrency “wallets” are hacked, lost, and stolen. If all of your investment is on one wallet, then you’re at risk for any of those three tragedies.
Don’t keep all of your cryptocurrencies on one online exchange or online wallet library. Split them up into multiple accounts, and ensure that you have 2-factor authentication (2FA) enabled to protect against a hacked account.
There are major password breaches announced every year. Chances are, your username, email address, and password is out there somewhere on the Dark Web. It just takes someone trying out your username and password on an online exchange to plunder your wealth and leave you in shambles!
In addition to switching up your password for every online exchange you’re a part of, split your investments into different exchanges to maximize your security.
4. Knowledge of a Variety of Coins & Tokens
As you research all of these AltCoins to determine which ones are best for your next investments, you’ll amass an abundance of knowledge about each of these coins. You’ll learn what unique aspects each coin promotes. You’ll see how these coins are complementary to other cryptocurrencies. And you’ll be better equipped to educate others when they ask you if it’s worth investing in any given coin. Of course it is unreasonable to expect to learn a lot about every one of these thousand cryptocurrencies, but keeping an eye on the top 10 or top 20 coins will give you enough knowledge about this industry to make well-educated decisions.
You cannot trust media headlines to give you all of the knowledge you need to invest. These media publications are watering down the knowledge so that even the uninformed can understand why a certain coin’s value is increasing (or decreasing). This is why you should absolutely be able to write out a short paragraph on each coin you choose to invest in, explaining what it claims to do.
How to Diversify Into New Blockchain CryptoAssets
Start out by learning about five coins that are not Bitcoin. You can browse cryptocurrency market cap online lists to see what coins are worth the most. A market cap is the sum of money of every coin in circulation added together. You cannot determine if a coin is successful based on the price for a single coins, because every currency has a different number of coins in circulation.
After you learn of these five coins, you’ll want to sign up for an account on any one of the major online exchanges. Remember that each exchange offers a different variety of coins for trading, so you may need to register to multiple exchanges. Each exchange has different requirements for joining. Some require you to submit documentation such as a driver’s license or utility bill to prove you are who you say you are. Others may want you to verify your email address and phone number. The more secure and regulated each exchange is, the more they enforce identity verification.
There are some unregulated exchanges out there that do not ask for identity verifications, but these may be shut down at any time for any reason. Before you submit a single item of information, do your research to see if the exchange is legitimate and trusted.
After you make your purchase and successfully diversify your portfolio, you can sit back and watch these coins’ values go up and down over time. Using a spreadsheet, keep track of what price you bought the coin at, and document its value increase or decrease after each month. This will allow you to identify coins that are most successful, and you may choose to invest more in those coins. Over time, add more cryptocurrencies to your portfolio.
There are some investors who have diversified their investments into 100 or more coins! How diversified you want to be is entirely up to you; the only strong recommendation is that you do your research before diving into a coin for the first time.
With a diversified portfolio, you’re empowered to ‘ride the wave’ on multiple coins and see your value flourish in many areas. Keep an eye on news announcement and cryptocurrency blogs to learn of new coin announcements. And most of all, keep your coins safe!