Diversification in Cryptocurrency

As covered earlier, diversification is an important approach for calibrating your portfolio to match your risk appetite. It involves diversifying between asset classes as well as diversifying within each asset class in your portfolio.

Cryptocurrency is arguably the riskiest asset class you can invest in. Before investing in cryptocurrency you should carefully assess the risks associated with this asset class to determine what percentage of your portfolio you’re willing to allocate (if any). The risks involved with investing in cryptocurrency aren’t for everyone and any decision to invest should be based on thorough research, personalised risk assessment and careful planning.

Different Types of Cryptocurrencies

If you’ve decided to invest in cryptocurrency, then it’s important to learn about different types of cryptocurrencies in order to better understand how you might want to diversify your cryptocurrency portfolio.

There are thousands of cryptocurrencies in the market and distinguishing between them can be intimidating for newcomers.

Common types of cryptocurrencies include:

• Currencies: Cryptocurrencies which are primarily used as a payment method to buy goods and services or as a transfer of value (e.g. Bitcoin (BTC)).

• Privacy coins: Cryptocurrencies designed with greater privacy relative to ‘traditional’ cryptocurrencies like bitcoin (e.g. Monero (XMR), ZCash (ZEC)).

• Utility tokens: Issued to fund development of the cryptocurrency and can be used to buy goods and services offered by the cryptocurrency project (e.g. Golem (GNT), Basic Attention Token (BAT)).

• Stablecoins: Designed to minimise price volatility by being pegged to a fiat currency, a basket of assets or a stable asset (e.g. Tether (USDT), Dai (DAI)). 

• Exchange tokens: Cryptocurrencies that are native to exchanges, often entitling the holder to a discount in trading fees and more opportunities to participate in Initial Exchange Offerings or IEOs (e.g. Binance Coin (BNB), Kyber Network (KNC)).

Consider researching each type of cryptocurrency to better understand their strengths, weaknesses and differences in context to your risk appetite. Nobody else can do this for you.

In your research, you may conclude that various risks associated with a certain type or types of cryptocurrency exceed the boundaries of your risk appetite and thus should be disqualified from having an allocation in your portfolio.

On the other hand, you may conclude that other types of cryptocurrency fall within the boundaries of your risk appetite and potentially qualify as investment opportunities.

Diversification by Industry

As covered earlier, cryptocurrencies and blockchain have the potential to impact, facilitate or disrupt many real-world industries or sectors. This is often a consideration for investors who are looking to diversify their cryptocurrency holdings. For example, if an investor has bought various cryptocurrencies that look to disrupt or solve existing problems specifically within the financial sector. Should they look to diversify, they may consider investing in cryptocurrencies that are linked to other industries or sectors, such as gaming to identity.

As you continue learning about the cryptocurrency space, consider monitoring which industries or sectors you believe blockchain technology can disrupt. This may inform or guide your personal interest or disinterest in specific cryptocurrencies, helping you choose which projects to research further.

For example, your research may lead you to conclude that blockchain technology can disrupt the financial and gaming sectors. You may also conclude the logistics and healthcare industries, for example, are the least likely to adopt blockchain.

Through this research, you gain insight into which industries are ripe for disruption right now, which industries may be disrupted in the coming years, and which industries are likely to never be disrupted by blockchain. All of these assertions will inform your investment decisions in alignment with your risk appetite.