The past few years have been a wild ride for cryptocurrency investors. The price of Bitcoin has skyrocketed from less than $1,000 at the beginning of 2017 to over $15,000 at its peak in December. The most recent fall in cryptocurrency prices has also been dramatic: In early November 2018, Bitcoin fell below $6,000 for the first time since October 2017.
These massive price swings can be unnerving for new investors looking to get into crypto and learn how to diversify their portfolios. To help you navigate this volatile market, we’ve put together some tips on strategic diversification—with an emphasis on portfolio balance rather than just sector allocations.
Understanding Cryptocurrency Diversification
Diversification is crucial in cryptocurrency investing. By spreading investments across different assets, you mitigate the risk of significant losses from any single asset. Cryptocurrencies, being decentralized and not backed by any government, carry unique risks and opportunities compared to traditional currencies. Investors often explore various exchanges and conversions, like swap USDC to BTC, as a strategy to manage their portfolios in the dynamic crypto market.
Risk and Volatility in the Cryptocurrency Market
If you're new to investing, the volatility of cryptocurrencies can be intimidating. But if you want to make money in this market, you must understand how cryptocurrency works and how volatility affects your portfolio.
In general, when people talk about volatility they mean price fluctuations that is, how much a currency changes in value over time. For example: if one bitcoin costs $1 today and then goes up 10% tomorrow, it's been more volatile than if its price stayed constant during those two days (see chart below).
In addition to being an indicator for potential profits or losses on investments like stocks or bonds, volatility also indicates risk the chance that your investment could lose value as compared with other assets such as gold bars stored under your mattress at home which would almost certainly be worth less than when first purchased but still retain some worth even after years of neglectful storage practices!
The Role of Bitcoin in Portfolios
Bitcoin is the most well-known cryptocurrency, as well as being the most liquid, stable and secure. As a result of its popularity, Bitcoin can be purchased on most exchanges with other cryptocurrencies or fiat currency (such as USD).
The anonymity offered by cryptocurrencies has been a key factor in their success so far; however, this feature is not available with all coins. For example, Monero uses ring signatures (a type of cryptographic algorithm) to conceal sender identities while Zcash offers complete privacy through zero knowledge proofs that allow transactions to be verified without revealing any information about them at all.
Beyond Bitcoin: Exploring Altcoins
You may have heard that there are thousands of cryptocurrencies out there, with "altcoin" being a term for any cryptocurrency that isn't Bitcoin. Examples include Litecoin, Ethereum Classic, Cardano, and EOS, each offering unique features. With the proliferation of these altcoins, platforms have evolved to support their exchange, such as converting CHZ to ETH, further broadening the accessibility and flexibility within the cryptocurrency market.
Diversification Across Different Categories of Cryptocurrencies
The first step to diversifying your cryptocurrency portfolio is to think about how you want to diversify it. There are many different ways that investors can diversify their portfolios, but one of the most common methods is by spreading investments across different categories of cryptocurrencies. By doing so, investors can mitigate some of the risks associated with any single investment strategy or asset class and potentially even increase returns over time if they're able to pick winners within each category that outperform others over time.
The next step is exploring what categories exist within the crypto space and determining where you might want your money invested based on your risk tolerance, investment timeframe (e.g., long-term vs short-term) and other factors such as market capitalization size or liquidity characteristics (e.g., whether it's easy/difficult for buyers and sellers).
Market Capitalization and Liquidity
Market capitalization is a measure of the total value of all the coins in circulation. It's calculated by multiplying the price by the number of coins in circulation, and it's usually expressed as a dollar amount per coin. For example, if Bitcoin were trading at $10,000 and there were 21 million BTC in existence (this is true as I write this), then its market cap would be $210 billion.
Market capitalization doesn't tell you anything about whether a cryptocurrency will appreciate or depreciate in value it simply indicates how much money there is invested into it right now. However, it does give us some insight into how liquid an asset may be: if there are lots of people who want to buy or sell something but don't have enough liquidity available on exchanges to do so easily and quickly without affecting prices adversely (that is to say "without moving them"), then we might expect those prices to drop before they rise significantly again.
This isn't always true there are plenty of cases where cryptocurrencies with low market caps experienced huge price increases despite being illiquid but generally speaking, higher liquidity means lower volatility over time because more traders can get involved when conditions warrant action from them.
The cryptocurrency market is a volatile one, with huge swings in price and high levels of risk. But it's also an exciting opportunity for investors who want to participate in the next big thing. By understanding how diversification works and following these strategies, you can protect yourself from losing everything while still allowing some room for growth and maybe even making some money!
